Customer reward programs: Creating phantom loyalty

ByJensGregersen:Aligningthemarketingandsalesdepartmentswithcustomerexpectationsismorethanmy expertise,itismypassion.Ideveloplongtermcompetitiveadvantagesbasedonconsumerandexperience orientatedprofitstrategies.StayconnectedLinkedIn

Companiesareinvestingbillionsofeurointocustomerrewardprogramsin anattempttobuildcustomerloyaltyanddefendtheirtoplineresults. Thisarticledescribeshowloyaltyprogramsshorttermcanboost revenueandwinovercustomers,butlongtermtheyarelikelyto becomecostcentres,whichconsequentlyleadtoadisturbanceof marketequilibriumintheshapeofanoverallhigherpricelevel. Accordingtoa2011researchreportbasedonananalysisof about96%ofallloyaltyprogramsintheUSthenumberof programsperhouseholdisnow18,anincreaseof50%since 2006.In2010theoverallestimatedtotalvalueofloyaltycur rencyintheUSrepresented48billionUSD. Theallimportantquestionis,towhatextendcanamonetary basedprogramsubstitutecustomersatisfactionandbuild loyalty?Numerousresearcheshavedemonstratedthatcus tomerloyaltyisbasedoncustomersatisfaction,whichisdi rectlylinkedtotheperformanceoftheemployees.

Serviceasprofitstrategy
Massproductionandglobalisationhavenotjusterasedany majorproductdifferencesintermsoffeatures,functionalityand price,ithasalsomadeiteasyforcompaniestopractisethesimplest,mostfamiliar,andeffective marketingstrategyofall,tocopyandmarketprovenideas.Thischangeinproductionalsohaveasignificant influenceoncompaniespositionstrategiesasitsproductsnolongeristheprimarysourceofcustomervalue thevaluereceivedcomparedtothetotalcost. Thisrealityisseeninanewcommunicationtrendhasgainedpopularityamongmajorproducersofconsumer goods(FMCG)inSpain;viaTVadstheycommunicatethattheydonotproduceforwhitelabels.Thisisrather interestingbecauseifyouthinkaboutittheyareactuallysaying;Dearcustomer,youcantreallytellthediffer encebytaste,feelorlook,butifyouwantourexceptionalproduct,youneedtobuyourbrand! Ashonestasthemessagemightbeitisasignificantshiftawayfromthecommunicationstrategyofforexample CocaCola,whichseeminglyalwayshasbaseditsmarketingcommunicationstrategyontheuniquenessofits productsthesecretformulalockingawayinavaultwitharustylock.True,CocaColasactualstrategyisbased onanairtightdistributionnetworkmakingitsproductsavailableineventhemostremoteareasoftheworld. AccordingtoFader(1993)themosteffectivegrowthstrategyisonebasedondistributionorproductavailabil ity.AnexampleofthisisfoundonVilliersStreet,ashortfootpathinLondon,connectingEmbankmenttubesta tiontoStrand.Onthese250metersatotalofthreeStarbuckscoffeeshopsarereadytoservethecafelatte segment.ThoughthreeStarbucksshopsonjust250metersissignificanttheyarebyfarnottheonlyonesserv inglattesandhandsonheart,thelatteservedatStarbucksisnotthatdifferentfromothergreatlattes.Hence, distributionisanobrainer;itisbasicprerequisitethatcustomershaveeasyaccesstoourproducts,especially

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whentemptingalternativesorsubstitutesarewithinarmslength.

Serviceproductiongap
Sincethe1970s(Hakansson1982),andmoresointhe80sand90s(Reichheldetal.1996)companieshave beenencouragedtodriveprofitabilityandgrowthviacustomerloyaltyinitiativesintheshapeofservice.Com paniesarenotblindtothevalueofprovidinggoodservice;manyhaveinvestedsignificantresourcesintodefin ingtheirservicestandards;butacompanycancarveitsservicestandardsinstoneontopofMountSinaifor thatmatterwithoutmakinganyqualifiedcontributiontheservicelevelexperiencedbyitscustomers.Thisis seeninthefactthattheserviceindustrybattlesthesameissueoflowproductivity,akeydriverofcustomer satisfaction,todayashasbeenthecasethroughoutthe70s,80s,90sand00sduetoalackofskilledmanag ersandtraining(Gregersen2011)butalsobecauseofthereplacementfrequencyofserviceemployees(Heskett 1994). Productivityintheservicesectorisdirectlylinkedtocustomerloyalty,asproductivitycreatesvaluewhichisthe driverofcustomersatisfaction,andwithoutsatisfactiontherecanbenoloyalty(Heskett1994).Ontheother hand,productivitydependsonemployeesatisfaction,whichisprimarilygeneratedby[...]theabilityandau thority...toachieveresultsforcustomers.(ibid).Inotherwords,customerloyaltybeginsandendswiththe employees. Theproblemwithserviceisthatitcanbedefinedbutnotstored.Inotherwords,serviceiscreatedandcon sumedsimultaneouslyandisthereforeinthehandsoftheperformersofservice,theemployees.Somewhere alongthelineofdefiningandper formingservicesomethinggoes Letterofindulgence wrong.Despitecompanieshave had34yearstopractisetheirser Dearvaluedcustomer: viceskillssincetheserviceindus trybecamethesinglebiggestbasic Thepast30yearsofmassproductionandglobalizationhavegivenlittle sectorofthedevelopedecono roomtodifferentiateourproductsandpricessowegaveuponthislong mies(Fuch1968),anastonishing ago.Inordertobattlethiswehavedefinedarangeofservicestandardsand 60%ofcustomersstillexperience communicatedthesetoouremployeessadlyithasprovenalmost poorservice.So,whattodowhen impossibletomotivateouremployeesbydirectives,consequentlyleading productsaregeneric,competitors toaservicelevelbelowwhatyourightfullycanexpectwhenpayinginthe cancopyyourdistributionnet areaof68timesthecostofgoodsinamarketwithendlesssubstitutes. work,andservicefailsmoreoften thannot?Onewayisbyconvinc Butdonotdespair,wehavecomeupwithasolution. ingcustomerstobeloyaltoyou. Claimyourindulgencecardnow!Well,wehavechosentonameitCustomer LoyaltyCardbutitsbasicallythesame.Whenyouhavepurchasedfromus

Artificialcustomerloyalty

Thisiswherecustomerloyalty programscomeinorreward cardsastheyaretypicallycalledin theUS.Thewonderfulthingabout loyaltyprograms,atleastfroma corporateperspective,isthatthey areeasytomanageandmeasure hardvaluesonsoftmeasures. Couldthisreallybethesilverbul letinbuildingcustomerloyalty?

ninetimesandexperiencemediocreservicewewillbuyourwaytoyour forgivenessbyofferingyouasimilarproductforfree! Butbewarned,ifyoudonotmakeninepurchaseswithinthreemonths, yourindulgencecardwillexpireaswecannolongercountonyourloyalty andcommitment. Bestregards, Yourcustomerserviceteam P.S.Thisemailwassentfromnoreply@company.com.

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Blimey,backtoservice.

Well,itreallydependsononesdefinitionofloyalty. Asdescribedintheintroductiontothisarticlecustomershaveanaverageof18loyaltycards.Thoughthe2011 Colloquyreportdonotspecifythis,itisfairtoassumethatpeoplehavemorethanoneloyaltycardperbusiness type.Thatraisesthequestionoftowhatextendcustomersareloyaltotheactualprogrammorethantheprod uct,serviceorbrand? TheAmericanterminology,rewardcards,isprobablyisamoreaccurateterm,asthesecardsdolittlelessthan rewardingcustomersfortheirrepeatpurchases.Thismightseemlikeaninsignificantlinguisticdifferencebut howtheloyaltyprogramisperceivedandarticulatedbytheissuingcompanyhasamajorinfluenceon,first,the designand,second,theactualoperationoftheprogram.Forexample,shouldtheloyaltyprogramofferimme diaterewardssuchaspricepromotions,orshouldtherewardbedelayedasinthecaseofairmiles?Shouldthe loyaltyprogramsupporttheproductsvaluepropositionorotherindirecttypesofrewards?Customersactually preferinstantrewardsintheshapeofdiscounts,directlyproductrelatedornot.Companiesontheotherhand preferproductrelatedrewards,providedimmediatelyordelayed(Dowling&Uncles,1997).Thus,arewardcard islittlemorethanadiscountcardinotherwords,loyaltyprogramsarebasicallycompensatedmonetary friendshipscomparableto,well,mercenaries,whowillalsostayloyaluntilsomeoneelsewithabiggerwallet comesalong.

Eightdifferentairlineshave In2010serialentrepreneurBillCarneydemonstratedthistoanex ecutiveMBAclassbyexplainingthatatotalofeightdifferentairlines myundividedloyalty. havemyundividedloyalty.Thisbehaviourisknownaspolygamous BillCarney(2010) loyaltyprobablynotthetypeofloyaltyhopedforbytheissuing companies.Ignoringexceptionalcases,polygamousloyaltyclearlydem onstratesaloyaltyprogramfailureasthewholeideaisthatcustomerschooseoneplaceoverothers.Addto thisthatresearchhasrevealedthatjust10%ofhighfrequencycustomersare100%loyal,andthat100%of theseloyalcustomersarelightbuyers(Dowling&Uncles,1997).Thus,launchingaloyaltyprogramcouldresult insignificantresourcesbeingallocatedtoloyalbutlightbuyers(ibid).Further,loyaltyprogramsareeasilyreplic able,thus,asuccessfulprogramwillhavealimitedperiodofexclusivitybeforebeingchallengedbycompeting programs,whichoftenprovidecustomerswithabetterdealinordertolowertheswitchingcostforthecustom ersoccasionallythisleadstoabiddingwarforcustomersleadingtohighercostfortheissuingcompanies, whichfinallyisreflectedinthepricespaidbythecustomers(ibid). Asmostloyaltyprogramsaremonetarybasedcompaniesareatbestbuying(orbribing)theirwaytoahigher levelofcustomertolerancetomediocreservice.Herebynotsaidthatloyaltyprogramsshouldbeexcludedalto gether;theyareanimportantsourceofinformationtounderstandcustomerbehaviourandpreferences,with thisinformationcompaniescancustomisedoffers.OneexampleofthisistheClubCardissuedbyUKretailer giantTesco,whosendouttheirClubCardnewsletterin1.7millioncustomisedversionstotheir15millionmem bersintheUK,IrelandandPolandanditworks!20%oftherecipientsmakeapurchasecomparedtojust0.5% forthesectoroverall.Butthisshouldnotnecessarilybeconfusedwithloyalty;thesecustomersmightmerelybe bargainhunters. ASDA,theUKarmoftheworldsbiggestretailer,haschosenanotherstrategy;theyhavechosennottohavea loyaltyprogramandtheyhavemadethisdecisionanintegratedpartoftheirmarketingstrategyunderthe brandEveryDayLowPrice(EDLP):AtASDAwerewardallofourcustomersfortheirloyaltybycharginglow priceseverydayoftheweek,allyearround.OneproblemwiththeEDLPstrategyisthatitishardtoprove,es peciallywhenregularpricesaremixedwithpromotionaloffers.Also,newcustomersmightbeconvincedbythe
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Polygamousloyalty

marketingpromisebutlaterthechallengeistokeepthisfreshinmind.TheEDLPstrategyissimilartoTescos ClubCardinthesensethatitisbasedonamonetarylogicthus,isunlikelytobuildlastingloyalty,orloyaltyat allforthatmatter. PassingGoinMonopolywithoutcollectingfromthebank Basedontheabovedescription ofthecomplexity,polygamous Onthebrinktothe00stheexperienceeconomytheorywasarticulatedit loyaltybehaviourandpurchase arguesthatcompaniesneedtoprovideexperiencesbyappealingtothe frequencyamongloyaltycard sensesandinvolvementofthecustomersinordertogainacompetitive holdersitcanbeconcludedthat advantageofexamplesgivenareHardRockCafandPlanetHollywood. loyaltyprogramsarenotthe servicesilverbullethopedforby Onecouldalmosthearthesighofreliefthroughoutthecorporateworld, manycompanies.Atbestloyalty finallysomethingconcretetocreatecustomerloyaltyinsteadofthesoft programscandisruptmarket andintangibleserviceconcept.Thus,moreandmorethemebasedbusi equilibriumandattractnew nessespoppedupintheshapeofIrishPubsandrosecolouredHimalayan customersbuttherealbattlefor saltflakes.Butbusinessesapparentlyoverlookedafundamentaldetailthe customerloyaltytakesplacein factthatcustomerstakeproductsandservicesforgranted!Inotherwords, theinteractionbetweenthe basingabusinessonaproductrelatedtheme,storytellingorevenafantas serviceemployeeandcustomer. ticpackingisnotsufficientiftheservicefails.Blimey,backtoservice.

Foodforthought
Satisfiedemployeesgeneratedemonstrablysuperiorcustomersatisfactionandthat,inturn,satisfiedcustom ersaremoreprofitableones.HerbKelleher,founderofSouthwestAirlines Basedon30yearsofresearchitcanbeconcludedthatenthusiasticemployeesconsistentlyoutproduceand outperformtheirlesssatisfiedcounterparts.JackWelch,formerCEOofGeneralElectric Companieswithahighlyevolvedsenseoftheemployeetocustomertoprofitabilitychainconstantlymeasure everything:customersatisfaction,employeesatisfaction,processefficiencies...everything.MarketingInnova torsInternational A5%increaseincustomerloyaltycanproduceprofitincreasesfrom25%to85%.Reichheld&Sasser Theaveragemonthlycostofreplacingasalesrepresentativewhohadfivetoeightyearsofexperiencewithan employeewhohadlessthanoneyearofexperiencewasasmuchas$43,000insales.AbtAssociates

Wewouldrathertakeaneager,hungry,customerorientated mindandmoldittowhatworkswellatSouthwest,thantryto changethehabitsofsomeonewhoscomeupthroughan organisationthatviewslifedifferently.

SherryPhelps,DirectorofCorporateEmployment,SouthwestA.

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