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We need to talk about… loyalty

We need to talk about… loyalty

Strategy

Dec,2018

Tesco, Sainsbury’s, M&S, ASOS and John Lewis and Waitrose have all either closed or changed their loyalty and reward schemes this year, which has raised doubts over the effectiveness of a marketing tactic that has been ubiquitous since the mid-90s.

The business model that underpins loyalty programmes is a simple one in theory: the quality of a product/service leads to a happy customer; a happy customer is more likely to be a repeat purchaser and become ‘loyal’ to a brand, which leads to better profitability.

And so businesses set objectives around ‘increasing brand loyalty’ to achieve this wonderful utopian world of having a fiercely loyal customer base. But as with most things, if it sounds too good to be true, then it probably is.

Take the supermarket category as an example. Research conducted by retail consultants TCC Global discovered that only 5% of retail shoppers would switch retailer if their current store withdrew its loyalty card scheme. Now if Tesco’s objective with its Clubcard was to foster loyal customers in their category, then you’d say they still had a job to do. But customer loyalty is only part of the Clubcard strategy for Tesco – the data collected on consumers and shared with brands is a huge revenue driver for Tesco, so acquisition is just as important as loyalty.

Telecoms megabrand O2 is another great example of loyalty schemes not doing quite what you’d expect. They decided to switch their marketing communications to target existing customers, highlighting improved service, loyalty rewards, and consumer benefits. The switch in comms was an unmitigated success for O2 (a reported ROI of 80:1) but because comms channels were aimed at a mass audience, rather than current customers specifically, the results were more about the acquisition of new customers than driving loyalty from their existing base.

These two examples highlight that while brand loyalty campaigns may seem successful on the surface, they are just market penetration campaigns in disguise.

So what’s going wrong here for brand loyalty?

Firstly, our definition of loyalty, in a marketing sense, needs to shift. The reality is that a brand’s customers use other brands most of the time and there’s absolutely nothing you can do to change that. You might well prefer to shop at Tesco for the Clubcard points, but if you fancy a quick snack as you’re walking by a Sainsburys, are you likely to bypass it to go to the Tesco 20 minutes away? Of course not. Convenience will always rule.

That’s not to say all loyalty schemes should be scrapped entirely. There are some quick and easy ways to make them more engaging for both brand and consumer and it requires us to rethink what we previously thought about how consumers operate.

Most schemes are set up with rewards established up front so that people know exactly what to aim for as they spend their money. But research shows that human beings are in fact far more motivated to reach a goal that has an uncertain reward – this is called the Motivating-Uncertainty Effect.

This was observed in a study in which participants were challenged to drink a set amount of water in 2 minutes and offered either a certain ($2) or uncertain ($1 or $2) reward if they succeeded.

Remarkably, adding an element of uncertainty to the reward meant that an additional 27% of people were more motivated to complete the task. Uncertainty makes the process required to get the reward feel more exciting because we care more about the process than the result.

The ‘experience’ of the process is also backed up by research on what people like about loyalty programmes too. A survey by Bond Brand Loyalty found the top 10 reasons why a loyalty programme is “great” from a consumer perspective:

  1. Programme meets needs
  2. Customers enjoy participating in programme
  3. Programme makes brand experience better
  4. Ease of redemption
  5. Programme consistent with brand expectations
  6. Programme rewards/benefits appealing
  7. Level of effort needed to earn redemption
  8. Time to earn desired rewards/benefits
  9. Amount accumulated per $1 spent
  10. Ways rewards/benefits can be earned

Notice how the top 5 are experiential in nature?

Sometimes the journey matters more than the destination, so think about ways your loyalty scheme can add an element of surprise that keeps people coming back… even if it’s just that occasional free Pret coffee.

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