Why loyalty programs don’t actually build loyalty!

Loyalty programs have been the focus of attention of both managers as well as researchers.  In fact, when most companies think of building customer, or partner loyalty, they think of a loyalty program or scheme.  However, increasingly we find that loyalty programs don’t actually build loyalty, or at least not the right type of loyalty (one of my blogs talks about different types of loyal customers).  So what exactly is wrong with loyalty programs and how can we improve them?

Many companies today heavily rely on loyalty programs.  Most think that they will build loyalty, and others use it as a means of getting customer data.  As a tool for getting access to customer data, I think they are brilliant.  You can get all sorts of information about the customer’s spending habits, which you wouldn’t normally get through any other source.  This data can then help you to target your marketing strategies according to the individual customer.

What’s wrong with loyalty programs

On the other hand, many companies are in an illusion, thinking that they will building customer loyalty.  If we break down what loyalty programs really do, we can see that they don’t achieve their stated goal.  Loyalty programs give customers points for every purchase they make.  The higher the quantity and frequency of purchases, the more points you get.  These are then traded in for discounts, and awards, etc.  Looking back at the definitions of loyalty, the higher end of the spectrum focuses on creating positive attitudes, and an emotional bond with the brand.  The lower level of loyalty focuses on repeat buying.  Hence, loyalty programs actually only encourage the customer to come back, and does not form a bond with the customer.

Some managers argue that this repeat purchase will eventually lead to higher levels of loyalty.  That may be true, only if it is accompanied with other factors, as I discussed in my blog on emotional attachment).  The loyalty program on its own will not achieve this.  In fact loyalty programs may be doing the opposite.  Customers become attached to the loyalty program, instead of the company.  For instance, in the UK there is the Nectar card.  This is a loyalty card which can be used by the customers in a number of different companies, ranging from BP and Sainsbury (supermarket) to Ford and Hertz.  Customers who become loyal to the card, would stick with whichever company is associated with the card.  For instance, if the card dropped BP, and instead went with Shell, then those customers who are loyal to the card would switch to Shell.

A similar situation can take place where a loyalty scheme is run by a single company.  For instance, if a customer uses the Emirates Airlines loyalty scheme, and later finds that Singapore Airlines is offering more points, or better rewards, he/she may switch airlines.  In both of these cases, the performance or the quality of the products or services are not considered by the customer.   Instead, the loyalty is towards the points, or the rewards that a customer gets.

How to improve your loyalty program

So what should you be doing to improve your loyalty programs?  Scrapping the loyalty program is not the best option.  The idea should be to improve it to adapt to the ever changing consumers.  More importantly, we need to reward the right things in order to build real loyalty.  For example, giving rewards not just for using the product or service, but also for things like recommending it to others, giving suggestions, complaining about poor services, taking part in customer focus groups, etc.  These are just a few of the behaviors we need to reward to encourage customers to build bonds with the brand.  The main idea is to move the customers from being passive to active, and to take ownership of the brand.

As an example, I worked with a firm based in Manchester, England to improve their B2B loyalty program. One of the things we did was to introduce an incentive for customers to take the initiative to help other customers.  So a customer who was familiar with the system would help out a new customer who may be having a problem setting up the machines or equipment.  In this case, both customers were offered rewards, with the one doing the helping getting higher rewards.  This not only reduced the burden on the tech support help lines, but also build a sense of comradeship between the customers.

There are countless other things which companies can do to improve their loyalty programs.  If your company is doing something innovative, or you’ve seen something which matches any of this, then please do share it.