The Futures Company 2014. Published by The Futures Company at 6 More London Place, Tooley Street, London SE1 2QY. Copying, redistribution and display is permitted under a Creative Commons licence for non-commercial purposes, provided articles are properly attributed. Please notify us of any such re-use by emailing unlockingfutures@thefuturescompany.com

Beyond the loyalty paradoxProofPoints are an occasional series of timely points of view from The Futures Company on issues which affect strategy, innovation, marketing and the way we see the future.

Customers are changing. They expect businesses to want to have an appropriate relationship with them, in which they get treated as human beings. And they’re more loyal to businesses that do treat them like this. But most loyalty programs are designed in a way that creates instead a transactional relationship with the customer. In this gap—which we call the loyalty paradox—lives a whole world of cost, and a whole world of opportunity.

As The Futures Company argues, we are moving towards a “kinship economy,” in which personal relationships are central, and those relationships then facilitate and foster brands. Among the consequences: businesses need to create engagement that isn’t wholly tied to usage or advertising; and they need to treat people so well that they choose to spend their social currency on your business. At the moment, most loyalty programs are not designed to foster this type of interaction.

Delta Airlines learned this the hard way last year when it effectively devalued overnight the airmiles that its customers held. One of the many specialist bloggers described this as “a reminder to always diversify your points;” or in other words, not to be loyal to any one loyalty program. Indeed, across all sectors, the research suggests that consumers hold multiple loyalty cards, while recent payments research in the U.K. by The Futures Company found that the items in their purses or wallets that most irritated consumers were

the loyalty cards. There were too many of them, not used often enough.

This loyalty gap is likely to get worse. Loyalty programs are the hybrid child of marketing and technology, the market expression of “one-to-one marketing.” Although the first recorded example of a loyalty program is in the late 18th century, the modern loyalty industry is a creature of digitized customer management, digitized stock management systems and digitized supply chains. As we move into a world of hyper-connectivity, in which customers and supply chains alike are swimming in data, it is more likely that loyalty programs will drive the customer relationship, rather than the other way around.

Loyalty is big business, worth $50 billion a year in the U.S. alone, according to some estimates. With so much money at stake, the literature is full of articles that demonstrate that loyalty programs generate a return on investment. But at the same time, the evidence is weak. Analysis by McKinsey of 55 European

ProofPointCraig Wood and Andrew Curry, The Futures Company

ProofPoint:7 | July 2014

“We are moving towards a ‘kinship economy,’ in which personal relationships are central, and those relationships then facilitate and foster brands.”

The Futures Company 2014. Published by The Futures Company at 6 More London Place, Tooley Street, London SE1 2QY. Copying, redistribution and display is permitted under a Creative Commons licence for non-commercial purposes, provided articles are properly attributed. Please notify us of any such re-use by emailing unlockingfutures@thefuturescompany.com

and American public companies suggested that those with extensive loyalty programs grew no faster than those without.

So it’s worth going back to first principles. The idea of a loyalty program is simple: to get closer to the customer. The means: a combination of learning (by collecting data) and rewarding. The intended outcome: to get a customer to return more frequently and/or to spend more than they would otherwise. The rewards typically work in one of three ways, sometimes in combination:

• A loyalty discount, either as a flat rate, or on selected purchases (the typical supermarket model)

• A reward after a number of repeat purchases (the classic coffee-shop model)

• A loyalty bonus or status upgrade (for example to a more comfortable room in a hotel or seat on an airline).

From a business perspective, the rewards tend to be driven by one of three questions;

• Do I have spare capacity that I can afford to give away (as, for example, in the hotel or airline industry)?

• How much margin can I afford to give away (or give back) to my most profitable customers?

• How can I find a subsidy to reward my customers?

The business rationale is either a calculation of ROI on returning customers who would otherwise have taken their business elsewhere, or on the value of the data they have provided to you for participation in the program. Terry Leahy, the former Chief Executive of the British supermarket chain Tesco, described the company’s loyalty discount as “a thank you, pure and simple,” but commentators pointed to the 19 million customer profiles that Tesco’s Clubcard program generated.

Looking at the loyalty space, as seen in the diagram, the typical

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“According to research, companies with extensive loyalty programs grew no faster than those without.”

loyalty scheme operates in a space bounded by the perceived consumer transactional benefit and the business cost/benefit. When the two get out of line, as in the Delta example, they get traded off: the business gains at the expense of the consumer. This zero-sum game may be good for the balance sheet but is bad for the reputation, especially when amplified, quickly, through social media.

The way to break out of this trade-off is to reconnect with your consumers through your loyalty framework, using the emotional space between

consumer, customer experience and brand. As Taddy Hall wrote last year in Business Insider,

“What if companies used their loyalty programs to make the product or service better for me? What if, instead of compensating me for what is usually a similar (and not very good) experience, they made the experience better?”

When companies use the whole space, what we see is loyalty programs that are indeed about experience rather than transactions, even about kinship. Such programs are better

Figure: Three-dimensional loyalty

Source: The Futures Company

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Perceived business ROI

The Futures Company 2014. Published by The Futures Company at 6 More London Place, Tooley Street, London SE1 2QY. Copying, redistribution and display is permitted under a Creative Commons licence for non-commercial purposes, provided articles are properly attributed. Please notify us of any such re-use by emailing unlockingfutures@thefuturescompany.com

aligned with the brand and are at least partly driven by brand experience. Take, for example, the loyalty scheme “myWaitrose,” run by the British employee-owned supermarket Waitrose. The program has three main elements: discounts on selected items; a free newspaper with a (modest) level of spend, and a free coffee on presentation of the card—cappuccino, espresso, or so on—whether or not you make a purchase.

This last feature takes it into the emotional arena. Waitrose has a reputation for quality and customer service, and employee ownership gives these further credibility. The notion that it will give something away to its members is right on brand.

From Waitrose’s point of view, the coffee machines are now a feature of their stores, and delivering a cup of coffee costs next to nothing (coffee margins are high). The cost/benefit equation looks good. From a consumer point of view, that same cup of coffee has a high perceived value because takeaway coffee prices are so high. But it’s the unconditional element—you can claim your daily coffee whether or not you purchase anything else—that gives it its emotional kick.

Brands don’t even need a rewards program per se to build loyal connections with customers. Turning to an American example, Harry’s is a new razor blade brand founded by one of the co-creators of Warby Parker that’s challenging the likes of Gillette and Schick. Their razors are made from high-quality steel and feature innovative ergonomic design and packaging. Harry’s razors look like a high-end product for the upper market. But the price tells a different story; at $2 per razor, it’s close to half as expensive as the leading competitors.

Harry’s is focused on the entire customer experience—all three dimensions—and they’re producing results, raising $122.5 million and purchasing a German razor blade manufacturer to fulfill their vision of vertical integration. The team at Harry’s is delivering an exceptional product, personalized experience and an emotional connection that differentiates them in a commoditized marketplace.

In short, the way out of the loyalty paradox is to shift away from the transactional focus, and look for different ways to engage with your interested and valuable consumers.

Whatever their limitations, loyalty programs fulfill a valuable role in a neglected area of business. Research suggests that companies lose 20-40% of their customers every year, and reducing this by just five percentage points can have a significant positive impact on profits. But only a fraction of marketing budgets tends to be spent on retention, which is why loyalty spend is valuable. It needs to work harder. Loyalty programs need to break out of the “me-too” space. They need to be as differentiated as the brands they are designed to support.

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Business questions to break out of the loyalty paradox

• How do you currently definethereturnonyourloyalty program? What’s not being measured?

• How can you extend the emotional connection with your customers into the design of your loyalty program?

• How do you execute this so that it can be delivered across your organization

Additional research by Hannah Moore

Contact us:

To find out more about how The Futures Company can help you measure and improve your loyalty program, please contact Craig Wood +1 (919) 932 8696

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