BY JOHN B. RICHARDS

L O Y A L T Y

WHERE DOES YOUR LOYALTY PROGRAM STAND? CRUISE LINE OFFERS LESSONS

IS ANYONE SAFE?

With loyal customers falling prey to instant internet poaching, companies are searching for new ways to protect and grow their customer base. The promise of powerful software solutions suggests that sophisticated loyalty programs are within easy reach. But the risk of customer flight combined with the lure of a simple loyalty solution have driven many organizations to rush to execution without a balanced strategy.

Many lopsided loyalty efforts are numbers-driven, little more than thinly disguised discount programs. Others are relationship-driven programs offered by smug, self-satisfied brands that take their customers’ loyalty for granted. Both types put a company at risk.

Today’s loyalty landscape is being quickly reshaped. New loyalty entrants and traditional practitioners alike need to step back and evaluate loyalty position, design and strategy to rebalance. No one is safe.

The Customer at Risk The ability to communicate instantaneously has blurred and threatened the position of many brands and sent their customers fleeing elsewhere. No more is loyalty a function of “loyalty, honesty, honor, and valor” and a lifelong pledge. It is now driven by data, offers, news and connections – yet it is potentially lost at a moment’s notice. Well-positioned brands earn their keep with substance and connection over time. Those that have programs use them to supplement their core mission and channel interest productively.

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To better understand how to supplement a good brand’s position, build relationships and channel demand productively, we need to step back from execution and understand how the parts fit together and how to measure success. This calls for a clear definition of loyalty components – beyond the numbers – and a better understanding of a brand’s emotional engagement beyond the ability to impact its commercial value.

Lopsided Loyalty – the Rush to Execution

When is the last time you were asked for your e-mail address to join a loyalty program and, despite some curiosity and the possibility of a future discount, turned it down?

Today, many loyalty programs are an invitation to be a member of someone’s spam club. The power of software and the temptation of big data have created a rush to execution before the value and source of connection are fully understood. Yes, as a brand, it is important to understand the quantitative value of a customer and count your winnings (today this is the easy part). But, unless you know where you want the relationship to go and how to measure the total value to you and your customer, the program becomes a predictable numbers game.

The risk with today’s easy-to-implement loyalty programs is that they create a lot of schemes without true purpose or mission. Airline programs have become a prime example. Today, with airline consolidation limiting choice of carriers,

customers become trapped. It typically creates a downward spiral in both the program’s value to the consumer and the motivation of the carrier to keep it fresh.

A good loyalty program is a tool, not an end in itself. Brand strategy comes first. A brand and its execution around its promise drive loyalty (Four Seasons Hotels, Starbucks and

Royal Viking Line have all excelled here).1 A loyalty program can activate and channel that loyalty productively, but it is no substitute for a well-thought-out position and consistent execution to back it up.

Designing a Program for Impact and Engagement – Balance Matters

By stepping back from everyday competition, we can examine the moving parts of a good loyalty program more closely and learn that it is more than an organized discount program.

Most brands today can marshal data and target offers and communication for impact. Some have the natural advantage of achieving an emotional attachment to their customer. All brands should engage their customers routinely in a way that builds the relationship appropriately for what it does. But that doesn’t mean everyone needs to do it in the same way.2

A good loyalty program has balance. It deploys some measure of data-driven impact so that the customer interaction is smart and appropriate. It emphasizes engagement practices that build the relationship and keep the customer connected in an appropriate, sometime surprising way.3 A great loyalty program enhances the assets of a great brand. There was a time when great brands didn’t need to consciously engage their consumers beyond the purchase cycle. Today, they all do – the internet and short attention spans have made sure of that.

1 See “Loyalty Started at Sea” by John B. Richards2 My dentist once said to me: “You come to me for good dental work, not for a relationship. If I do good work, you will come back.” (I bet he doesn’t have a loyalty program, and we can see that there are times when attempting one simply clutters the relationship).

HonestyHonor

Loyalty

Valor

NewsConnection

Data

Offers

Traditional Loyalty Cycle1 Today’s Loyalty Cycle2

1 King Arthur’s Round Table 2 Today’s Round Table

HonestyHonor

Loyalty

Valor

NewsConnection

Data

Offers

Traditional Loyalty Cycle1 Today’s Loyalty Cycle2

1 King Arthur’s Round Table 2 Today’s Round Table

TO BETTER UNDERSTAND HOW TO SUPPLEMENT A GOOD BRAND’S POSITION . . . STEP BACK FROM EXECUTION AND UNDERSTAND HOW THE PARTS FIT TOGETHER . . .

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Building a Customer Army: Mercenaries or Loyalists?

Many loyalty offerings today present clear winners and losers. At one extreme are strongly data-driven programs (e.g., airlines). At the other end are programs that rely on a brand’s emotional connection and uniqueness for loyalty (e.g., many high-end hotel companies). Precious few firms do both well.

Many companies fail to realize that, today, both the emotional engagement of the brand and the power of information are essential for a strong loyalty connection. There are those who have defaulted

to buying loyalty and, conversely, those that rely on distinctiveness alone. Both are vulnerable and likely to lose over time.

If the loyalty program is to deliver meaningful lifetime value, it must combine commercial value and emotional connection. Loyalty is earned, not purchased. History tells us that armies made up of loyal residents with an emotional connection always triumphed over mercenaries whose loyalty was purchased. Mercenaries were always the first to cut and run, as will your customers if they are “purchased, not pampered” and not committed to a purpose beyond the commercial relationship.

3 Four Seasons Hotels’ reputation and brand loyalty were cemented by surprising the guest in unexpected ways. When a businessman got in a cab at the hotel and left his briefcase on the curb, he was surprised and delighted when the bellman followed him to the airport and presented him with his briefcase. Here, service culture drives loyalty in the absence of a formal program.

COMPILING TRANSACTION DATA - Essential foundation for loyalty management to understand size, profitability and trends in customer behavior leading to Lifetime value calculation.

CREATING MEANINGFUL SEGMENTATION - Using data to create discrimination among customer segments defining what is meaningful and actionable.

DEVELOPING TARGETED PROPRIETARY OFFERS - Using segmentation to craft meaningful offers that simulate continued growth in customer purchases.

INCREASING ENGAGEMENT AND NEWS - Timely and appropriately “metered” communication that builds the relationship by stimulating interest.

PROVIDING RECOGNITION AND SURPRISE - True recognition needs to surprise the loyalist. Loyalty is maintained by recognizing patronage. It is increased by “surprise and delight.”

DEVELOPING PARTNERSHIPS THAT DIFFERENTIATE - Partnerships help broaden market reach and create valuable differentiation tools your brand can’t deliver or shouldn’t.

IMPACT

ENGAGEMENT

LOYALTY DESIGN COMPONENTS

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DATA-DRIVEN PROGRAMS – Airlines (e.g., American Airlines Aadvantage) – Once the godfather of loyalty programs, the airline program was the first and best at marshalling big data to encourage loyalty. However, the consolidation and competitive insulation of most airlines have diminished the motivation to use their programs creatively and lessened their value and consumer impact. Data-driven programs need to strengthen

their engagement efforts to broaden brand commitment beyond predictable award levels that can only meet (or may

even fall short of) expectations when award levels are diluted. Consumers will be headed south – not just for the winter.

NEITHER DATA-DRIVEN NOR RELATIONSHIP-DRIVEN (e.g., Fast Food /QSR) – Recent developments in software have allowed for easier consolidation and understanding of transaction data – easing the myriad of systems in existence across the fast food industry. Competitive intensity and changes in consumer behavior have driven a defensive rush to put something in place, resulting in little more than organized

discount programs. One exception is Starbucks. With a first mover advantage in systems and loyalty design, its integration of online ordering and incentives match well with consumers’ demand for convenience. Programs (like

those of most fast food brands) that are neither strong in data nor engagement must first reassess brand positioning and uniqueness of mission so that customers have something to be loyal to.

ENGAGEMENT/RELATIONSHIP-DRIVEN (e.g., Luxury hotels/cruises, such as Four Seasons, Ritz Carlton) – A strong emphasis on brand and highly differentiated service have historically insulated these businesses from the forces now

impacting other sectors. New hotels and cruise lines don’t materialize overnight. But the

lack of organized engagement can hurt a property or a group when competition finally shows up and business suddenly sours. In the cruise industry, there are already too many indistinguishable ships that can duplicate each other’s offerings

and itineraries. And while hotels have some insulation due to location, this only means a slower death. When competition finally arrives, it’s too late to start the conversation with your customer about loyalty.

Now is the time for companies to develop an organized approach to loyalty to help channel brand assets effectively and assist in the waning brand differentiation. Cruise lines can do more shore side to build unique connections. For luxury hotels, organized engagement must start early – before it seems necessary. Complacency is the enemy of success here. RELATIONSHIP AND DATA-DRIVEN (e.g., American Express/Neiman Marcus) – American Express, long the king of big data

before the world caught up, effectively cultivated its cachet and brought real value through a variety of engagement techniques and a meaningful reward program. Its competition was a collection of “city-state banks” with little organization around data or message.

However, that competitive landscape has changed, as low interest rates have motivated bank competitors to focus and organize their credit card businesses with meaningful results. Amex, once an excellent example of impact and engagement techniques, should now focus its offerings and bring greater clarity to its complex, multi-tiered value proposition in the face of a more distracted, knowledgeable and highly sought-after consumer.

Neiman Marcus was an early adopter of sophisticated loyalty management techniques through its IN-Circle Program. But the company is now under assault by the web and needs to strengthen its value proposition to retain a better-educated consumer who can be easily poached. After years of cultivating cachet and the engagement side of loyalty, Neiman’s needs to rebalance and strengthen its value proposition to better pair with its legendary merchandise editing. Uniqueness and value should be possible.

Creeping complexity is often the enemy of well-developed, seemingly balanced programs such as these. Overly rich and complicated award schemes can blur the brand position and its value proposition, leaving the consumer confused by too much choice. For companies like American Express and Neiman Marcus, complexity is the enemy of success.

Fast Food

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The Loyalty Matrix

Where Do You Fit?Where do you fit on the Loyalty Matrix? The degree to which you

execute loyalty tactics and balance impact and engagement determines it.

Engagement

• News• Recognition & Surprise• Partnerships

Impact

• Data• Segmentation• Offers

EngagementDriven

Weak Data and Engagement

DataDriven

Data & Engagement

Driven

American Airlines

American Express

Starbucks

Ritz Carlton

Fast Food

Neiman Marcus

Four Seasons

Rebuild meaningful award value

Crystallize and simplify award level options

Leverage outside partnerships to build brand context

Leverage Marriott data - but partition and strengthen unique “Ritz” engagement

Tie awards to catering/delivery to combat convenience trend

Create value proposition tied to unique merchandise

Structure/organize initial recognition and engagement process

Current Direction Strategy Options

Fast Food

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John B. Richards is the former

President of North American

Operations for Starbucks

Coffee Company, Executive Vice

President of Four Seasons Hotels,

and the CEO of Elizabeth Arden

Red Door and Dean and Deluca

during the formative growth

years of these companies. He

is currently an Advisory Partner

and Principal at the New England

Consulting Group. He designed

his first Loyalty Program in 1982.

This is the second of a three-part

series on Loyalty foundations,

structure and measurement.

Measuring Results – Beginning the Journey to Lifetime Value

With the advent of big data and elegant software programs that make it easier to sort and understand customer performance hierarchies, it is tempting to assume you are nearly finished once this is implemented. But thinking about loyalty requires combining high impact information and engagement strategies that result in a meaningful long-term customer relationship. From the start, you must envision what this relationship looks like, how to value it and keep it fresh. Understand your desired result while you are assembling the necessary data instruments to keep score and the relationship strategies for stronger engagement.4

Four factors can apply to assessing the lifetime value of the relationship:

Visualize success before you start. Organize your information so you and the customer can gauge the success and growth of the relationship. Enforce a balance to planning that ensures the appropriate tension between engagement and impact. Frequently audit that balance and ensure an element of surprise in the relationship so you are not trapped in a cycle of creating expectations through a numbers-only program that you can only meet and never exceed. Exceeding expectations builds the relationship; meeting them is at best a form of defense. Data-driven programs meet expectations; adding engagement gives you a chance to surprise and exceed them. Companies that have already mastered data management need to assess the complexity and clarity of their programs to be sure that overengineering the loyalty award proposition has not left the customer confused and wondering where they stand.

Try this exercise: objectively assess the strength of your program’s strategies: data-driven (Impact) and relationship management (Engagement). Then position them alongside the examples of well-known programs in the loyalty matrix to see where you stand. Move “forward” (to the upper right-hand corner of the matrix) by executing balanced strategies.

Royal Viking Line improved its market position more than 30 years ago by harnessing high impact, data-driven strategies to accompany its strong engagement efforts. You can too.

The definition of loyalty still stands: “a strong feeling of support or allegiance.” If you provide the support, customers will provide the allegiance.

1. PURCHASE FREQUENCY – HOW OFTEN?

2. PURCHASE GROWTH – CHANGE OVER TIME

3. PURCHASE QUALITY – MIX OF PRODUCT AND LEVEL OF PURCHASE

4. AGE – DURATION OF RELATIONSHIP

4 Defining the dimensions and quantifying life time value is the subject of the third article in this series. By running sophisticated analysis against these data pools, a clearer understanding will emerge of which elements drive loyalty. This will focus marketing strategy and service recognition efforts moving forward.

WIN, WIN: LOYALTY TACTICS TO LEARN FROM

TYING AWARDS TO POSITIVE, PROFITABLE BEHAVIOR STARBUCKS AWARDS LOYALTY POINTS FOR ONLINE ORDERING, ENCOURAGING BEHAVIOR THAT SATISFIES CONVENIENCE NEEDS AND IMPROVES SERVICE DURING MORNING CRUNCH TIMES WHILE CONTRIBUTING TO HIGHER TRANSACTION COUNTS.

ADDING SURPRISE TO A NUMBERS PROGRAM AMEX COUNTERS THE PREDICTABILITY OF A HIGHLY-ENGINEERED NUMBERS PROGRAM WITH FREQUENT ATTEMPTS TO ENGAGE THAT AREN’T EXPLICITLY TIED TO AWARD LEVELS. THROUGH AN UNEXPECTED FREE GIFT OR EXCLUSIVE ACCESS TO CERTAIN EVENTS, THE COMPANY TRIES TO REWARD PATRONAGE WITHOUT A DIRECT QUID PRO QUO.

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