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Why loyalty programs aren’t working

Many businesses today feel compelled to create a “loyalty program” as part of their marketing mix. From airlines to grocery stores to gas stations to financial services to drugstores to sporting goods chains, it seems most industries have loyalty programs. To many marketers, simply having such a program means ipso facto that they will have more loyal customers.

The reality? Most of these programs are not building loyalty. They’re just creating noise for consumers and draining valuable resources from businesses.

According to Colloquy, a firm that specializes in studying customer loyalty, program membership grew 26% between 2012 and 2014, with the average U.S. household belonging to a whopping 29 programs. But even as loyalty programs proliferate, the number of programs consumers actually participate in is declining. In 2014, while the average U.S. household was a member of 29 programs, they were active in only 12. Actually, it’s hard to fathom that households are truly active in 12 programs. That’s a lot of data to keep track of…all those points, miles, discounts, offers, structures, etc. Common sense would tell us that a typical household probably is actively engaged in fewer than half that number.

So, the question is, what are these companies and programs doing wrong?

  1. First, and most important, companies are thinking about loyalty in the wrong way. The objective is not loyalty. Companies that consider loyalty as being one of 12 cards stuffed in a wallet that a customer might use on occasion (if prompted by the cashier) aren’t focused on the right thing. Loyalty is more about the rational reasons why someone buys a product or service. The true objective for marketers is to create an emotional obsession with the brand.And the emotional is often irrational. When consumers are truly, emotionally attached to a brand, they believe the brand makes their lives better, and they may even have a hard time imagining what the world would be like without that brand. Do you feel like that towards your grocery store, your gas station, or your drugstore? Probably not.But you might feel that way about your iPhone, your Starbucks coffee, your favorite jeans, or your running shoes. Such brands don’t have merely your loyalty. They have your heart, your mind, and your wallet.
  1. Companies aren’t digging deep to understand consumers’ needs, behaviors, and desires. Because companies don’t understand their customers well enough, they aren’t designing sufficiently relevant or compelling benefits and services as part of their loyalty programs or, more important, as part of their total brand offering. To engage customers, you have to start with a deep understanding of customers’ basic needs and wants. Then you have to push further. You must understand how they act when searching for, buying, and experiencing what you offer, because in those behaviors lie the unarticulated needs and desires that don’t come to light in a survey or focus group. Most companies stop at the surface level and don’t get to the deeper insights that they could use to design experiences that connect emotionally with consumers. Without these insights, many programs offer their members benefits that they don’t even care about.
  1. Some loyalty programs are too complicated to understand or make customers wait too long for a “payoff.” If the benefits of your loyalty program are not simple, clear, and reasonable to achieve, you’ve handicapped your efforts from the start. One hotel loyalty program’s “at-a- glance” list of benefits includes 41 elements. It takes three swipes down the computer screen, not just a glance, to see them all. Many programs also hurt themselves by being structured for a big payoff that will happen only in the distant future. What consumers really want are incentives that don’t have to be large, but that keep them engaged and encouraged until they one day do achieve the bigger payoff.
  1. Companies structure their loyalty programs as one-way communication (company to customer) rather than creating a dialogue with customers or fostering conversations and engagement among customers. I keep a separate email account to store the useless emails I get from businesses and programs I mistakenly signed up for. I know other people who do the same. Businesses need to realize that what they have to say is not the most important or interesting thing to consumers. They would be better off allowing customers to select the content most interesting to them, or asking for feedback from customers rather than sending a barrage of messages based on their own agenda vs. the consumer’s.
  1. Companies aren’t differentiating their highest-value customers and providing them extraordinary value. You have undoubtedly heard of the Pareto principle, or the 80/20 rule. It suggests that not all customers are created equal in that a disproportionate level of revenue and profit comes from a small proportion of customers (i.e., 80% of profit comes from 20% of customers). It sounds rather simplistic, but it has proven true in many business cases.Surprisingly, companies don’t identify the 20% of customers (or even the 10%) who create the extraordinary value. They don’t treat them differently or offer them better experiences. They lump the valuable customers in with the other less valuable 80%. If businesses provided extraordinary treatment to the 20% of customers generating the most value for them today, it is very likely they could extract even more value from these customers in the future. And if businesses understood more about their most-valued customers’ profiles, they could find and target other customers like them, thus making the valuable 20% an even larger group.

So, if all of these companies are doing it wrong, is anyone doing it right? One brilliant example is the Nike+ (Nike Plus) program. Nike views Nike+ not as a loyalty program but rather as a way to create a passionate following for its products and what the brand stands for. Nike tapped into the core consumer insights of desire, competitiveness, and tenacity and harnessed these insights to create a community of like-minded, fellow runners.

Nike+ starts with having a sensor that fits in your shoe. It “talks” to the wearable or portable device of your choice, captures your run data, and uploads it to the Nike+ site. Nike+ has a number of features that allow consumers to track their runs; set goals; participate in challenges with other runners; join a club to help train for a race; and, importantly, share their running experiences on social media.

Before Nike+, the company’s touch points with consumers were fairly limited. Nike really “touched” customers only when they purchased shoes in a Nike store or on and had little to no connection with them in the important usage stage…when they were running. Introducing Nike+ has expanded the company’s ability to touch customers and to engage them on a daily basis.

Nike has been brilliant in allowing the community to fuel itself. Rather than delivering one-way messaging from company to customers, Nike has cultivated multifaceted communication among the community of runners. These highly engaged customers are more likely to purchase Nike products, to upgrade to better, more expensive shoes, to purchase more frequently, and perhaps to purchase multiple pairs each time they buy. What’s more, Nike is gaining their customers’ opinions and invaluable data on their customers’ running habits as well as how the shoes perform to feed back into the product innovation cycle.

Reports of Nike+ membership range from 10 million to almost 30 million. The company apparently has seen double-digit growth in running-shoe revenue and has been able to reduce its spending on marketing running shoes. All because Nike+ has become an incredible form of marketing for them…even though it doesn’t seem like marketing to the consumer.

So, if you are a brand or business leader, ask yourself, do I really need a loyalty program? Or, should I instead push for a deeper understanding of my customers’ behaviors and unarticulated desires? Armed with this knowledge, should I focus more on creating experiences so engaging that customers will want to connect with my business everyday? Should I foster conversations with and among my customers and avoid only talking, not listening?

If you take these few critical steps, your business will be far ahead of most loyalty programs out there today.