Liquidity of Loyalty Points drives Customer Engagement

Markets naturally evolve with maturing technologies and changing customer behavior. During this Century, we have seen immense changes across many industries, and these changes foreshadow a natural evolution in the loyalty sector.  People now expect flexibility and convenience in almost everything they do. This is largely because people are living in a world where the majority of things are available with a simple swipe on their smartphone.

But not every market has kept pace. Take customer loyalty for example. The majority of loyalty programs today have barely altered their design from those of 15-20 years ago. And, the thousands of programs a customer can choose from mostly look similar. Rather than producing mass adoption, the proliferation of programs is leading to increasing apathy where most participants are being unnecessarily constrained in achieving goals.

The key to reinvigorating engagement in loyalty programs is providing liquidity. Today, there are tens of thousands of incompatible loyalty point currencies, and customers can't possibly remain engaged in five of them - let alone 25 or 30.

I will share a number of examples that demonstrate how reducing barriers (complicated rules), opening up markets (greater liquidity), collaboration (networking with partners), and embracing common standards (reduced complexity) has enabled other markets to grow (quite significantly) for everyone. The evidence implies a similar evolution will happen with loyalty marketing.

However, before I explain why offering greater liquidity will be the next major evolution in loyalty marketing, let me say that I don′t think giving a customer some points or miles actually generates much loyalty. At best, it creates a degree of ′lock-in.′ Offering points is often expected in exchange for giving up personal data, but more importantly, giving some points in a loyalty program is the opportunity to start a dialog – and through that dialog, a brand can try to build affinity. Creating real loyalty is built through providing a consistently good experience and delivering overall value. Arguably, the “points” themselves have a cost (liability) to the program operator, but only have perceived value by the customer if they can do something interesting with them.

What do we mean by liquidity in loyalty programs?

Providing liquidity basically means making things easier; allowing greater control and choice. It is equally about making things less complicated for the customer. It means removing friction around how people collect, redeem, transfer, or exchange the value associated with loyalty currencies. We will show how liquidity is applied in other industries and why the loyalty sector is ripe for increasing liquidity.  Unless you are a frequent business traveler, there is very little ′liquidity′ in loyalty programs or their currencies.

The typical story goes something like this: ′A customer joins dozens of programs and quickly realizes they have a tiny number of points in most of them with no real expectation in accumulating enough points in any one program to redeem for something of emotional interest, so they lose interest and quit participating.  It is not because the customer doesn′t like the brand or program; it is simply because they can′t possibly spend enough with a specific merchant or travel supplier to accumulate the number of points necessary to redeem for something of emotional interest.

This is a huge problem for merchants and travel suppliers because only their top 15%-25% of customers remain engaged – which means they know little to nothing about the other 80% of their customers. This un-engaged 80% represents the mid and long-tail of customers and is a massive opportunity to grow the business because they probably are spending money with competitors.  

You could change lots of things about your program – from the system that runs it, to enabling more mobile engagement, to being more generous (albeit with the associated cost), but none of those will move the needle by more than a percentage or two. Only adding liquidity can have a significant impact on participation level.

Until loyalty marketers start to think differently about how to engage the entire customer base and build loyalty on the combination of perceived value and experience with the brand, the mid- and long-tail will shop primarily based on price.  Of course building real loyalty is hard and involves the entire company working together to deliver a better overall experience and high perceived value. What is much easier is making your loyalty currency more valuable (i.e., more liquid) so customers spend more with you to get the points in the first place. Points are made more valuable in 3 fundamental ways:

·        Enabling exchange – so customers can shift value between independent programs

·        Enabling redemption for high-margin (often more aspirational) rewards – where the wholesale cost may be quite reasonable but the perceived value by the customer is much higher

·        Reducing operating costs so more net value goes to the customer rather than the intermediary

Sainsbury′s and Tesco have both stated publicly that their best customer is one motivated to collect their loyalty currency – but shifts that value to partners to redeem for something more aspirational.

If we continue to do the same things at a time when the competitive environment is changing so quickly, we should actually expect results to get worse. And, you can be certain that Amazon will take advantage of inertia across the constantly growing sectors in which they compete.  

Many industries embracing greater liquidity through more open collaboration and efficient ecosystems have grown tremendously over the past 20-30 years. Let's take a look at some lessons learned elsewhere in order to predict how the loyalty sector must evolve to remain relevant.

Increasing Liquidity Stimulates Market Growth

The low-cost airline boom (primarily in Europe and Asia) has led to massive expansion of the industry and makes traveling much more accessible to nearly everyone. For example, Ryanair carried just over 1 million passengers in 1993. By 2016 this figure had jumped to 106 million passengers. Similar growth can be seen with EasyJet, Vueling, Norwegian, etc.

Flying can be considered a commodity or a luxury depending on your perspective, but the barriers have come down dramatically over the past 25 years. You might not think of this in the context of ′liquidity′ but the availability of seats, low switching cost, reduced border-crossing complexity, and improved airport infrastructure have all contributed to greater engagement (in traveling by air) for the mass market.

New Technologies are often patented to enable the inventor to realize some financial gain from their innovation. Fortunately for consumers, governments promote ′liquidity′ in the long-term by ′opening-up′ the technology after a period of time (the patent cliff). In the pharmaceutical industry, the end of protective periods for major drug discoveries last Century has led to a massive growth of the industry overall because of the shift toward so-called generic drugs, which are significantly cheaper (sometimes 50%-70%) compared to branded drugs. According to a report by IMS Health, in the period 2013-2018, generic drugs were due to account for 52% of global growth in pharmaceutical sales, compared to just 35% for branded drugs.  Demand grows when products are more accessible, or the marketplace is more liquid.

In financial services, marketplace dynamics have led to much greater efficiency in trading assets (foreign exchange, futures contracts on commodities, stocks/bonds) – which in turn has dramatically increased the volume and value of transactions. The FinTech revolution we are experiencing now is applying considerable pressure on banks to lower fees and open up services to a wider market. Companies like Transferwise, Mint, etc. are creating liquidity in products and services that were historically operated by Oligopolies – and not only are benefits flowing to consumers, but the industry is much more inclusive.

Many nations introduced competition in the telecommunications industry during the 1990s – which led to lower prices and massive increases in volume. Putting phone, electric, or gas lines into a building was a natural monopoly for a long time, but through greater liquidity in the ′network,′ customers get greater value - and increased volume flows to the best service providers.

Similarly, the market for computing hardware and software like PCs and mobile devices has grown as markets opened up and embraced greater collaboration around technology standards (i.e., liquidity).

The tide rises for every company that can remain competitive as markets evolve. The losers, when markets go through major evolutions, are those who don′t adapt. It is human nature to constantly strive for greater efficiency, and markets will always evolve toward a more liquid and efficient state. As this happens, customers migrate to the supplier that offers the best overall value (not necessarily the lowest price).

The growth of nations

So far our examples have focused on industries and how they evolved. But we can also study liquidity in the context of nations and how their economies have grown when they removed barriers to trade and embraced a more open economic policy.

There are many countries that have experienced explosive growth over the past few decades. In fact, last decade discussion of the BRICs (Brazil, Russia, India, and China) consumed more headlines than any other business topic. The key to their growth was introducing more liquidity into their markets. Brazil and Russia have sputtered a bit due to political or corruption issues, but their growth remains strong. In the western world, Spain grew like crazy after the dictator left power in the 1970s – and didn′t stop until the ′lack of liquidity′ with banks caused a severe recession in 2007. In fact, it was lack of liquidity that kept the economy from bouncing back until just a few years ago. Even small countries like Peru are growing at 7% by ′opening up′ and enabling greater freedoms for their citizens and businesses.

One case is particularly interesting - Vietnam. The country still has problems with poverty, but the economy has been growing consistently since the 1980s. GDP in the country is up more than 6% each year. The country has been able to control inflation as it grows, which attracts investment and allows the standard of living to rise.

With this increase in business and investment has come an associated rise in opportunities and a growth of choice for its citizens. The middle class in Vietnam is due to double to 33 million people by 2020. There's also a booming startup scene in the country.

In a future-thinking report by PWC on the world in 2050, their forecast saw Vietnam as the biggest mover in terms of global economies between 2016 and 2050, moving up 12 places from 32nd to 20th.   That !! is profound change – enabled primarily by promoting liquidity.

Each of these examples demonstrates how reducing barriers (complicated rules), opening up markets (greater liquidity), collaboration (networking with partners), and embracing common standards (reduced complexity) enables the market to grow for everyone. There is no reason to think that a similar evolution won′t happen across industries where loyalty marketing is prevalent.

The common theme in each example is enabling liquidity. Ryanair might have reduced prices in the airline industry, but as their customer figures suggest, their business model (following Southwest in the USA) also helped to drastically increased the volume in the industry.

At Currency Alliance, we estimate there are over $500B (that′s right; BILLION) worth of loyalty currencies in circulation worldwide. That is a huge number. Only 23 countries have a larger economy. By treating this value more like money, we can apply many best practices from other industries to help businesses and customers realize more value. And, since people often value ′experiences′ higher than the money that can buy them, we can help increase the perceived value of loyalty currencies without increasing their cost to loyalty program operators.

The average customer today has a greater volume of choice than at any other point in history. Indeed customers now expect to have a huge amount of choice.

In some cases, loyalty programs have addressed this demand by adding things to their redemption catalog. That′s great, but the moment you start treating loyalty currencies like money, you can give your customers almost infinite choice without having to manage a specific catalog – and keep it fresh.

Delivering greater customer welfare

A fall in prices combined with an increase in volume leads to something we could define as customer welfare – i.e., customers realize net benefit.  In my opinion, customer welfare across industries exists on a continuum – perhaps from 0 – 10, where no industry has yet reached 10. In most of the examples cited, customer welfare rose from perhaps 4 or 5 to 8-9, but I think in loyalty (with the exception of frequent travelers and other heavy spenders) most customers remain around the lower tiers. The one change you can make to jump up 2, 3, or 4 levels without breaking the bank (by simply being more generous) is adding liquidity.

Thirty years ago, loyalty programs were designed to lock-in a customer in exchange for some rewards. Recently the focus has been rewards and experiences in exchange for Big Data. The future will be defined by offering greater liquidity in customer loyalty programs in exchange for access to a richer, 360 degree profile of customers based on everywhere they shop.  Accessing such a rich profile will be enabled by customer-controlled data wallets, Blockchain, and progressive personal data protection regulation (such as GDPR in the UK).

It's been proven that customers are fairly happy sharing data about themselves so long as they value what they are getting back in return.

Of course, enabling total liquidity with loyalty currencies could be dangerous for loyalty programs. Some of the larger programs could bankrupt their owner′s business if all the points were redeemed too quickly. Or, if too many points migrated to a specific brand overnight, they could struggle to service the redemption obligation. And, if you enrich the program by being too generous, ROI could go down (not up).

More and more brands talk about putting their customers first in the design of their loyalty programs but when it comes to trusting their customers with more freedom around earning and redemption, the ′words′ often don′t materialize into actions. Creating customer welfare rather than seeing customers as numbers and simply trying to keep them locked in is much more likely to result in genuine customer loyalty in the long-run. And the best way to generate this customer welfare is via increased liquidity. 

How the customer loyalty market can become more liquid

We've already explored some of the current problems facing the customer loyalty industry. So how can we go about changing it through increasing liquidity?

The key point here is that brands will almost certainly need to work together. Collaboration around common loyalty currencies and sharing data (in a compliant manner) is the only way to understand the customer well enough to compete with giants such as Amazon, as well as more recent players such as Airbnb, Uber and Booking.

Although it is fairly logical that until now brands have wanted to focus on their own individual loyalty programs and try to ensure that customers only use their loyalty currency, in the coming years this will no longer be realistic.

As we've already seen, the modern customer is a very different one to that of 15-20 years ago. They operate in more liquid, flexible markets and are likely to be apathetic toward loyalty programs so long as they see very little prospect for receiving back something of value to them or if they encounter complicated barriers.

If customers were able to exchange loyalty currencies as easily as they exchange fiat currencies at the airport, this would definitely boost customer welfare and motivate customers to collect more of the loyalty currency in the first place – independent of where they redeem.

And it wouldn't just be the customer benefiting. Brands are currently limited by only having customer data based on the customer′s shopping activity in their store. But, if a company is part of a loyalty ecosystem with other brands, then those brands would be able to share top-level data about their customers without sharing specific transaction details.  In a world where customers are increasingly expecting personalization in almost all of their experiences, this holistic data could be incredibly valuable.

For those familiar with the loyalty sector, you know that Coalition Loyalty programs – where many merchants issue a common loyalty currency – have been relatively successful over the past 20 years – especially in countries like Germany, the UK, and Canada. However, the existing operators of coalition program have been extracting a very significant margin for their intermediary role. Coalitions as we have known them did deliver much greater liquidity to customers – and thrived because of this – but the current business model is not engineered to allow more value to flow through to the customer (so, they represent greater liquidity but with considerable unnecessary friction).

An open ecosystem

At Currency Alliance, we're convinced that in a few years′ time the customer loyalty market will be based around a much more open ecosystem. It's the logical way for the market to evolve.

This implies broader collaboration between brands offering customers the loyalty currency most desired by each customer – while maintaining control over partner activities. When customers can capture much more value in a single account and have greater freedom to spend it how they want, many people who are currently apathetic about participation will once again become active.

We've seen that in other industries, the natural direction in the last 20-30 years has been toward increased liquidity and greater customer welfare. If brands desire greater welfare for their customers (which they certainly should), then the best way to go about it is by lowering barriers and by being more flexible and innovative when it comes to their loyalty program.

The way in which the customer of 2022 will interact with different loyalty currencies from one store to the next is likely to be a lot more fluid and open than is the case right now. Digital transfers from one currency to another in the cloud will be done with a simple swipe of a screen and the companies with the best value proposition will attract the lion′s share of benefits.

Businesses might understandably be sceptical about being part of such an open ecosystem where their loyalty currency could be exchanged for another brands'. However, they need to understand that the alternative is that the loyalty currency is simply not valued at all by the mid to long-tail. No brand has the digital infrastructure and data bank on its customers that Amazon is accumulating. If smaller companies don't want to be forgotten in the coming years, the answer is related to greater collaboration in a broader ecosystem.

Blockchain may be part of the solution in generating greater liquidity, but we are years away from that becoming a reality because of operating costs, frequent changes to the underlying infrastructure, and lack of partners on any Blockchain with which to do business. We are huge proponents of Blockchain and will lead initiatives to use it for loyalty, but it will be 3-5 years before the infrastructure is stable enough and smart contracts are mature enough to enable real benefits.   

It might sound like a cliché to say that it's crucial to put the customer first, but for too long this hasn't been the cornerstone of a great number of customer loyalty programs. It has been more important to try and tie people in.  This is not sustainable.

The customer has evolved in recent years to be quite accustomed to sharing data about themselves and being part of various social and commercial networks in order to feel more connected. If customers are ready to participate in an open ecosystem in order to get better perceived value, it seems logical for brands to take this as their cue to do something similar.  

 Toward Liquidity - the natural evolution

There are hundreds of millions of people in the developed world that perfectly understand loyalty programs, and yet rarely participate. To bring them back into the fold, the industry must embrace liquidity and an open ecosystem that is built for collaboration.

By trying to focus on customer welfare, you add an emotional dimension to the equation. Treating the customer like a person, rather than only trying to maximise Lifetime Value (LTV) and Key Performance Indicators (KPIs); and, viewing them as more than a number in a database is much more likely to result in genuine customer loyalty. People sense through every touchpoint when they are treated like a person rather than a number.

It's time for customer loyalty to evolve as other industries have done by embracing shared technology, breaking down barriers and encouraging greater liquidity. There is no fast way to create real customer loyalty, but additional steps can be taken by providing customers with more options, increased flexibility and greater perceived value. It basically means treating people with respect.

I acknowledge that many loyalty programs seem to be working “OK” because the company operating them has kept them alive, but “working OK” is the enemy of working great and I hope many of my loyalty marketing colleagues are tired of being mediocre.

In my next article, I will explore the optimal percentage of sales to give back in the form of loyalty points to customers.  Most loyalty programs give about 1% of the purchase amount in the form of loyalty points – but that same retailer or travel supplier is likely offering 6%-10% in cashback discounts to attract non-loyal customers. That seems strange. However, I believe the lack of liquidity in loyalty programs today has actually been the main reason we can′t test whether 1% or 3% or 5% or even 10% of the purchase amount in loyalty points may be the optimal amount to give in order to maximize program ROI. The amount would likely vary by sector and it might even vary by customer – if we know what each person values most – but the arbitrage today between loyalty programs (retention) and discounting tactics (acquisition) seems far from optimal.