Rethinking loyalty: dogs, cats and the shopper conundrum

The difference between dogs & cats

Man’s best friend they say. But why are dogs so damn loyal to us humans?

Well it’s not just about giving them food and shelter. Cat’s benefit from that too. The difference lies in their mentality. On the whole dogs are pack creatures unlike the more independently and solitary minded cat. Their wolf ancestors imparted a desire to build social relationships. Put simply dogs prefer the company of others, fostering inter-dependent bonds of loyalty and security underpinned by the pack benefits of better survival.

Dog experts believe this mentality causes dogs to be loyal to humans too where they see us as the ‘alpha dog’ and therefore naturally follow our lead. There is even research-based evidence that dogs love their humans. This shows that when owners interact with their dogs, the human and their dog appear to release oxytocin; a chemical measure of love in mammals. So, this ‘until death do us part’ loyalty is a deeply wired-in natural social behaviour for dogs.

Brand loyalty tends to be more cat-like

Encouraging brand loyalty is a key goal for many marketers, on the oft quoted basis that it is cheaper to retain customers than recruit new ones. According to Fred Reichheld, author of the Loyalty Effect, a 5% increase in customer retention can lead to a 25-100% increase in profit for your company.

Yet while many people claim loyalty to their favourite brands the reality is far from the truth. We humans aren’t as intrinsically dog-like faithful despite our best intentions and desires. Just like our real-life relationships, by extension brand loyalty isn’t always exclusive or ‘until death do us part.’ In fact, we tend to be a bit more cat like when it comes brand loyalty,  choosing to come and go as the mood takes us.

Why is this? 

Well for starters, what we claim to do and what we actually do are two very different things.

There is a tendency to overclaim perceived loyalty where actions speak louder than words. One shopper study by Alliance Data found that ‘52% of respondents say they’re loyal to their preferred grocery store, yet only 35% of respondents shop there exclusively.’  This is a bit like saying: "I am very store loyal; I hold loyalty cards from five different retailers!"

 

This is partly driven by product choice and financial pay-offs against affordable price and perceived value. So, while customers may really love a particular retailer or product they might not be able to or justify buying it as regularly as they like. This is a desire driven more by aspirational affinity rather than loyalty. As a personal example, I love the All Saints retail brand yet rarely buy at full price due to the expense.

And secondly, how we make purchase decisions isn’t as rationally based as once thought. Instead, a plethora of research over more recent years shows the things we buy are mainly driven by emotional decisions and/or time-saving habits. So, we are less analytically disposed which requires conscious effort, often defaulting to easier unconscious gap-filling to quickly assess and process purchase options based upon past experiences and intuition.

Big expensive things such as houses, cars and holidays are largely emotional driven purchases – we buy because it ‘just feels right’ – and post rationalise to ourselves afterwards. While small everyday items such bread, beans and butter are largely time-saving habit driven. However,  yet again this is underpinned with the emotional reassurance of  recognisable ‘trusted’ brands we have purchased before thereby editing out the less familiar and those brands less normally purchased. So familiar brands help us save time by short-cutting and navigating through the many purchase decisions we make in life. Our minds are lazy and love automaticity - certainly more desirable than the time and effort required for more conscious consideration. Given a choice, we prefer doing the same things repeatedly where previously satisfied by the past-experience. Each time you choose and use a  product or service, its advantage over those you didn’t choose accumulates.

 But this in itself doesn’t drive loyalty.

The key drivers to purchase loyalty

Pause for a minute and think about how many brands are truly unique or distinctive. Looking inside my fridge I only found one – HP Brown Sauce. Most other products have comparable substitutes once you get beyond any projected brand image wrappers suggesting for example that one ice cold lager is more ‘you’ than another similarly tasting ice cold lager.

As Byron Sharp points out in his thought-provoking book ‘How Brands Grow’ very few people are exclusively loyal to one brand. In fact, brand loyalty is more akin to an open marriage where most people tend to purchase from a repertoire of brands.  As he further explains purchase preference and choice is driven by a combination of mental and physical availability:

• Mental availability is about brand salience – those brands that pop up in the forefront of your mind (beyond general awareness) as satisfiers to a particular need. So, for example when hungry and thinking about fast food, McDonalds or KFC may spring to mind rather than Burger King or Pizza Hut. As well as past experience, brand salience is influenced by advertising and market prominence (bigger well-known brands stand out with more people).  Also, given the average supermarket holds around 30,000 products this mental availability, supported by recognisable product labelling and point of sales support helps cut through the noise selection. Drawn to the familiar we ‘satisfice’ rather than optimise product selection to speed up choice against products we consider satisfactory rather than working harder to find the absolute best product for us (with the reality the store would most probably be closing before you get half-way through your shopping list!).
• Physical availability is about proximity and availability to purchase. This could be about store location through to instore shelf prominence of preferred/recognisable colours and packaging. With regards to proximity, every morning I used to stop off for a coffee at the same coffee chain store near my office. Now that I no longer work there I buy my coffee from a different chain. And with availability, while I prefer the taste of Coke Zero, in its absence I’ll substitute this for the similar tasting zero calorie Pepsi Max if not in store. Similarly, I recall from previously working with News International as a client that stock availability was a greater driver to newspaper sales on a given day above and beyond any marketing activities. It transpired that regular readers would rather swap to another paper than incur the additional effort of walking to the next available newsagent. So physical availability is of equal – perhaps even greater - importance to mental availability.

The fallacy of targeted loyalty programs

Again, according to Byron Sharp, historically the thinking behind many loyalty programs was flawed. There was a mistaken belief large investment could drastically reduce churn and that existing customers relationships could be cultivated to encourage devout purchase from only one brand (100% loyalty) leading to substantial growth in revenue and profits. It was also mistakenly believed that targeting a brand’s most loyal customers would generate the greatest return. (With greater hindsight  - aside from cross-sell or upsell opportunities -  it’s conceitedly easy to foresee financial suicide for companies focused on providing highly loyal existing customers with discounts on products they’d readily purchase and pay full price for; effectively giving away rewards for little change or gain in behaviour in return).

Separate research conducted on behalf of the Institute of Practitioners in Advertising (IPA) concluded that as many as 91% of loyalty campaigns fail to deliver significant profits. And of those that do profitably deliver, they do so in most cases by winning new customers. Given how few brands promote loyalty as a broader proposition across the buyer category it’s perhaps then no surprise.

What’s interesting is that loyalty rates don’t radically change across brands. Yes, bigger well-known brands may have more customers who repeat buy more often on average compared to smaller brands with less market share (known as the double jeopardy law – extensively established by Andrew Ehrenberg’s research). But their exclusive loyalty to that brand is only slightly stronger. Every brand has customers who buy other brands too. Therefore, trying to build a brand this way is futile. Research further shows big brands succeed by building weak purchase relationships with lots more infrequent buyers. So, most brand growth is driven by market penetration. In other words, it’s more profitable for brands to build preference and habit with the many rather than by building exclusive ties and relationships with the intensely loyal few to encourage buying even more.

As we touched on above, the key task of marketing therefore is to make a brand easy to buy through building up mental and physical availability. The implication of this means it is more beneficial in talking to everyone in a given category to increase demand amongst ‘customers’ and non-customers’ alike albeit with tailored messages where relevant.   Brand growth therefore requires supporting loyalty activities to also effectively attract and engage ‘the many’ – from existing loyalists (to cross sell & upsell to) to infrequent light buyers through to those potential buyers who have yet to purchase.

An example cited in the enlightening book ‘How not to plan’ by Binet & Carter is with O2 who have run mass market campaigns that include promotion of their Priority loyalty scheme. While loyalty metrics improved - such as reduced churn - the main impact was in the recruitment of new customers.

This underlines how it pays to avoid narrowcast loyalty promotion within environments more likely to just engage existing loyal customers  (i.e. such as in-store and via customer CRM activities). Instead it is more profitable to take a broader category approach where acquisition and retention activities are effectively 2 sides of the same loyalty coin. Attracting light buyers is king which sounds counter-intuitive. However, all brands have them and as there are so many they make a significant contribution to sales volume.

If Byron Sharp’s view on loyalty is correct, brands may be pursuing a lost cause in seeking to generate an emotional bond. Sharp argues repeat purchasing is instead driven by making a brand physically and mentally available to the whole market at the right prices, while your customers are almost certainly buying from your competitors at the same time.

However, while I agree that not many people genuinely want a deep relationship with a brand or retailer they do seek relevancy, value, accessibility and positive experiences (where especially for retailers the physical instore experience can be a vital driving differentiator above and beyond digital ease and convenience). Therefore, creating emotional bonds are important when tied into the context of utility and delivering an overall rewarding shopper and consumptive experience. 

Focusing on the right tactics

Whatever loyalty initiatives are deployed these need to be focused around measuring the right business driving metrics. 

Not all loyalty schemes have the same objectives. Some are focused on reducing churn. Others may perhaps seek to grow organic reach via member-get-member programs. And a few such as the aforementioned O2 or brands such as Boots (with their Advantage card) will seek to make their loyalty proposition as widely appealing as possible as part of their brand value proposition.

Recent articles report some forward-thinking brands seeking to reward customers based upon their longer-term loyalty. Sky was cited as one such company seeking to redress existing customer disgruntlements that new customers were getting the better deals. Through their Sky VIP scheme, they are now more focused on rewarding tenure to make loyal customers feel more valued.

Others such as M&S through their Sparks card recognise customer loyalty across a variety of metrics including recency, frequency and value of purchase as well as social media engagement. Regular reward offers tailored against this behaviour are then sent as a pick-list for customers to choose which to redeem against. However, the scheme has been criticised as confusing rather than empowering customers.

Academic research also advocates moving away from fixed rewards to reinforce loyal behaviour. Contrary to common belief, consumers are more likely to take desired action if the incentive is of an uncertain value, offering a way to make loyalty schemes both cheaper and more effective. BF Skinner is regarded as one of the most influential psychologists of the 20th century. His ideas have shaped modern society, where to quote from this Marketing Week article: ‘Skinner dedicated his career to understanding what type of incentive most powerfully shaped behaviour. One of his findings was that uncertain rewards were more influential than certain ones. When animals were only sometimes rewarded with food, the associated behaviour became more embedded than when they consistently received food. It’s a surprising finding but one that we now know applies to humans.’

Some takeaway learnings

Encouraging new purchase behaviour through predictive cross-sell / upsell data…

Recognising and rewarding loyalty based on longer term tenure not short term spend…  

Injecting uncertainty into your rewards as a more powerful incentive for shoppers to act…

It all feels like the Emperor’s new clothes. In my working experience there have always been forward thinking brands deploying these approaches – though admittedly perhaps not that many. Here’s three selected from the past to present with some lessons that can be learned:

1.      Tesco Clubcard – transaction driven value

• Overview: The original big daddy of loyalty schemes driven by the data analytic prowess of dunnhumby. Some would argue it created a transactional, points-make-prizes programme, rather than something that would build a deeper connection. However, in its heyday is was successful at driving associated cross-sell / up-sell opportunities through the sheer mass of data accumulated and analysed augmented with third-party providers who provided broader ‘every little helps’ benefits beyond Tesco core products such as pet insurance, wine club membership etc. They also understood - and directed their efforts accordingly - that customers who are loyal in the long-term drive more bottom line opportunity than those who are loyal only for a 12-week period, even if the latter are heavy spenders.  However, times have moved on and the markets have changed. While the success of Tesco Clubcard in the 1990s and 2000s quickly created an established model for discount-based brand loyalty in the UK, there has been increased competition with the rise of nimbler Everyday Low Price (EDLP) retailers such as Lidl and Aldi. This has made it more difficult for transactional based loyalty schemes to cut through, while macro-economic pressures have introduced the perennial dilemma of balancing customer incentives with the cost to the business. As a point in case, earlier this year Tesco delayed changes to its Clubcard rewards scheme after a backlash from customers who objected to them reducing the value of vouchers without warning.
• Learning takeaway: According to this article a recent report from Forrester makes clear, loyalty schemes that balance discounts with non-transactional benefits are the most likely to boost customer engagement: ‘Stronger connections with customers are created as much by experience, quality of service, personalisation, and a strong link between online and offline, as by vouchers and discounts. Considering this, loyalty is being redefined not as a parallel part of the brand world but as an embedded part of it’.

2.      IKEA Family card - tenure driven value

• Overview: Here’s a personal example. I worked on the positioning and UK launch of this scheme around a decade ago with the original proposition being ‘the more you visit the more you get’ in terms of  access to home living and lifestyle rewards. The premise behind this was to drive up store visit frequency (and therefore spend) with shoppers, where even amongst those classified as loyal shoppers this was still relatively low. The radical departure was in developing and setting this up as a ‘pointless loyalty’ scheme. This was based upon a mix of ‘fixed’ and ‘uncertain’ rewards in recognition of store visits rather than a transactional spend-to-points-to-rewards rebate. The mix of ‘fixed’ instore rewards included free tea & coffee with each visit and the opportunity to exclusively purchase Family only products from a branded sub-store. ‘Uncertain rewards’ on the other hand were determined by a mix of previous store visits, engagement and purchase behaviour. A mix of discount rewards and event invites were mailed and targeted around this tiered behaviour augmented by datacaptured lifestage/lifestyle data (without shoppers ever knowing their behaviour algorithm). Admittedly the data analysis and offer segmentation wasn’t the most sophisticated at the time (it may have evolved) but it was successful in driving the desired shopper behaviour in line with the findings of the aforementioned BF Skinner’s research.  Results showed an ROI of 163% in the first year alone with 66,000 additional store visits. IKEA Family members were also 35% more profitable than non-Family members.
• Learning takeaway: Where it was less successful was in attracting a wider less frequent/non-shopper audience perhaps as a) it wasn’t widely promoted to attract this group as it was mainly via instore (via kiosks and point of sale), website & CRM activities and b) the fixed rewards by themselves weren’t powerful enough incentives to make the effort of shopping at IKEA (renowned at the time for battling the off-putting busy carparking, instore one-way system and large check-out queues) attractive to less loyal/non-shoppers while the more attractive targeted offers only kicked in once habit and tenure had been established - leading to a possible Catch 22 impasse.

3.      Amazon Prime – real-time driven value

• Overview: This leads me onto the final example which is arguably a non-loyalty loyalty scheme. Rather than a loyalty bolt-on Prime has become an intrinsic part of the way Amazon runs its business and the benefits it affords its members. Think about it – you pay to become a member the significant sum of ￡79 per year!  But you get a lot for that –

o  FREE one day/same day/2-hour deliveries

o  FREE rental access to Amazon Video library (selected titles)

o  FREE streaming access to Amazon music library (selected artists)

o  FREE Kindle eBook library book borrowing service

o  FREE priority access to lightning deals and exclusive Prime day sales

As Behavioural Economics tells us , humans go purchase mad with the notion of FREE. Amazon tested this business model a few years back before roll-out with a FREE delivery service in some countries and a near-to-free delivery service in others. Both saw a rise in orders, however this was only slight in the near-to-free countries, but sky rocketed in the markets where it was FREE. Our brains are wired to be irrationally compelled by the notion of FREE, hence we buy more, more often. Or at the very least compare prices on Amazon first as it drives habitual shopping behaviour.

• Learning takeaway: Loyalty isn’t always about vouchers or discounts provided over a piece of plastic or an app. Amazon may not always offer the cheapest products in the market, but they have a broad enough range, competitively priced to make it a good starting point to look. It then delivers real-time consistent value through every transaction and interaction while removing the barriers and pain points to purchase. So, they are as instantly appealing, nudging and gratifying to new customers as they are to existing loyal customers. While at the same time it harnesses browsing and shopping behaviour to further refine its offers and recommendations specifically to you with relevant and complimentary products backed up with reassuring reviews and the knowledge your delivery will safely and speedily arrive and/or be returned without worry or hassle. The ‘everything store’ continues to innovate with a total focus on the consumer. So much so, that two thirds of Amazon Prime members would try banking with the retailer. From books to banking – there’s a ringing endorsement in trust for you which is no surprise given they are currently top of the UK Customer Satisfaction Index, a position they’ve held over the past 5 years in meeting and exceeding customer expectations.

Final thoughts…

My daughter’s school has a mantra ‘Dare to be remarkable.’ I like that – why just be OK, or good when you can really push yourself to become the best version of yourself you can possibly be.

Brands and retailers can be remarkable too – especially important when consumers can more easily today vote with their wallet to spend elsewhere . If branding is about establishing a compelling and meaningful marketplace position within the minds of consumers, then all marketing activities – including loyalty activation communication, rewards and actions -  should consistently execute against this with remarkable experiences.

When it comes to loyalty activations it is clear there is no one-size-fits-all approach. So, it could be remarkable with a big ‘R’ or small ‘r’ in helping deliver a total experience that creates customer value and business impact. 

Big ‘R’ disruptive loyalty experiences such is the case with Amazon Prime. But, it doesn’t always have to be tech driven or require massive expenditure updating legacy systems. 

Just like the Sky cycling team and their 1% marginal gains, an accumulation of small ‘r’ remarkable experiences can be customer feathers that favourably tips the scales. So, for example, while Waitrose can’t compete at the same level as the EDLP operators such as Lidl and Aldi one of their most successful initiatives was the simple introduction of free coffee to existing loyalty customers.

You can also think creatively to develop effective solutions at low cost. You may recall the tale of simplicity and thrift deployed by the Soviets during the 1960’s space race in seeking an effective writing implement that could work in space. As the myth goes, the Americans spent millions on a pen that could put ink on paper without gravity. The Soviets on the other hand simply gave their cosmonauts pencils. Akin to this is the example of a Korean supermarket which alleviated a customer pain point with a simple stroke of genius by selling banana packs with 6 bananas of different ripeness. 

In today’s world where, more and more customers expect much more from brands and retailers beyond basic product offering and transactional value, companies need to think less about building bolt-on loyalty programmes and building a loyalty driven company that rewards customers throughout the end-to-end experience – real-time, everytime, without working too hard to achieve these. 

For infrequent purchases such as cars and (for many) airline tickets there’s already tried and tested ways of creating meaningful interactions via drive day events and collecting credit card airmiles.  For online retailers and brands there’s the prospect of creating memorable and shareable unboxing experiences. Plotting the customer experience journey against the present state is a great start point to establish and map out additional valued opportunities.  It could be as simple as putting a smile on peoples’ lips as my local rail station shop does each day.

Big and disruptive or small and delightful. High tech or low tech. Big ‘R’ or small ‘r’. Whatever the remarkable experience, it’s all about finding compelling ways to compete, attract and retain new and loyal customers alike. Being a company that dares to be remarkable by providing Every Time Appreciated Value.