Two strategic shifts to make your loyalty programmes relevant to customers

In recent years, I've found myself engaged in numerous debates centred around the existence of customer loyalty in today's market - “Does customer loyalty still exist nowadays? And if not, what is the point of having a loyalty programme?”

These questions are an accurate reflection of the changes in the market dynamic and customers’ behaviours in the FMCG and retail industries. Nowadays, every category brims with different brands. Research shows there are more than 8,000 branded coffee shop chains in the UK as of 2023. And in Europe, there are 195 airlines plus 10 major third-party booking sites! Faced with an abundance of options, it's no surprise that consumers are increasingly inclined to explore new brands and alternatives rather than remaining committed to one. No wonder some people claim that “customer loyalty is dead”!

But is it though? Or is it time to refresh our definition of customer loyalty???

My favourite definition of customer loyalty

Taking the executive course “Customer Loyalty: A Strategic Approach” was a revelation for me, and my favourite definition is from Professor Thomas O'Toole at the Kellogg School of Management:?

“Customer loyalty is the customer’s decision to use a brand, product, or service on a preferential basis over time which results in increasing customer lifetime value.”?

The term that resonates with me the most is “preferential basis”, which means that customers exhibit a preference for a specific brand, product, or service over competing options. However, it's important to recognise that preference doesn't require exclusivity, i.e. a customer can be loyal without being exclusive. While customers are increasingly open to exploring new brands and may have multiple options in their purchasing repertoire, they can still demonstrate loyalty to certain brands by showing their preferences. Therefore, it's more accurate to say that "brand exclusivity is dead, but customer loyalty still thrives!"

So under this context, how do we evolve loyalty programmes to remain relevant to customers?

There are two strategic shifts we need to make for loyalty programmes:??

1. From ‘focusing on high-value customers’ to ‘recognising the majority’?

Traditional “loyalists” typically referred to customers who shop with one brand consistently and frequently, often recognised as “high-value customers”. High-value customers still exist, but the number of this group is getting smaller amidst a growing array of options in the market. For example, high-value customers only account for 1% - 3% of the total customer base in the QSR (Quick Service Restaurant) industry. And the total revenue from this group of customers is shrinking.?

Currently, many loyalty programmes are tailored primarily to benefit high-value customers, which has two challenges. One, because the overall revenue and value from the loyalist group are declining, the return on investment of a loyalty programme is likely to be lower. Two, the majority of customers find loyalty programmes are not relevant to them. An Oracle survey showed that the top reason for customers avoiding hotel loyalty programs is “it takes too long to get rewarded”. I heard the same feedback from QSR customers.?

Therefore, to improve the return on investment of a loyalty programme and to maximise the benefits to businesses, we need to tailor the loyalty strategy and mechanics to attract and engage a broader customer base.?

2. From a ‘reward programme’ to an ‘incentive programme’

Many loyalty programmes are structured to reward their customers at the end of certain actions and behaviours.? For example, “dine with us five times to receive? a complimentary main dish.” If I put myself in the customer's shoes, I can easily see the flaws of this approach. One, a free main dish is enticing, but with all the other options, I’d rather have variety than go out to the same restaurant five times. Two, even if I committed to getting the free main dish, it may take me a while to reach the “five times” threshold. We are in an era of a shrinking attention span, so I will likely lose interest throughout the journey or forget about this mechanic. This is the challenge many loyalty programmes face - while the end rewards may have appeal, the mechanics are often too lengthy or complicated for customers to stay engaged.?

That’s why loyalty programmes nowadays need to be shifted from “reward” at the end of actions, to “incentivise” immediate and repeated behaviours. How do we make this shift?

a) Make the value tangible and instant

Some businesses implement instant gratification as their loyalty mechanism, offering exclusive discounts to loyalty members or immediate rewards after each transaction. This eliminates the need to wait and all customers can see the value of being a member right away.?

With points-collection programmes, businesses can assess and evolve the reward thresholds to make them more attainable for most of their customers. And don’t be afraid to give customers incentives upfront to get them to start using the loyalty programme.?

b). Speed up the cadence

Loyalty is beyond a one-off purchase - it is about getting customers back to repeat purchases. Therefore loyalty programmes should always focus on driving the next purchase and making the next purchase faster.

For example, with points-collection programmes, businesses can introduce “double/triple points” promotions to speed up the progress toward rewards. Also, businesses can shorten the redemption window for rewards to drive a sense of urgency and prompt customers to return faster.?

c). The power of communication?

Loyalty programmes are complicated so it is the brands’ job to educate customers patiently about the mechanism, and prompt customers regularly to take action. Therefore establishing a series of “reminder” communications is crucial to ensure customer engagement and participation in the program.

Final thoughts

Customer loyalty is not dying. But the market is crowded and customers are more and more fickle. So it's crucial to reassess the strategy and mechanics of loyalty programs so they resonate with a wider customer audience, encourage desired behaviours, and promote repeat purchases more efficiently.

If you find this content useful, please check out my article "How to make your loyalty programme stand out of competition"

Reference:

https://www.oracle.com/webfolder/s/delivery_production/docs/FY16h1/doc11/global-survey-data-insights.pdf