Research shows that monetary rewards are not the only driver for customer loyalty programs and that increasing experiential rewards provides greater long-term benefits.
Loyalty programs are supposed to unlock great value for companies by driving higher sales and boosting brand affinity. So why aren’t they doing this? Although more and more companies now have loyalty programs (they’re growing at 9% a year), the number of customers who actively participate in them continues to hover at only about 50%, suggesting that there is still something missing in most programs.
In late 2017, McKinsey & Company surveyed more than 9,000 consumers about their experiences with loyalty programs across nine different business sectors, including grocery/drug/mass merchandise, retail, airlines, hotels, car rental organizations, and restaurants. They asked consumers what they value in a program and how they engage with them. They found that having a successful loyalty program does, in fact, drive significant value and is critical for growth. Having a program scoring high on what they call the Loyalty Performance Score is strongly correlated with greater shareholder return, especially in the airline, retail, and grocery/drug/mass-merchandise sectors.
This measures both how customers feel about loyalty programs and how well programs drive value for the company — for instance, how often customers choose the brand over other options or pay more to earn a higher status. They also found that consumers who participate in top-quartile loyalty programs are 80% more likely to choose the brand over competitors and twice as likely to recommend the brand to others.
So what makes a "good" loyalty program?
1. Tailor your program’s benefits to the “head” and the “heart.” It’s no surprise that what the feature loyalty members say they care about most in a program is monetary rewards. But it’s important to note that offering a basic “earn-and-burn” points mechanism isn’t enough in today’s market. Customers care almost as much about a company making them feel special and recognised as they do monetary benefits (see “What Customers Really Care About”). “Surprise and delight” features like unexpected gifts and special recognition deliver exceptionally high value to customers and can be achieved at low cost.
2. Speak to all parts of the loyalty funnel.
Amazon Prime has created an ecosystem that engages customers at every level of the funnel. Prime uses free trials and clear communication of benefits to convert 60% of customers to participate, compared to an average of about 50% participation for other retailers. Of these members, roughly 80% are actively using their Prime membership (versus 60% for retailers), and 80% of those active users increase the amount they spend at Amazon.com. Amazon is able to achieve these results by delivering differentiated benefits to the Prime customer whom they care about, including such varied benefits as free shipping, movie and music content, and Prime Day offers. Amazon is always raising the bar on the program with continual additions of new features and benefits for consumers (Twitch Prime etc.).
3. Offer customers rewards today and tomorrow. The two attributes most attractive to loyalty members in the survey were the accumulation of points for a big reward as well as the ability to spend points sooner for a smaller reward. (See “What Customers Really Care About.”) The key point here is that customers want access to more types of benefits. They want to feel like a program is working for them in the short term, while also knowing they can work toward something quite substantial in the long term. This is especially critical in sectors where products or services are more expensive and may be purchased less frequently, such as airlines and hotels. In that case, “instant gratification” rewards keep customers involved and aware that they’re benefiting from the relationship with the brand.
Those rewards can appear quite nominal (for example, a free sample from a store or free drink on a plane) but are nonetheless effective. It’s important to note that this isn’t just a binary rewards approach. In practice, there can be a range of rewards to appeal to different customer segments along the short-term/long-term spectrum. Southwest Airlines, for example, offers the short-term benefit of free priority boarding, the longer-term reward of free flights, and the additional value-add of a free companion pass that members can earn when they fly.
4. Make it easy to understand and use. In their efforts to enhance loyalty programs, companies have tried to add all sorts of bells and whistles along the way. While adding innovative new features is essential to any program’s success, throwing too much at customers, especially at one time, can be confusing and disempowering. Companies need to strike a balance by keeping loyalty programs relevant to their customers’ needs while also accessible and easy to use.
The simplicity of outdoor retailer REI’s payback model, in which customers earn money back with each purchase — shown clearly on the receipt — is a feature that helps the program earn high marks from customers and builds affinity for the brand.
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