The Problem with Loyalty Programs

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What is loyalty, really? Traditionally, consumer loyalty is defined by measures such as intent to continue purchasing or likelihood to recommend the brand. And while these are certainly important KPIs for any company looking to grow its business, they are framed entirely from the company's point of view: What will you (the consumer) do for me (the brand)? They do not attempt to measure the softer, more emotional qualities of a brand that actually matter to customers when choosing to do business with a company.

We've observed with our clients that loyalty programs are not a guaranteed path to increase revenue and share of wallet. Furthermore, the proliferation of loyalty programs -- particularly in the age of big data -- has reinforced the notion that loyalty is a transactional relationship, built on rewards, coupons and promotions.

In our 2016 Customer Quotient (CQ) study -- which measures, from the customer's perspective, how people feel about companies and the experiences they provide -- we found evidence this is a pervasive problem across industries.

At grocery stores, loyalty programs may foster return visits and repeat purchases, but they do little to provide consumers with the intangible, but very real, benefits that drive true emotional attachment. In fact, at Trader Joe's -- one of the supermarkets that shoppers experience as the most intuitive, customer-centric and in sync with them -- there is no loyalty program. Rather, Trader Joe's cultivates a loyal following through their unique product selection and corporate culture.

The airline industry -- the legacy US airlines, in particular -- use their large scale and complex loyalty programs to keep customers coming back, even in the face of inconsistent performance and middling service. Airlines operate essentially as undifferentiated commodity providers, and, as a result, their customers show little emotional attachment or affection.

However, Alaska Airlines demonstrates customer centricity by tailoring their experience to the local Pacific Northwest market and engaging in a respectful, open dialogue with their fliers. In return, their customers show a passionate affection for, and unflagging loyalty towards, the brand. "They seem to welcome me as a customer," says one happy passenger, "instead of expecting me to welcome them as an airline."

A two-way street

We found in both the 2015 and 2016 benchmark studies that the customer-centric brand behaviors identified by our CQ model predict intent to purchase and recommendation with over 90% accuracy. That is to say, brands with strong intuition naturally engender advocacy behaviors, but these behaviors are a result of the emotional connection companies have created with their customers, not the reason for it.

An examination of loyalty through this lens reveals a critical truth about the way customers define loyalty: it must be reciprocal. Like other good relationship behaviors -- trust, empathy, open dialogue -- it must flow both ways. Loyalty is as much about a brand showing customers they value their business and recognizing that they have plenty of other ways to spend their time and money, as it is about customers showing a brand that they value it above all others.

The main problem with relying solely on conventional loyalty programs to connect with consumers is that they reinforce a relationship that is purely transactional, which fosters a fickle relationship between consumers and retailers. Loyalty is actually an emotional relationship, not a synonym for repeat purchases. Sales and promotions are not the same as a brand showing that they're loyal to you, on your terms.

If retailers want consumers' loyalty, they need to do more than give them a plastic card to scan for discounts at checkout. Loyalty is fundamentally a relationship-based notion; it's not a function of points or coupons. It doesn't have a minimum purchase or expiration date. It's not a one-time offer, but "Do I feel well treated?" No matter how tactical the benefits of any loyal brand relationship, it's still at its heart an emotional and personal connection.

Across industries, we have seen that a loyalty program -- or the lack of one -- makes little difference in whether a company is seen as customer-centric. We are loyal to the companies and retailers who show us they understand us through the products they offer and the customer experiences they create. Empathy, intuition, emotional benefits, shared values ... these are the attributes of strong and durable relationships, and the very same qualities that ultimately drive meaningful and lasting shopper loyalty.