The Untapped Potential of Customer Loyalty Plans

More than 90 per cent of consumer-facing businesses today either have their own loyalty program or participate in one. Loyalty programs have become so prevalent that the average Canadian is now a member of 14 programs.

These loyalty cards come in all different shapes and sizes. Some encourage patronage at very large businesses (the likes of PC Optimum and Scene+), while others are more modest endeavours (think of your local coffee shop’s buy nine, get the tenth free punch card.) They might offer points that can be redeemed for products and services or provide perks such as early access to store sales or reservations at hot restaurants. Whatever the format and features, the goal is to reward consumers for reaching milestones, such as spending a certain amount or referring friends.

Retailers like loyalty programs because of their ability to catalyze positive business outcomes. They’re meant to retain customers (which is exponentially cheaper than acquiring new ones), boost sales and generate precious data about consumer behaviour and preferences. And when done well, they can be a differentiator.

The problem? These days, loyalty programs can be hard to get right. The space has become so crowded, and plans are so indistinguishable from one another that intended audiences are starting to tune out. A typical consumer regularly uses only half of the rewards plans they’ve signed up for, and most people — upwards of 70 per cent — say they don’t feel particularly loyal to the brands whose cards they carry. 

Many organizations aren’t recognizing — much less capitalizing on — the full potential of their loyalty programs. “There are brands that do pieces of the overall loyalty experience well, but I think there are very few examples of any who are offering the end-to-end experience in an optimized way,” explains Bryan Pearson, MBA’88, whose credentials on the matter run deep. Pearson is past CEO of LoyaltyOne, former president of AIR MILES and author of The Loyalty Leap: Turning Customer Information into Customer Intimacy.

What exactly are brands leaving on the table — and why? Pearson and other loyalty experts provided Smith Business Insight contributor Deborah Aarts with the inside scoop on how brands can get more from their customer incentive plans.

Opportunity 1: Strive for simplicity

At its root, a loyalty program is a straightforward exchange between consumers (who give patronage and data) and retailers (who give perks and appreciation). It should feel frictionless, explains Yulia Nevskaya, an assistant professor at Smith School of Business who studies how consumers respond to incentives and rewards. What people want tends to be very simple, she asserts: clear progression towards a goal and tangible benefits for reaching it.

Data confirms that above all else consumers want simplicity and ease of use in their programs. Brands often fail to recognize this. “Many companies overcomplicate their loyalty programs,” Nevskaya says. And while the tendencies and preferences of some customer bases can sometimes necessitate adding in bells and whistles — especially as programs mature — there’s plenty of proof that intricacy does not always equate to better outcomes.

For example, Nevskaya says the enduringly popular — and wildly successful — Starbucks Rewards program succeeds because its process of accumulating and redeeming points, or “stars,” is both simple and immediately gratifying. “People love participating in the game because they find it fun and exciting,” she explains. In contrast, the rewards program of rival Tim Hortons has rubbed many consumers the wrong way, in large part because its processes and terms are just confusing enough to repel participation: “When people look at the rules and can’t make sense of them, they just give up.”

Opportunity 2: Aim beyond habit

Many brands consider their loyalty programs a habit-creator, something that delivers measurable returns in terms of frequency and spend. Those are, of course, positive things for any business to gain. But according to Barry Cross, Distinguished Faculty Fellow of Operations Strategy at Smith School of Business, there’s an opportunity for companies to take things beyond the realm of the transactional. In his view, a good loyalty program can serve as an on-ramp to something far more valuable: enthusiasm.

Enthusiasm stems from a feeling of belonging, Cross says — a customer’s sense that their needs are being understood and met, that their values are aligned with those of the company, and that they’re part of something bigger than themselves. “When you get to true enthusiasm you’re looking at customers who are ambassadors for your brand,” he explains. “They tell the story of what you’re doing. They refer friends. They tend to spend more.” 

Most loyalty programs have the ingredients to create this feeling via the data accumulated over time, but, as experts point out, not every brand is set up to use those ingredients effectively. Say your program is designed to issue points after a spend of $100: Customer A might hit that with a single one-off purchase, whereas Customer B might get there by coming in every day for a few weeks. The likely lifetime value of Customer B to the brand is significantly higher than Customer A, as is the likelihood that Customer B will become a superfan. Yet many programs would treat them with the same rewards.

If a brand was to offer would-be enthusiasts something extra — a little bonus that makes them feel seen, or that removes some friction in their experiences — it can double down on the more transactional benefits to create a much richer relationship. “When you can offer these customers some delta in the service equation, it demonstrates greater value and interest in them,” Cross explains. “And that starts to change their perception of how the organization interacts with them.”

Think of the airline customer who evangelically flashes their membership tier card to everyone else as they board the plane, or the one who books an unplanned trip at the end of the year just to maintain their status. Cross says such enthusiasm is significant, and the small things really do make the difference in nurturing it. “If, for example, I don’t have to explain what I want done with my hair at the barber shop — if it can just kind of happen and leave me with a happy outcome — that organization is providing me with a type of simplification, or problem-solving, or enhancement of value in my day-to-day life,” he says. “That creates a very different feeling than the more transactional element of loyalty.”

Opportunity 3: Leverage data (without being creepy)

Technology has also dramatically unlocked all sorts of opportunities in the loyalty space. The near-ubiquitous adoption of smartphones, paired with dizzying advances in data analytics, means that retailers are now armed with a quantity and quality of consumer information that would astound people in the profession a few decades ago. “The technology barrier has been virtually eliminated,” Pearson explains. “We now have this tremendous combination of enablement that’s come through software, analytics, tools and talent. It’s a very rich environment for loyalty programs to survive and multiply in.”

Based on data alone, retailers can now tailor offers and perks to a very sophisticated degree, especially when paired with the computing firepower of artificial intelligence. But that same potential makes it easy to overstep, according to Pearson. “There’s a balance between what is appropriate and what feels creepy.”

Consider a company clocking a purchase of a pregnancy test and then immediately offering prenatal vitamins as a perk. In Pearson’s view, there is a way to introduce such things that doesn’t make people feel exploited or spied upon, but it requires a deft touch. “How brands act on the data they have is as much an art as it is a science,” he says. “If the science is the data analytics, the art is really how you bring that to life.” And trained and experienced humans are still better at sussing out the nuances of that than the robots.

It’s tricky, tripwire-filled work, but when organizations figure out how to use loyalty data responsibly and effectively, Pearson believes the benefits are manifold. “You can gain a deeper understanding of why your business is performing the way it is,” he explains. “You can identify your most valuable customers, connect with them and make sure that they feel they’re getting more value from the brand.”