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A New Formula for Loyalty Program Success

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Feb 17 2009

What comes to mind when you think of loyalty programs?  I'm guessing it's not S&H Green Stamps or the Gold Bond Stamps program.  However, the prevailing loyalty programs in today's marketplace are nothing more than more automated versions of these early vanguards.  We've traded in stamps for points and books for online statements.  But the underlying structure of the loyalty program has remained the same.  It's high time we wipe the slate clean and re-think loyalty program objectives and design.

So what's wrong with the loyalty programs of today?  When run well, today's programs can certainly garner a positive ROI and engender loyalty.  However, far too often it's the wrong kind of loyalty created, resulting in sub optimal ROI results.  Most programs are transaction based.  Spend and earn points or miles to redeem for merchandise.  Often what's lost in these programs is the true value of the transaction back to the firm and its impact on customer value.  For instance, most airlines give flyers the same number of miles for a flight regardless if they paid the same price.  Other programs such as grocery point of sale provide everyone with the same discount without regard to their value back to the organization.  Worse yet are the co-branded credit card loyalty programs where customers earn points for all purchases regardless of brand, product or service and are able to redeem points for merchandise outside the co-branded company's product portfolio.   In each of these cases customers become loyalty to transactions or the program itself, but not the company's products, brands or services.

So how should loyalty programs be re-structured?  I suggest a new formula for success should be adopted:

                Loyalty = Engagement = Customer Value

Increasing customer loyalty should lead to increasing customer value.  How do you increase loyalty and customer value?  This is achieved through increased customer engagement.  What are the implications of this formula to loyalty program design then?

  1. All elements of a program should be designed to drive engagement with the company's brands, products and services and not third parties.  The earning of points or rewards should only be based on increasing engagement with the company. 
  2. All incentives and rewards must be owned by the company and reinforce the value of ongoing engagement with the company.  Offering up third party rewards diminishes the company's brand and encourages customers to spend their resources (time and money) elsewhere.   This undermines the effectiveness of the program at driving increasing engagement with the company. 
  3. Programs should be structured to lead customers through a path to high value status.  Understanding who your valuable customers are is not enough.  Understanding how they became valuable customers is equally important.  The goal of the loyalty program should be to move as many customers through this path as possible. 

Finally, a loyalty program should not be confused with loyalty strategy.  A loyalty program should be viewed as a key tactic within a broader company-wide loyalty strategy.  This same formula can be applied outside of the program to drive broad scale results.

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