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Dead Man Walking: The Fragile Future Of Loyalty Programs

During my weekend travels, I was hit up for two more lame old-school rewards programs from brands I already like and support: Panera Bread and Dunkin Donuts. The interesting thing about these two retailers is a loyalty program will have absolutely zero impact on my spend with either – they have my cash when it’s geographically convenient.  So unless my customer status allows me to work with the real estate and/or franchising folks, it’s an utter waste of time. (But I sure would like to see a Dunkin Donuts on Windward Parkway if anyone in Massachusetts is listening!)

All this got me thinking about what the future state of loyalty programs should be. And that’s from someone who’s had a fair amount of cycles in creating and running existing loyalty and retention programs for the likes of UPS, Home Depot, Delta Air Lines and a few private-label deals ­– both internally and on the agency side. During my Digitas days, I worked with 20-30 of the best minds in the space, including the guys who developed American Express Rewards, Best Buy Rewards and GM Lease Loyalty. So, in essence, I guess I’m calling my own t-shirt ugly.

So here’s my Top 5 ways the loyalty business needs to completely change if there’s any hope:

1) Embrace Open Authentication: Why not start off with the hairiest of them all? If cross-brand loyalty is going anywhere (and I think that’s the industry’s best hope), there needs to be a standard toolkit for any brand to plug into – including both a technology backend and point values. The days of proprietary programs created by Maritz or Digitas will eventually fade based on the cost-to-deliver and which companies can afford them. In my experience, most companies aren’t running tight ROI calculations to determine revenue lift (adjusted for discounting and SKU-level margins) versus cost to operate a program. You’ll see all kinds of cost avoidance strategies – like moving statements and redemption methods online – but no one wants to admit their program might not make fiscal sense anymore. (Just think about the difference in SkyMiles when an average business traveler paid $1,200 versus $350.) If there was a single program that allowed brands to share hard costs like card production and technology enhancements, I think you’d find a happy medium for offer details and the sharing of transaction-level data – the two main drivers of why every company thinks they need their very own loyalty program. And sure, you’d need to sort out the branding junk but who wouldn’t be down for 2x increase in ROI?

2) Become Socially Aware: Purchase behavior has been the primary cornerstone metric over the entire history of loyalty marketing. You gathered punches or points or stamps or boxtops or whatever, but every single one required a purchase. This concept should be killed with a quickness. In the new socially aware world, you could argue influence on a purchase might earn you even more points. I’ll share a real-life example: I’m shopping for a RAID backup solution for my network. When I tweet or Facebook my followers to ask their opinions, why isn’t Sanjay Parekh given points for engaging me in a discussion on Drobo? Or Rob Kischuk being given some cred for recommending NetGear? Imagine if Drobo knew Sanjay was a customer (and had already awarded him points for his purchase) and then dropped a few more based on his tweet mention. Now that would be a way to create grassroots conversation about your brand or product. Or what if a Foursquare or Gowalla check-in earned you some small increment of the same points? And finally, why wouldn’t any new-style loyalty system be Facebook core from the start – including Places? The demographic match between Facebook and the traditional deal-seeker is tough to ignore (female head-of-house, over 30).

3) Move Beyond Discounts: The core of any great loyalty program should be pretty simple: Get your best customers (usually defined as most profitable) to spend more money with you, thereby increasing revenue and profits. Somewhere along the line, this concept got bastardized into increasing market share and hopefully creating more revenue, which led to deeper discounting to draw the attention (and purchase behavior) of a fickle consumer with ever-expanding retailer alternatives. So in essence, your loyalty program ended up creating a whackload of coupon customers who now have to feel like they’re getting a deal to even consider a purchase. And yep, the Groupon phenomenon is just about the zenith of this trend. This is a natural tug-of-war, and can only really be short-circuited by adding non-discount strategies to your loyalty program. Think Best Buy’s Exclusive Shopping Evenings, or the occasional offer I get from Mercedes Benz to attend track day at some exotic location. They don’t send me $5 off an oil change like Jiffy Lube does, they convince me that Mercedes is a brand I want in my life. And it works like milk and cookies on me personally…

4) Deliver Affinity-Based Rewards: This is another concept that fundamentally changes loyalty marketing, but requires brands to work together. The key is to separate the earning events from the redemption events, and give the choice to the consumer. Any brand worth its salt has at least some basic persona types applied to their customer segments. In the absence of hard research data, you can extrapolate that teenagers like social stuff, dads like sports and moms are the primary buyers of virtually every item in a household. So if this is the case, why not play right into these affinities? Again, let’s look at another example: What if eating Whoppers at Burger King earned me discounts at GameStop instead of simply more (or cheaper) food? The ability for me to select my own rewards would certainly motivate my earning behavior better than almost any monetary offer. Hell, I’d even pay full price for the Whopper because I knew I was accumulating more points for something I love. Again, back to the core strategy of getting high-margin customers to increase their spend…

5) Get Mobile – And Fast: One of my biggest issues with Panera Bread on Saturday was they wanted to me carry another damn key fob. Well guess what, I’ve got a much more capable device than a key ring in my pocket – it’s called a smartphone. Why would a retailer give every program member a physical card that costs ~$1.50 when they could find a multitude of other ways to drop a unique ID on me like Bluetooth pairing codes or an Address Book entry? Oh, and I’m going to lose that card, so you better budget for 2-3 per customer per program lifetime. I really do struggle to understand how Kroger affords to run their loyalty program with how aggressively they sling physical cards. But make no mistake, you don’t just go digital with your loyalty program one day. Most businesses have an upper-income segment of users who are older and potentially not that into technology (although exceptions abound), but the savviest marketers understand their next generation of customers is going to have completely different expectations. The beauty of mobile platforms is they also bring along all the location-based services that absolutely should be part of the loyalty equation. I know the Apple kids would freak from a T&C perspective, but imagine layering GPS data into a customer record…

So I’ll sum up my thoughts with an equation:

Social + Location + Affinity = New Loyalty

The consumer’s patience with wallets full of punch cards or key chains full of bar codes is coming to an end. And what I don’t mention in the equation above is just as important: purchase history and coupons. A completely different mindset is required if any semblance of a loyalty program is going to stick to today’s 20-year-old, who is the prime earner of the next 20 years. Online reputation and real-life experiences will trump a 15% coupon any day of the week and twice on Sundays.

comments 

 
0 # Mike Schinkel 2010-09-13 08:50
Nice article Dave.

#2 sounds a like like the startup Jason Brett was trying to launch about ~2 years ago. OTOH, I think that part of the proposal is off-base, at least if the rewards are monetary.

If the social rewards are instead status or opportunity oriented related to the brand, then I think you are spot-on. Imagine if Panera allowed it's best customers to have access to a high speed WiFi with none of that wacky login-first crap and without having to worry about timeouts, now there's something worth chatting up my friends and suggesting the go to Panera instead of sending tweets like this!

http://twitter.com/mikeschinkel/status/22389784900

And #3 is probably the most valuable point you made. Of course it'll also be one of the hardest for many companies to implement because it will require them to think creatively which we've learned isn't something larger brands do all that well. It's much easier to just slap a discount on something and be done with it.

BTW, I've been thinking much the same about GroupOn. Kudos to them for being a success but I find the trend ushered in by GroupOn, ScoutMob, et. al. to be very troubling. They are training consumers to have zero loyalty, and developing loyalty is what allows a business that becomes great to actually become great. If businesses are constantly operating at razor thin margins they have very little room for innovation because a failed innovation might mean a failed company.

Of course I've felt the same about Google Ad Words for years too since Google sucks all the profit out of business where the keywords are highly competitive. But I digress...

Anyway, nice article.

-Mike

P.S. I don't think your "Notify me of follow-up comments" actually works. I can't remember every getting a follow up email on any articles I've commented on.
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0 # GFRRTDEFF 2010-09-13 20:58
Mike: I think the faster brands can expand the definition of rewards beyond monetary, the better everyone is. And yes, I believe Groupon will end up being a great case study in e-commerce, but do nothing to help local businesses over time. I'll have the tech ninjas check the follow-up feature, and I'm testing it myself.
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0 # Matt French 2010-09-30 22:40
Awesome post Dave

My startup Devotee is building a mobile app here in Pittsburgh that involves all but the 'open authentication' idea. This is the way of the future--mobile loyalty. Our users are converted brand advocates that earn rewards by evangelizing the brand on Facebook, Twitter, or Foursquare to earn rewards. The app is simple, not another social network, but a way to show your loyalty to a business you love and earn rewards for doing so.

The businesses get a self serving rewards platform that let them have free creative reign over the loyalty program and rewards they would like to offer. We've seen some great creativity on rewards! I'd love to talk more and show you a demo! Email me
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0 # Demos 2010-10-01 00:14
Take a gander at CardStar and CardMobili. Two multi platform mobile apps (the former US based the latter EU based) that are moving traditional loyalty programs onto mobile devices. They've both hit a lot of points on your list already.
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