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Are You Loyal to Loyalty Programs?

NEW YORK (MainStreet)—Gone are the days when a loyalty program meant awarding a free sandwich for every six you bought. In this world where we have an abundance of choices, the idea and definition of "loyalty" is rapidly changing. Nearly every store we visit offers a loyalty perk of some kind. In fact, in the U.S. alone, there are more than two billion loyalty program memberships – that's 18 different loyalty programs for every American household.

But are we loyal to loyalty programs? Not so much. Of the 18 loyalty programs we carry with us in our wallets or on our key chains, each household uses less than half within a year. Loyalty can no longer be "solved" by merely issuing a key fob and doling out points. So what does it take to win loyal consumers? Innovative companies must seek out the pockets of emerging and latent consumer demand – the gaps between sales and demand – and ensure their programs are helping to resolve undesirable tradeoffs, eliminate nuisances and deliver new benefits.

The challenge for marketers is that very different consumer experiences manifest in a singular behavior – a sale – making it easy to mistake sales for actual consumer demand. This gap between the two attracts upstart innovators, which sneak in when established leaders are preoccupied with their current rivals. For example, if larger breweries are in competition over the best beer for watching the big game, their preoccupation makes it easier for smaller upstarts to become the best beer for dinner. Consumers really need little prodding to embrace compelling solutions.

The Loyalty Litmus Test

Successful loyalty programs – those that give us a reason to keep coming back again and again – are built on healthy relationships between consumers and brands; they create value for both. Shared value, a product of meaningful innovation, is created when consumers reward brands for performing important jobs in their lives. In some cases, we choose brands because they perform an important job particularly well. In others, consumers select brands simply because they are better than available alternatives.

Harrah's Resorts, for example, leverages data to provide a superior customer experience, as well as align expenses and service levels with the value of each individual customer. Harrah's systematically forgoes the industry arms race to build the fanciest, glitziest, most over-the-top attractions and instead invests in delivering entertainment experiences fulfilling the diverse desires of their broad customer base. When you participate in Total Rewards, you get a better experience and Harrah's gets a more profitable business. That is shared value. More broadly, Harrah's Total Rewards program highlights the features of a well-constructed loyalty program.

Here is a three-part litmus test for loyalty program health:

  • Shared Value Test: Does the program deliver benefits to customers and create value (profit, not just data) for the marketer?
  • Profitable Share Test: Does the program engage with the customer base broadly, or is it only relevant to a select few? Unless you're a luxury brand, profitable growth requires healthy relationships with diverse customers – not just an elite few.
  • Innovation Energizer Test: Does the program serve to spur innovation, or is it an excuse (stated or unstated) for deprioritizing new ventures?
  • Answers to these questions go a long way toward determining whether a loyalty program supports a healthy, sustainable consumer relationship or if the program is a crutch, propping-up weak customer allegiance and false management confidence. Successful brands grow because they innovate relentlessly. They identify nuisances in our lives and resolve them; they sense desire in our minds and fulfill them.

    Loyalty – like profit – is a function of consumer focus and relentless innovation that creates value for customers and brands. But it is neither a strategy nor a business purpose. As Peter Drucker taught years ago, "the purpose of business is to create customers, and a customer is created with each sale and each need filled." A loyalty program does not ensure loyalty. Smart service and solid products do. Are you loyal to your loyalty programs?

    --Steve Carlotti is the CEO of The Cambridge Group, a growth strategy consulting firm that is part of Nielsen. Taddy Hall is project director at The Cambridge Group, senior vice president of Global Practices and Consulting Services at Nielsen.

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