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Building Customer Loyalty, Not Reward Programs

Over 75 retail executives attended the Thoughtworks Retail Roadshow in Melbourne and Sydney on the topic ‘Building Customer Loyalty’. 

1. The Challenge

Defining Loyalty

The million-dollar question is: if loyalty is about having customers repeatedly choose a brand in the face of alternatives, how do we encourage customers to consistently choose one brand over another? True customer loyalty is about creating feelings of affiliation, connection, trust and reassurance. 

Realising Full Value

According to a 2013 McKinsey study, North American companies spend $US50 billion ($AUD68 billion) a year on loyalty, but for many the return on investment is negligible. The study found that companies with a strong focus on loyalty programs had weaker sales growth and margins than companies with less focus on loyalty. Why? It may well be that these companies are dedicating their resources to initiatives that erode margins and don’t actually encourage shoppers to choose their brand over alternatives. For example, consider the common habit of providing coupons for customers on products that they would have bought at full price anyway.

Companies that create a loyalty strategy aimed at enhancing their core value proposition, rather than focusing exclusively on discounts, points and deals, have the opportunity to influence customers in new ways. In Australia, Aldi boasts revenue and profits that have more than doubled in the past five years, with no loyalty program. Instead, Aldi invests money and effort to constantly improve its range, quality of weekly specials and geographic reach.

Retailers have conditioned customers to expect loyalty programs. According to some studies, as many as 7 in 10 customers expect it as part of their relationship with a brand. Yet many customers feel that the loyalty efforts of their preferred retailer fail to take into account their individual tastes and preferences. 

Another common challenge companies face is directing efforts towards the acquisition of new customers at the expense of existing loyal customers, despite the well-appreciated reality that it costs significantly more to acquire a new customer than to retain an existing one. 

Loyalty needs nurturing. Maintaining levels of engagement requires a focused effort to build moments of delight at both the macro and individual customer level. 


2. There’s a Better Way - Principles for True Loyalty

A key theme of the Roadshow was that today’s customer wants to be educated, entertained and engaged. With more information, more choice and more available channels, retailers who want to create meaningful loyalty should turn their focus to interactions rather than transactions. There is less and less differentiation in the eyes of the consumer on functional benefits.

Given the importance of emotion in the decision-making process, the most effective programs will be built on the back of experiences. 

Five key elements are common among retailers that are leading on customer loyalty:
  • Contextual: Retailers should think beyond the functional benefits of products and services and instead think of how they apply to the context of their customers' lives. What are the broader problems that they are trying to solve? What dreams are they trying to achieve?

     When customers apply for a mortgage, what they are really buying is the pride of ownership in a new home. Instead of offering them strictly factual brochures, consider running a property series for loyal customers who are currently in search of a new home. Assist them with designer partnerships or provide them with tools to visualise what their new home might look like.
  • ​​Personal: Focus on the ability to drive personalised, value adding experiences at scale. These must take into account customers' unique interests and provide them with opportunities which connect with them as individuals.
  • Relevant: Build loyalty by creating a sense of shared value between the retailer and the customer. It is important to understand that customers may define value in many different ways. For some it is only about price, but for others it might be about prestige, social influence, and the nature of the experience or unique sets of products.
  • Connected: Connect people in two ways - by taking advantage of interpersonal connections and using modern tools to make a connection at meaningful moments.  For example, KLM connects travellers with their Meet and Seat Program, allowing participating customers to share LinkedIn profiles and choose who they sit next to based on their networking interests. 
Domino’s Pizza’s Pizza Mogul platform takes advantage of the power of the crowd and rewards customer engagement rather than dollar spend. A Mogul can earn money with Domino’s without even purchasing a single pizza! Moguls create their own pizzas, promote them to their friends and receive a royalty for each pizza sold. This highly engaging program turns the brand’s most loyal customers and followers into particularly effective advocates.​

  • Customer-centred: Companies that put the customer’s need and life context at the heart of their loyalty programs consider partners that can offer an extended ecosystem of complementary products and services.
3. A New Paradigm: Four Steps to Building Real Customer Loyalty

Step 1. Define the Customer’s Why

A key theme underpinning the presentation was 'Understanding the customer's why' as it leads to thinking with a new lens. For example, instead of focusing only on how to make a pizza taste better (a functional benefit), the focus turns to how to create a more fun and memorable occasion with friends (an experiential benefit).

Step 2. Design the Experience

The pres also emphasised that creating loyalty extends far beyond the creation of a program. Rather than focusing on any single transaction point, it's important for retailers to explore multiple ways to deliver value, as defined by the customer, throughout the entire customer journey. This takes into account ways to influence behaviour from pre-purchase through to the use of products post-purchase.​

Step 3. Take Action: Test and Experiment

Gaining greater insights as part of an ongoing dialog with customers allows retailers to be more creative and responsive in delivering solutions that actually build loyalty. The process of continuous testing and learning supports the notion of an ongoing dialog. Great ideas evolve over time, informed by greater insights as customers respond (or not) to elements of a company's solution.

4. Continuous Loyalty: It’s Not Just One and Done

Loyalty requires nurturing. Ongoing engagement means developing the appropriate organisational capabilities to support the process of discovery, testing with consumers and refinement of new benefits or products based on feedback, data and insights. This allows businesses to follow a repeatable model that drives speed to value by developing a consistent process for developing and delivering innovation. 

Creating a platform for experimentation:
  • Concept: Explore initial concepts and prototypes with customers before making a significant investment. Gather feedback early in the process to develop the right value proposition.
  • Pilot: Test ideas with small segments of the customer base, e.g. with the most loyal customers or with a small market subset, to see how it performs ‘in the wild’. Use feedback from customers and transactional data to refine the offer and identify what tweaks may need to be made to drive the desired behaviours.
  • Scale up: Having learned and refined based on the pilot, companies are in a position to scale, taking into account business objectives and organisational capacity.
  • Roll out: At this stage offers which have proved highly effective for the initial target segments can be rolled out to other segments for further benefit.
  • ​Evolve: Competitors copy innovations till they are commoditised. This is why developing a continuous loyalty capability is so critical. Retailers that adopt continuous loyalty are positioned at any time to pivot to the next new set of ideas and innovations.
​5. Platforming for Continuous Loyalty Innovation​​

Today’s technology provides the backbone to deliver loyalty solutions in new ways.

  • Mobility: Today customers see their personal mobile devices as a window to their world. Offers need to be more timely, ideally reaching consumers through their mobile phones while they are shopping rather than through direct mail and email. Programs and experiences need to be designed with a mobile-first strategy.
  • Data: Customers expect more customised solutions that address their unique challenges. For companies to excel they must find ways to collect the data that they need, make sense of reams of transactional, structured and unstructured data and translate it into meaningful and actionable insights.
  • Cloud: The advantage of the cloud is the ability for companies to be more responsive and adaptable. This addresses a key challenge that has often plagued retailers; how to reduce the lag between the time that data is initially collected and the ability to quickly use it in real time at a point of interaction to actually influence desired behaviour.
Today only few retailers around the globe are running loyalty programs that actually win customers’ hearts as well as realise positive financial returns. With this in mind, there’s a golden opportunity for retailers to rethink their approach to loyalty, create programs that focus on placing the customer at the centre, and deliver meaningful experiences at the moment of truth. Retailers that will be able to embrace the Continuous Loyalty approach are most likely to be a step ahead of the competition when it comes to staying relevant to customers as their preferences change in the long term.

Disclaimer: The statements and opinions expressed in this article are those of the author(s) and do not necessarily reflect the positions of Thoughtworks.

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