How do you encourage customers to repeatedly choose your brand in the face of alternatives? This is the question we posed at our executive retail breakfast series in London, Manchester and Hamburg this month.
Traditional loyalty programs are built on mechanics from the 1700s. Around this time, American retailers started to give copper tokens at the point of sale that could be redeemed on a future purchase. Fast forward three centuries and modern loyalty programs actually haven’t changed too much. Sure, now there are more advanced ways to collect and redeem rewards, but the points for prizes model is still fundamentally unchanged.
A Reward Program is Not Enough
Conventional programs enthuse in the beginning, but bore over time. In 1993, Wolfram Schulz, a professor at the University of Cambridge ran an experiment with a monkey named Julio. Julio was placed in a room with a monitor. If he touched a lever when a squiggle appeared on the monitor, blackberry juice would run down a tube and into his mouth. Over time, this became a habit. Julio came to anticipate the juice and it was less of a reward, and more of an expectation. The same logic can be applied to traditional loyalty programs. A new program often triggers a flurry of attention - they're shiny, new and exciting. After the initial hype customers come to expect benefits. The program ceases to delight as rewards become expectations.
Most programs don’t achieve their promise. 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. 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 dedicate 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.
How can brands avoid this expensive ‘design, launch, promote' cycle and move towards ‘continuous loyalty’? We propose new principles to create ‘whole brain loyalty’. The kind built on feelings of trust, affinity and habit - not reward programs. The most successful retailers move beyond functional benefits and concentrate instead on creating desire with meaningful and pleasurable interactions.
Personal: Build 1:1 relationships at scale. These must take into account customers' unique interests and provide them with opportunities that resonate with them as individuals. Nike is focusing on personalization in 2016 with its new Nike + app. The tool is designed as a VIP training and retail experience. In addition to a personalized product feed the app allows customers to book a one on one in store consultation, find running groups nearby or chat with a training and fitness expert.
Relevant: Build loyalty by creating a sense of shared value. People care about different things: for some customers it’s about price, for others it’s convenience, for others it’s exclusivity, prestige or uniqueness. Make a concerted effort to build up an understanding of what’s important to your key customers and allow them to shop on their own terms. Harvey Nichols takes their traditional rewards program up a notch by letting customers choose their rewards each quarter. The company conjures up a list of enticing rewards every 3 months, from casks of premium wine to express pedicures to avant garde dinners. If nothing appeals, customers can opt for vouchers instead.
Contextual: Truly understanding context allows for the definition of moments of influence and moments of delight. What are the broader problems that they are trying to solve? What are they trying to achieve? Starbucks gets context. They embed coffee effortlessly into the broader setting of their customers’ lives. For situations where time is of the essence, customers can use mobile order and pay to shave minutes and seconds off the rushed coffee run. For a more leisurely brew, the brand provides a relaxed atmosphere with free wifi and charging stations so that customers can comfortably linger. They understand different contexts and build their brand experience to support them.
Connected: Connect people in two ways - by taking advantage of interpersonal connections and using technology to make a connection at meaningful moments. For example, Domino’s Pizza Mogul platform is groundbreaking because it rewards customer advocacy rather than dollar spend. A Mogul can earn money with Domino’s without even purchasing a single pizza! Moguls create pizzas, promote them and receive a royalty for each pizza sold. This highly engaging program turns the brand’s most loyal customers and followers into particularly effective fans.
Customer-centred: Companies that put the customer’s needs and life context at the heart of their loyalty programs consider partners that can offer an extended ecosystem of complementary products and services.
A New Paradigm: Four Steps to Building Real Customer Loyalty
Step 1. Define the Customer’s Why
A key theme of the breakfast series was 'Understanding the customer's why' as it leads to new ways of thinking. For example, instead of focusing only on how to make a shirt cheaper (a functional benefit), the focus turns to how to create a more uniquely personal shirt that the customer can’t wait to wear on the weekend (an emotional benefit).
Step 2. Design the Experience
Don’t focus on a single touchpoint. Build an entire customer journey, where each touchpoint contributes positively to building loyalty. 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 insights as part of an ongoing dialog with customers allows retailers to be more creative and responsive in delivering initiatives that actually build loyalty. The process of continuous testing and learning supports the notion of an adaptive brand experience. Great ideas evolve over time, informed by greater insights as customers respond (or not) to new initiatives and solutions.
Step 4. Continuous Loyalty: Loyalty is nurtured. Retailers should create capabilities that evolve with the customer. To do this, your organisation needs the right platforms and structure to test with customers and refine new ideas 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.
Today only few retailers around the globe are running loyalty programs that actually win customers’ hearts as well as realise positive financial returns. New technologies coupled with a dizzying pace of change mean there’s a golden opportunity for retailers to rethink their approach to loyalty. Retailers that embrace the Continuous Loyalty approach are most likely stay relevant with rapidly evolving customers.
Disclaimer: The statements and opinions expressed in this article are those of the author(s) and do not necessarily reflect the positions of Thoughtworks.