Customer loyalty programs are an extremely effective revenue generator for businesses when designed and deployed right. Loyalty programs can increase store visitation by as high as 60%. More visits translate to more sales.
Boasting a rich history that dates back to the 1800s, customer loyalty programs have undergone multiple changes over the decades. However, following the profound influences of new technologies on the consumer market, along with customers’ increasing reliance on these technologies, the big question now is:
“Will loyalty programs remain relevant as the world moves forward?”
This is a complex question. But looking back at the customer loyalty program’s past and evolution holds the answer to its continued prevalence in the near and distant future.
“Spend and Get” Model (18th to 20th century)
The evolution of customer loyalty programs started way back in 1793 when an American merchant handed out copper coins or tokens to repeat customers. The tokens were used to redeem merchandise in the store. The idea took root and became the foundation of the “Spend and Get” customer loyalty model that flourished into the 20th century.
The concept was that customers had to spend if they wanted to get something in return. It was a wonderful idea that flew right off the bat. However, for the brand, the merchant, and the sponsor, it was all built on hope: Hoping that the customers come back. There wasn’t a tracking mechanism to monitor customers when they redeem. There was no way to collect and analyze customer data – except for using the storekeeper’s memory.
When copper tokens became infeasible, merchants offered stamps from the late 19th century to the late 20th century. Stamps were joined by boxtops and coupons, led by prominent brands like Betty Crocker.
The 1980s, and the Birth of the Modern Loyalty Program
In the 1980s, when businesses began to scale and corporations took over, loyalty cards and frequent flier miles became the kings of loyalty programs
American Airlines’ American AAdvantage was the first modern customer loyalty program. It intended to disintermediate and improve American Airlines’ relationships with fliers. Hard as it is to believe today, at that time, 95% of airlines’ bookings came through travel agents! By removing these external parties out of the picture, American Airlines trained its focus on their fliers.
Until this point, American Airlines didn’t even know their customers by name. They lacked basic information. With American AAdvantage, fliers had to register their names and addresses, and allow American Airlines to monitor their travels. To incentivize fliers to give their details, American Airlines offered a free flight upon collecting a total of 25,000 miles flown.
With this, the basic architecture of the modern loyalty program was born.
The initial success of American AAdvantage was impressive. In its wake, other airlines presented their own programs. Hotels, banks, credit card companies and ultimately retailers joined in. Customer databases ballooned. With it, corporations successfully enriched customer experience and added value by analyzing data and tracking customer behavior so they could better target offers and content to the right customers.
However, as more loyalty cards and frequent flier programs saturated the market, customers no longer went out of their way to earn points. Over time, programs matured and became ubiquitous. To remain economically viable, airlines had to devalue their programs. Collecting rewards became a difficult prospect. Other programs (like credit cards) tended to commoditize the loyalty programs by just giving clients a cashback on their statements. (Most people say they love cash, but they don’t appreciate cashbacks because they just don’t feel it.)
Rewards became undifferentiated and failed to offer much value. It became apparent that businesses either didn’t know their customers or didn’t accurately predict the Customer Lifetime Value (CLTV). As customer participation declined, the decreasing quality and availability of data made it harder for marketers to really know their customers, offer rewards of value and relevant experiences, and maximize Customer Lifetime Value.
Mass Customer Loyalty Approach (2000s to Present)
The emergence of mobile communications, the Internet, and social media paved the way for the mass loyalty model. Instead of operating loyalty programs on their own, brands formed coalitions and strategic partnerships amongst themselves. Customers earned points through transactions and burned those points across brands.
Coalition programs that succeeded in markets like Europe, Canada and Australia proved largely ineffective in the States, and the American loyalty market never really moved into multi-brand programs. An exception here was coalition programs where a single parent company owned all the participating brands (e.g. Hilton, Marriott, Pottery Barn, and 1-800 Flowers). This scenario was not the norm, however. In general, declining customer satisfaction and engagement contributed to the short and uneventful run of coalition programs.
Beyond coalitions, loyalty program partners transitioned from loyalty cards to contact number-based systems to gather and redeem customer points. This approach enabled direct mass marketing and promotions via email and text. The advent of social media amplified the users’ reach.
On the positive side, customers no longer carry multiple loyalty cards. Businesses cut down the costs that come with operating a card-based loyalty program. However, the model focuses on transactions rather than improving and enriching customer relationships. That presents a big problem.
For instance, Johnny orders a $50 meal from a restaurant, earning him points that he could redeem for merchandise or discount from that restaurant’s loyalty partners, which could be a nail salon or a tire shop. There’s a glaring disconnect in the experience as well as the relevancy of transition from one brand to another.
Mass marketing activities across multiple brands can lead to spamming users with wholly irrelevant messages and promotions. On top of that, businesses struggle with customer anonymity. They fail to distinguish registered customers from family members sharing the same number.
This leads to poor customer insights, which equates to the inability to create and provide personalized experiences. Thus, this approach often results in growing disinterest among customers who applied for the program.
The end result? The relationship between the brand and the consumer crumbles.
New Tech Paradigms & Data Security Concerns
The modern atrophying of the brand-consumer relationship is compounded by a growing awareness of data security issues.
Consumers are becoming more and more conscious when it comes to their data. They like to know what data is collected, and how their data is being used. Their fears are justified. Data safeguards such as Europe’s GDPR and California’s CCPA sprung in place to address these fears. However, this limited access to data makes it hard for modern customer loyalty programs to learn more about their target consumers.
The emergence of digital voice assistants has further re-intermediated brand-customer relationships. When someone orders a pizza through Alexa or Google Voice Search, Amazon or Google gets the customer’s data, not the pizza store. With the information, Amazon or Google can infer the size of the household as well as the customers’ favorite toppings. The pizza store doesn’t have the information needed to enrich relationships with customers, foster loyalty, and build trust.
Nike’s move to cut ties with Amazon was part of this loyalty landscape. The athletic company announced that the decision to leave the Amazon marketplace stemmed from its desire to directly engage customers, among other things.
“As part of Nike’s focus on elevating consumer experiences through more direct, personal relationships, we have made the decision to complete our current pilot with Amazon Retail,” Nike’s official statement read.
With Amazon out of the picture, Nike has full control over its customers’ data. This enables Nike to create programs that absolutely resonate with their target consumers and find more highly qualified customers to incent. This reclaiming of a more intimate relationship with consumers represents the future.
The Personalization of Rewards
Even in the earliest days of loyalty programs, when merchants were just selling goods directly to their customers, they were already aware of how far a positive experience went in terms of loyalty. Before mass merchandising, the local butcher knew you and saved that particular cut of meat you wanted. Businessmen back then made it a point to know what their customers and their families liked. This cultivated loyalty and a fruitful, enduring relationship.
It is as true in 2020 as it was in 1820: Personalization fosters customer loyalty. According to Gladly’s 2020 Customer Expectations Report, 79% of consumers say personalized experiences are better than personalized marketing. The same study also reported that 84% of customers will spend more on brands that deliver personalized customer service. Meanwhile, 68% of customers leave a brand when they feel unappreciated and undervalued.
Enterprises must strive to meet their customers on a personal level. A global survey by Acquia revealed that 75% of consumers are loyal for life once brands secure their trust. Another important fact is that approximately two-thirds of respondents of a customer loyalty survey said they are willing to join fee-based customer loyalty programs only if these come from their preferred retailer and the rewards are relevant. This is why the rewards matter as much as the experience.
We see this evidence in the history of coalition programs, as well. Though these programs usually failed, American consumers reported that they did indeed want more programs that cross brands. Why this contradiction? Because coalition programs as they existed produced poor customer experience. However, if such coalition programs can seamlessly deliver utility, value and relevance, as customers move across from one brand to another, a coalition program is bound to be successful. The key is to make the transition as smooth and relatable as possible.
Lessons for the Future
Customer loyalty programs, when well designed, invest in the people in the customer segments where there is potential incrementality. They are not designed to simply pay off the best customers. Instead they are about making good customers better and more valuable. They are about maintaining profitable behavior from your best customers, by thanking them and making them feel valued. From a brand’s perspective, customer loyalty programs must change the consumer’s behavior, improve their behavior, and enhance the value of customers who have room to be enhanced.
Looking back, the most profound lesson every business can glean from the history of loyalty is that customers should be the paramount of priorities. Their experiences and expectations matter more than anything else. Also, customers want to be rewarded for their loyalty and not be pressed to prove it.
The advent of new technologies and wider access to customer data-enabled modern enterprises to design, create, and operate personalized loyalty programs. However, beyond personalized experiences, customers demand personalized rewards.
The success of any modern customer loyalty program no longer hinges on what the company can give in exchange for loyalty. Rather, they must anticipate their customers’ wants and needs and provide them when they expect it. They need to think about how their customers feel, not only what they want.
For programs to succeed in the 21st Century, program sponsors must be responsive to changes in the marketplace; today’s consumer wants greater privacy protection, more power over how and with whom their data is shared, more choices, greater value, meaningful personalized experiences, rewards and opportunities.