Research shows that monetary rewards are not the only driver for customer loyalty programs and that increasing experiential rewards provides greater long-term benefits.
Loyalty programs are supposed to unlock great value for companies by driving higher sales and boosting brand affinity. So why aren’t they doing this? Although more and more companies now have loyalty programs (they’re growing at 9% a year), the number of customers who actively participate in them continues to hover at only about 50%, suggesting that there is still something missing in most programs.
In late 2017, we surveyed more than 9,000 consumers about their experiences with loyalty programs across nine different business sectors, including grocery/drug/mass merchandise, retail, airlines, hotels, car rental organizations, and restaurants. We asked consumers what they value in a program and how they engage with them.
We found that that having a successful loyalty program does, in fact, drive significant value and is critical for growth. Having a program scoring high on what we call the Loyalty Performance Score is strongly correlated with greater shareholder return, especially in the airline, retail, and grocery/drug/mass-merchandise sectors. This measures both how customers feel about loyalty programs and how well programs drive value for the company — for instance, how often customers choose the brand over other options or pay more to earn a higher status.
We also found that consumers who participate in top-quartile loyalty programs are 80% more likely to choose the brand over competitors and twice as likely to recommend the brand to others. (See “The Value of High-Performing Loyalty Programs.”)
What Makes a Good Loyalty Program?
So how do you move your loyalty program up into this lucrative top tier? We’ve identified four key principles.
1. Tailor your program’s benefits to the “head” and the “heart.” It’s no surprise that what the feature loyalty members say they care about most in a program is monetary rewards. But it’s important to note that offering a basic “earn-and-burn” points mechanism isn’t enough in today’s market. Customers care almost as much about a company making them feel special and recognized as they do monetary benefits (see “What Customers Really Care About”). “Surprise and delight” features like unexpected gifts and special recognition deliver exceptionally high value to customers and can be achieved at low cost.
For instance, Sephora’s Beauty Insider program speaks to customers’ emotional benefits by offering exclusive perks like supplier-funded product sample giveaways and chats with makeup enthusiasts. At the same time, it also appeals to customers’ rational benefits with clearly defined loyalty tiers that encourage customers to want to reach the next status level.
2. Speak to all parts of the loyalty funnel. All customers fall into one of four points along a loyalty funnel, and top-performing programs holistically address each level, from program awareness and membership to active engagement and changed behavior. Most organizations do a good job at some levels but not others. For the 50 companies in our survey, the point along the loyalty funnel (see “The Customer Loyalty Funnel”) that presents the greatest opportunity is between points A and B, where customers have joined a program but aren’t actively using it. These are people who signed up for a reason and are motivated to engage. Companies should take the time to show them the way.
Amazon Prime has created an ecosystem that engages customers along every level of the funnel. Prime uses free trials and clear communication of benefits to convert 60% of customers to participate, compared to an average of about 50% participation for other retailers. Of these members, roughly 80% are actively using their Prime membership (versus 60% for retailers), and 80% of those active users increase the amount they spend at Amazon.com. Amazon is able to achieve these results by delivering differentiated benefits to the Prime customer whom they care about, including such varied benefits as free shipping, movie and music content, and Prime Day offers. Amazon is always raising the bar on the program with continual additions of new features and benefits for consumers.
3. Offer customers rewards today and tomorrow. The two attributes most attractive to loyalty members in our survey are the accumulation of points for a big reward as well as the ability to spend points sooner for a smaller reward. (See “What Customers Really Care About.”) The key point here is that customers want access to more types of benefits. They want to feel like a program is working for them in the short term, while also knowing they can work toward something quite substantial in the long term. This is especially critical in sectors where products or services are more expensive and may be purchased less frequently, such as airlines and hotels. In that case, “instant gratification” rewards keep customers involved and aware that they’re benefiting from the relationship with the brand. Those rewards can appear quite nominal (for example, a free sample from a store or free drink on a plane) but are nonetheless effective. It’s important to note that this isn’t just a binary rewards approach. In practice, there can be a range of rewards to appeal to different customer segments along the short-term/long-term spectrum.
Southwest Airlines, for example, offers the short-term benefit of free priority boarding, the longer-term reward of free flights, and the additional value add of a free companion pass that members can earn when they fly.
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4. Make it easy to understand and use. In their efforts to enhance loyalty programs, companies have tried to add all sorts of bells and whistles along the way. While adding innovative new features is essential to any program’s success, throwing too much at customers, especially at one time, can be confusing and disempowering. Companies need to strike a balance by keeping loyalty programs relevant to their customers’ needs while also accessible and easy to use.
The simplicity of outdoor retailer REI’s payback model, in which customers earn money back with each purchase — shown clearly on the receipt — is a feature that helps the program earn high marks from customers and builds affinity for the brand.
How Does Performance Compare Across Industries?
Our analysis of Loyalty Performance Scores among 50 companies reveals that we are in a new era of loyalty leaders. (See “Loyalty Program Performance.”) While the sector most readily associated with loyalty is hospitality (airlines, hotels, and rental cars), we see the best scores showing up among newer programs, specifically in restaurants and retail. Restaurants excel because they are raising the bar on consumer expectations for convenience and value. Retailers see loyalty programs as central to customer engagement and have spent considerable effort ensuring they stay relevant. Sephora — a top-quartile company across all sectors by its Loyalty Performance Score — has evolved its program considerably over time, beginning as a simple points-based program to a now expanded community that encourages members to engage with other makeup enthusiasts and professionals, even using augmented reality so members can test products in the mobile app.
Low-performing sectors and companies have major opportunities to move into the top tier by modeling and adjusting their programs based on the four principles we’ve outlined. Organizations that do this have the benefit of not only boosting customer engagement with new and appealing rewards, but these loyalty leaders will also drive more frequent customer spending, higher sales, and sustained long-term growth.