Loyalty programs

McKinsey Quarterly has a brief article called Better Rewards for Hotel Loyalty that outlines how to improve hotel customer loyalty programs (free registration required). The bottom-line advice is appropriate for all businesses:

In fact, a hotel can learn a good deal by conducting a better dialogue with its guests and by giving frontline staff members an incentive to note their observations...

Hotel operators should also search for innovative ways to distinguish programs from those of the competition and to make them more appealing to frequent travelers. Free meals aren't much of an incentive to anyone on an expense account. Instead, these customers want their rewards to be personalized with things that matter to them: benefits such as upgrades to concierge floors or offerings (including free movies or minibar items) not covered by their expense policies. Moreover, some guests may be planning special events (such as weddings, honeymoons, vacations, or large parties) that could not only serve as the focus of innovative rewards programs but also use up lots of points—if hotels were aware of them.

This article got me thinking about loyalty programs. As I see it, there are three kinds of customer repeat business (sometimes known as loyalty):
1. Repeat business due to monopoly. Telecom and energy services pre-deregulation, and Microsoft Windows & Office, are examples of repeat customer business driven by lack of choice. When new choices become available, customers eagerly seek out alternatives if they're not satisfied with their current provider. Microsoft is beginning to face serious threats from Linux on the OS front; it's also losing share in the browser category to Mozilla and soon to Google (who recently registered gbrowser.com).

2. Repeat business from loyalty programs. A good example is my so-called "loyalty" to American Airlines. I fly AA because I have a bunch of frequent flier miles. And after hitting Gold status, I do enjoy a better experience than I did previously. However, this does not mean I'm loyal to AA. My bad experiences far outweigh the good ones and I wouldn't recommend the airline to anyone. I just fly them to get free trips. My last experience was bad enough that I'm tempted to use up my miles and start flying with another carrier... except I'm a bit stuck with AA as they have the most direct flights out of Dallas.

3. Repeat business due to true loyalty. This is where customers love their interactions with a company and eagerly refer others. For a lot more info on this subject, visit Ben and Jackie's Customer Evangelism blog. The reason why Linux, Apple and Google are making inroads into Microsoft's territory is because their customers are passionate about these brands.

The McKinsey article is attempting to get hotels to start thinking in terms of #3 instead of #2. The transition starts with dialoguing with customers and learning what's important to them. A free room isn't compelling to someone on an expense account; a free movie or a mini-bar item is. If American Airlines wanted to create true customer loyalty, they'd get serious about what customers really want: on-time flights and friendly, helpful staff. If Microsoft wanted to transition from monopoly to loyalty, it would stop pushing one-size-fits-all products and start giving customers what they really want. For example, a fitness trainer doesn't need (or want to pay for) the same functionality as a corporate marketing director. They could start with unbundling Office programs, or creating versions with less functionality at a lower cost, etc. Just skip the idea of a loyalty program altogether.

American Airlines' frequent-flier program birthed the misleading idea that companies could buy loyalty. Because it appeared to work, companies in all industries started creating their own versions. IMO, there is no such thing as a "customer loyalty program." Look at any company that has true customer loyalty and you'll find that they don't need a loyalty program. Starbuck's has enough loyal customers that they don't need to distribute "buy 10 and get 1 free" punchcards.

I'm not saying that there's no place for heart-felt thank-you's. Effective customer programs are those that trade value for value in acknowledgement of the relationship that's been built over time. Think about it in terms of a personal relationship between individuals: everyone knows that you can't buy love. But in a strong relationship, each party offers gifts -- tangible and intangible -- that reflects the value placed on the other party. And the gift should be something that's valued by the recipient. A gift that's selected simply because it's cheap and easy for the giver is worse than no gift at all. I'm thinking about a Sienfeld show where George buys Elaine a cashmere sweater for Christmas with a red stain on it, and he catches hell for being such a cheapskate.

So are you buying customers with a 'rewards' program? Or are you showing your appreciation to loyal customers by trading value for value? There's a world of difference.

Comments

[Nandan Kamat]

Companies cannot buy customer loyalty by developing reward schemes which are not personalised. But most marketers think that having a loyalty card and accruing points/ miles is enough for a loyalty program.
Today I hate to have too many cards in my wallet which really dont mean anything. One of them belongs to a leading retail chain, which has not checked what I would like to buy over the last whole year. Coming to Airline frequent flyer programs, the award flights remain an incentive to keep flying with an airline. But more than that, I would really remain loyal to an airline which assures me safety, efficient and pleasing service and recognition of my preferences whenever i approach any of their staff, at the service centre or in the airports. The last bit is missing but the first two reasons still are strong enough to ensure my loyalty. In absence of excellent service, a customer would look at the first chance to defect by redeeming his points balance.

[David foster]

Companies that really want customer loyalty should focus on hiring employees who are customer-oriented, and on maintaining a culture that keeps these employees happy. They should also provide efficient mechanisms for front-line employees to forward their ideas and experiences to those in a position to do something about them. And they should avoid the excessive use of Taylorist techniques (like giving employees scripts that tell them exactly what words to say in all circumstances)

Frequent-buyer programs may be worthwhile, but they are merely nibbling around the edges of the real issue.

[John]

Good points! Loyalty to American Airlines? Are you kidding me? I hate to say it, but I think these loyalty cards work. The point is you belong with/to them in some strange way. Even if you don't particularly like them. Meet your new in-laws!

I now have a card for a drug store chain, and I have to caution myself before I use it. The drug store is, from my vantage point, indistinguishable from its 2 main competitors. But I only have one drug store loyalty card, and it’s nested with my one gas card and one library card and ....I question myself each time I dig for it in my Costanza-styled wallet.

Since acquiescing to the agent's plea for me to sign up, I don’t exactly look forward to a free bottle of contact lense solution sometime in the next few months. Of course such rewards are presented as the goal, but they're incidental. The reward for me is that I belong.” There you go, Mr. D." I’m afraid whether these cards and their promise of belonging really matches who I am and who the company is may or may not be all that relevant. I belong because I belong.