Loyalty programs that reward repeat business with point programs and other freebies are common. Whether it’s a “Buy-10-Get-1” punchard or a post-purchase discount code for your next shopping trip, they’ve blended seamlessly into our consumer lives. But can programs like purchase points really build and brand loyalty and create an authentic brand relationship?
In many ways, these transactional reward systems seem at odds with such a goal. And even if there’s a lot right with many loyalty programs, the current climate and pandemic related issues probably require an updated approach.
So, how can loyalty programs elevate the modern shopping experience? And are they the best way to create devoted customers?
Brand Loyalty Leading Up to 2020
In 2011, McKinsey completed an analysis of U.S. retailers that looked at the effect of traditional loyalty programs. They found that those with loyalty programs posted a 2.28 percent comp sales increase, while those without loyalty programs posted 4.26 percent gains. There are potential contributing factors for the disparity, but a key takeaway for McKinsey: “Just because you have a loyalty program doesn’t mean it’s working.”
For example, they found that many companies’ best customers weren’t even using their expensive loyalty programs. But the companies didn’t know it because they adopted a “set it and forget it” approach. Following the study, they first recommended companies clearly define the customers they hoped to reach, suggesting they focus on high-value and at-risk customers. They then recommended that companies:
- Identify clear and specific business objectives outlining the program’s goals
- Get granular data to understand which customers present the best opportunities
- Develop rewards that resonate by using the customers’ definitions of value
This past year, researchers at Wharton revisited the basis for the McKinsey study to see what loyalty programs might face today.
Brand Loyalty During the Pandemic
The world isn’t short on blogs about the importance of authenticity, and how, more than ever, brands need to connect with their customers in meaningful ways. But when it comes to brand loyalty, it’s true.
Thomas Robertson, a professor of marketing at the Wharton School, says loyalty programs continue to grow in popularity, as he discussed on this podcast in September. Wanting to better understand if that was the right move, he and his team completed a survey-based study in 2020. The report, The New Reality: Understanding the Retail Consumer Experience During a Pandemic, is available for free download.
The researchers found that overall loyalty decreased as online shopping increased over the past year, and that more customers are reporting problems when they shop. The team collected surveys in Q1 in February, and then again in Q2 in May. They found the number of dissatisfied shoppers increased 10 percent between February and May and that shopper patience did not improve.
“One of the biggest takeaways of all was that customers have been less forgiving during the pandemic,” Robertson said on the podcast. This was not what the team expected. In addition, customers in loyalty programs showed incremental dissatisfaction. Specifically, 47 percent of the unhappy customers reported being part of a loyalty program. This large portion of customers probably experienced more challenges due to higher engagement than non-members.
“According to our analysis, it is because of the complexity of loyalty programs, and points are a big issue,” he said in the interview. “Consumers are always trying to figure out how many points they have, and what they can cash in with these points. So, they have to contact retailers a lot more. They also had higher expectations. If you’re in a loyalty program, you think that the retailer is going to treat you in a special way, and you don’t expect problems. And if you do have problems, you expect them to be resolved quickly, which wasn’t always the case.”
Get Back to the Basics to Improve Brand Loyalty
The 2020 Wharton study identified three particularly brand-damaging problems:
- Paying for shipping to return an item
- Needing a receipt to return an item
- Difficulty navigating the website or app
Simply put, shoppers today want a seamless online experience and easy returns.
“Loyalty programs will not compensate for poor service or a poor product,” Robertson said during the podcast interview. “They will just add cost.”
To keep customers, companies should get back to the basics of good customer service—taking an honest look at their online experiences. Before introducing any new, complicated sales-based loyalty programs, companies should invest in changes that will make the online experience mirror the in-store level of service.
If a company already has a loyalty program, then it likely already has extra information about loyalty customers. Retailers should avoid asking for that info again during unpleasant transactions, like returns. It will simplify the process for loyalty customers, who tend to expect higher levels of service.
While the urgency to address these types of issues increased rapidly over the course of 2020, these types of problems probably existed before the pandemic, too.
For example, consider Joybird, a furniture company that in the past enjoyed high praise and even received The New York Times Wirecutter recommendation. After reported issues with deliveries, returns, and even some manufacture defects, they lost support in 2017. You can read Wirecutter’s take here. And this gets at another important issue related to brand loyalty: how to cultivate promoters. A good loyalty program should build a community of brand evangelists.
Build Lasting Brand Loyalty Through Community
Since the early aughts, brands have simplified measuring customer satisfaction with one question: “Would you recommend it?”
A strong customer base of promoters displays high loyalty and can play a key role in overall growth. But people are not likely to recommend a product or brand just because they receive a coupon or other freebie. Afterall, that somewhat suggests that a product is valuable, but only if you can get a good deal. Such programs can also emphasize the more cynical, transactional nature of retail, which may prove counterproductive for brands hoping to foster authentic relationships.
In her February 2021 Harvard Business Review essay, Want More Loyal Customers? Offer a Community, Not Rewards, Ana Andjelic argues the importance of building emotional relationships over rewards programs.
“The irony of most of today’s customer loyalty programs is that they aren’t about loyalty at all,” Andjelic writes in the essay. “They have more to do with an economic transaction than with true affinity for a brand. For example: some companies allow you to earn points for following them or writing a product review. This sort of bribery usually attracts the least loyal and least valuable audience—people mostly interested in claiming the reward not invested in the brand.”
Brands can avoid a race to the bottom on prices and giveaways by providing quality products, a good shopping experience, and access to a community that shares their values.
“True loyalty is emotional and irrational and leads to customers feeling like they’re part of an exclusive membership group, which then leads them to become loyal subscribers or consumer network participants,” she writes. “Consider, for example, sneakerheads waiting in line all night to score a coveted item. They don’t do it to make money on resale; they do it for the in-crowd bragging rights.”
That’s not so to say that any VIP-styled loyalty program has an inherent advantage over a reward-based one. Luxury brands and others can all cultivate a passionate group.
“The keywords are not necessarily prestige and exclusivity, but identity and belonging,” Andjelic writes. “People take pleasure in the intimacy of consuming together and interacting with a like-minded community.”
Consider Sephora’s Beauty Insider approach. They have tiered benefits for those valuable customers who spend more, but they also have benefits at their free “Insider” level. And while they give away birthday gifts and samples as freebies to members, the program also offers a community full of others passionate about the brand where they can post photos and exchange tips. Along with building sincere brand loyalty, such a program can help mitigate missing face-to-face, in-store interaction due to the pandemic.
Where to Find More Ideas on Developing Effective Loyalty Programs
If you’re looking to revisit an existing loyalty program or hope to start one that generates real brand passion, check out Pat Flynn’s book Superfans. In it, he offers lots of examples of how to get current customers involved in ways that will jumpstart a community that can support an authentic, meaningful loyalty program that benefits brands and their best customers.