The Idea in Brief
Companies of all kinds are killing off their customer loyalty programs. Why? Most loyalty programs don’t produce the results they promise: lower customer churn, higher sales and profitability, and more valuable insights into customers’ behavior.
Yet some firms—including Sprint, Amazon.com, and United Airlines—have designed ingenious loyalty programs that do deliver as promised. Authors Joseph Nunes and Xavier Dreze reveal the secrets of these successful programs. First clarify your loyalty program’s goal: Do you want to discourage customers from defecting? Motivate them to buy a broader range of products from you? Spur more frequent purchases?
Then design and execute your program so it fulfills the purpose you’ve defined—while boosting your bottom line. For example, Harrah’s Entertainment rewards customers based on their profitability, not purchase volume. Very profitable customers—those who prefer games that generate a higher profit margin for Harrah’s—stay at Harrah’s properties for free. Less profitable customers may pay hundreds of dollars for the same room or even be told a hotel is booked.
No loyalty program can ensure unwavering devotion to your company. Yet properly designed and implemented, your programs will yield longer relationships with happier customers—earning you the best kind of competitive advantage.
The Idea in Practice
To design a successful loyalty program, Nunes and Dreze recommend:
Clarify Your Purpose
Decide whether you want your program to:
- Discourage defections. For example, for every dollar long-distance customers spend with Sprint, they earn an airline mile redeemable at any of five different airlines. Rival AT&T doesn’t offer such a plan. Result? Members of participating airlines’ frequent flyer programs retain Sprint as their long-distance carrier.
- Motivate customers to give more of their business to your company. Amazon.com offers shoppers a credit card that rewards them a penny on every dollar they spend, distributed as Amazon gift certificates. Shoppers who might otherwise alternate among stores now have a reason to favor Amazon.
- Encourage additional purchases. When a car-wash chain began offering a free wash after eight purchases, drivers washed their car more often as they got closer to earning the freebie.
- Gather data about customer buying behavior. U.K. grocery store chain Tesco collects purchase data from members who swipe a Club Card. Then it uses the data to carefully customize its quarterly magazine. For each mailing, Tesco prints product promotions tailored to at least four million different types of customers based on their purchasing habits.
- Turn a profit. American Airlines’ wholly owned subsidiary AAdvantage profitably sells miles to other businesses to use as rewards for their customers—even as the airline itself racks up billions of dollars in debt.
Design Your Program
To ensure that your loyalty program is attractive to customers and not too expensive for you, design program components carefully:
- Sense of momentum. Provide a jump-start for new program members: The car-wash chain shortened time between washes even more by changing its “buy 8, get 1 free” program to “buy 10, get 1 free”—and pre-stamping members’ first two washes. The car wash did not award any more free washes, but the pre-stamped washes gave members the sense of being farther along in the program than the previous promotion did.
- Nature of rewards. Give customers memorable treats they wouldn’t splurge on with their own money. American Express’s In:Chicago and In:LA specialty cards award cardholders special dining, drinking, and entertainment experiences at some of these cities’ best spots.
- Relationship expansion. Customers who like a product enough to buy it 10 times would probably pay for the 11th purchase too. So don’t make it free. Instead, offer rewards that expand consumers’ repertoire of purchases. Rather than giving an 11th cup gratis, a coffee shop could offer a free pastry that attracts consumers to a new product and thus promote higher future sales.
What is more rare than undying loyalty? Apparently, an undying loyalty program. In the past few years, we’ve seen companies of all kinds killing off the programs they’d designed to inspire greater fidelity in the ranks of customers. Subway, the restaurant chain, got rid of its Sub Club cards, which allowed diners to earn a free sandwich after purchasing eight. In Australia, Coles supermarkets phased out a program that rewarded owners of the company’s stock with merchandise discounts ranging from 3% to 7.5%. Online phenomenon eBay quietly pulled the plug on its Anything Points program for U.S. customers. Target missed the mark, it seems, with its innovative approach involving “smart” credit cards. American Airlines and America Online jettisoned their joint customer-loyalty program. The list goes on. Even as loyalty programs are launched left and right, many are being scuttled, and not with a sense of mission accomplished.
