Can Anything Save Loyalty?

There’s no good news these days if you’re in the loyalty business.

It’s easy, though, to think that there is.

For instance, just last week, Colloquy’s annual loyalty census reported that loyalty membership is exploding, with 3.3 billion loyalty memberships now in place in the U.S.

If you never read beyond the headline, you’d think that loyalty innovations were setting the world on fire.

But, it’s the fine print that tells the real story.

Active participation in those loyalty programs has been on the decline since 2010, when it was pretty pathetic to begin with. Then, 54 percent of loyalty program members were inactive. Five years later, in 2015, nearly 60 percent (58 percent to be precise) of program members are inactive – despite the fact that the number of memberships is on the rise at 29 per household.

And, since the definition of active participation is pretty vague, I’d bet that engagement, as defined by the ability of those programs to drive incremental spend to merchants, doesn’t even break double digits.

You don’t need to have passed high school algebra to figure out something is way off here.

I can’t say that I’m surprised.

It’s just way too easy to start a loyalty program. And, most of them are big blunt price discounting instruments that are successful at two things: getting consumers to sign up for the initial “benefit” and subsidizing already loyal consumers. The statistics show that most of them fail miserably at actually keeping consumers engaged.

And, loyal to the brand.

And able to deliver incremental value to merchants.

Smartphones and apps were supposed to save the loyalty industry, and merchant and brand engagement along with it. But at least so far, all that it seems to have done is expand the supply of loyalty programs and fragment the number of loyal consumers.

That was the topic of discussion last week with a professor from the University of Chicago’s Booth School of Business who’s done a lot of work on what motivates a consumer to actually engage with a brand. Professor Oleg Urminsky’s work and insights are not only interesting, but highlight the incredible complexity associated with getting loyalty initiatives to deliver loyal consumers and an ROI to the brand.

If you were listening in to our conversation that afternoon, here’s what you would have heard us talking about.

Consumers Like Working Toward A Goal, Except When They Don’t


Achieving goals is a basic human nature. See a goal. Work toward it. Achieve it. Get rewarded. Feel great. That feedback loop is at the core of most loyalty programs in the market today. It was, in fact, the premise of one of the earliest loyalty programs ever introduced – S&H Green Stamps. S&H Green Stamps was started in 1896 but really gained momentum in the 1960s as grocery stores, primarily, used them to hook consumers to shopping regularly at their stores.

Stamps were earned based on the amount spent at a participating store. The more money spent, the more stamps would be earned, and then redeemed at S&H Green Stamps Redemption Centers.

At that time, it also didn’t matter to your Mom or your Grandma that it took spending $100 to get an item worth a fraction of that, not to mention the time and trouble they took to paste the green stamps into the books. It was the sheer act of having an eye on getting that new pressure cooker (a popular kitchen appliance at the time) – and then getting that little gem (and bragging about it to her friends) that kept those women buying groceries and pasting those little green stamps into those coupon books.

The S&H Green Stamps scheme had one other thing going for it that kept those housewives motivated. The redemption centers where those women went to redeem their coupon books were filled with all sorts of shiny objects. When Sally went to the redemption center to redeem her books and get her pressure cooker, she saw the electric skillet and ran right back to the grocery store to start the process all over again.

Except when doing that got to be too much of a pain.

S&H Green Stamps fell out of favor in the 1970s when the recession eroded the value of the stamps and therefore, the value of the reward. Going to all of the trouble of getting the stamps, pasting them into books and then schlepping to the redemption center to claim a prize that was pretty cheap to buy on sale elsewhere just wasn’t worth the trouble anymore. The stores that had to buy the stamps from the S&H Company stopped buying them, and the program slowly faded away.

Urminsky’s research reveals that the value of the reward is subordinate to the feeling of accomplishment that a consumer has when achieving that reward.

Except when the consumer does the mental math and decides that the trade-off isn’t worth it.

It’s why Green Stamps don’t exist anymore. And why most points programs today are languishing. When it’s too hard or takes too long to achieve a goal that isn’t very meaningful, and other options exist that deliver more perceived or real value, consumers just don’t bother.

The juice just isn’t worth the squeeze.

Consumers Don’t Like Starting Over

Pop Quiz.

Which rewards program do you think is more valuable from the consumer’s point of view: one in which she has to buy eight things to get one thing free, or one in which she has to buy 10 things to get one free, but she starts out with two credits?

If you answered the latter, give yourself a raise!

This was actually a real experiment that Urminsky told me about to see just how consumers would respond. Nearly 2x the number of consumers actually went on to redeem the reward that came with the two credit “head start” (although nearly two thirds never bothered to get engaged at all). Even though consumers had to actually purchase the same number of things to claim their prize, giving consumers the feeling that they were starting out two steps closer to the reward was the psychological boost they needed to get off the dime and get engaged.

Urminsky’s research suggests that the closer a person is to achieving their goal, the faster they work to getting it. That, he suggests, is not only a key driver of successful loyalty programs, but a way to drive incremental value to the merchant, too. It makes sense. The closer that Mom or Grandma was to having enough coupons to get her pressure cooker, the more times she went to the store or the more she spent while there so that she could fill up her coupon books. Today, the closer business travelers are to achieving elite status, the more trips they pack onto that particular airline to cross that threshold. The closer that Neiman Marcus InCircle rewards members are to Platinum status, the faster they work at trying to get there so that they have more time to enjoy the benefits.

But the real insight from Urminsky’s work is about keeping consumers engaged once they redeem their reward.

As the data shows, most consumers aren’t engaged in loyalty programs to begin with. And getting those who are motivated enough to start all over again, back at square one once they’ve redeemed their reward, is a huge hurdle that most loyalty programs never seem to overcome. Achieving a new goal seems too far away.

But it also explains why those programs that matter to those engaged consumers – like airline and hotel rewards – are those that consumers spend the time and effort to maintain. Starting over at square one is just too painful because the value associated with achieving the higher status is tangible and meaningful.

Invisible Rewards Equals Invisible Consumers

Speaking of tangible and meaningful, Mom and Grandma and all of their housewife friends got pretty fired up each and every time that they went to those redemption centers, Green Stamp books in hand, and walked out with that pressure cooker or toaster for one simple reason: while waiting to score their reward, they could lay their eyes on the next item they wanted to get. And, how many Green Stamps they needed to get it.

What served as the ultimate incentive was the mental image of the benefit they were working toward – it made the goal and the effort tangible and real and worth achieving.

Urminsky and I chatted about the importance of those visual or tangible cues in keeping consumers engaged in loyalty programs. No surprise that it’s pretty important since it always reminded the consumer that the juice is worth the squeeze. And how valuable the loyalty program provider is for making that value available to that consumer. And the risk associated of losing it or not working hard or fast enough to benefit from the reward.

It’s also why card-linked offers are such a puzzle and perhaps why they’ve struggled so much in the past. Their benefits to the consumer are totally invisible. They may be easy for the consumer to enroll in, but they are also the least impactful. Consumers don’t know how or when they’re rewarded and retailers and card brands miss out on getting the recognition associated with making those rewards available. And when it’s done after the fact, there is no way to deliver any incremental value or benefit. The value of the program is out of sight and out of the consumer’s mind.

Rewarding Customers When They Least Expect It

Who doesn’t like getting a present “just because”?

That’s the premise of Panera Bread’s My Panera Rewards, which has taken the notion of a fixed progression toward a known reward and turned it on its head – and, Urminsky says, made it an example of one of the most flexible and creative loyalty platforms that exists today.

My Panera Rewards members never know when a reward is coming their way or what it will be, but they know they’ll get something they value at some point. Each time members visit and swipe their cards, they have the chance to be offered, randomly, a free drink or a muffin or other treat. Of course, it’s not random at all, but the result of data algorithms working in the background that prompt an offer based on spend, frequency and preferences.

Urminsky says that programs that use these sorts of tactics are among the most effective programs in keeping loyal customers loyal and delivering a meaningful ROI. Benefits can be tuned up or tuned down, always in the background, and typically consistent with the brand’s other objectives. If Panera wants to launch a new menu item, that can be what it gives away as a way to seed demand. If it wants to keep an otherwise loyal consumer who hasn’t visited in a while coming back, they can offer a surprise as a way to remind that consumer how much they are appreciated – and missed. Since how rewards are calculated are never revealed, consumers don’t ever feel that something is being taken away from them or changed.

The result is that the reward feel less like something that a consumer has to work for by making X visits or spending Y amounts of money, and more like a gift in appreciation for being a loyal customer.

Which is exactly what it is intended to feel like.

Getting Consumers To Buy In, Literally

Asking consumers to pay to get benefits from being part of a loyalty club was unheard of until the Price Club opened its doors in 1976. The concept started out as a way to give small businesses a price break on supplies but grew to serve a membership-only audience of non-business members later on. Costco opened in 1983 with the same premise, and merged with Price Club in 1993. Today 50+ million members pay $55 and up to belong to a club that allows them access to a store where they can buy bulk goods at cheap prices.

Amazon Prime is a membership program of a different sort. In exchange for $99 a year, members get free two-day shipping on any of the 20 million products that Amazon has to offer. Amazon doesn’t publish any numbers, nor does the head of its program talk much about its success. In fact, a recent interview done between Amazon Prime Vice President Greg Greeley, and The Wall Street Journal on Prime’s 10th anniversary was almost a non-interview. No stats were released, no details about future programs were discussed, and about the only thing that Greeley did acknowledge was that it was the 10th anniversary of Amazon Prime.

But Jeff Bezos, in Amazon’s most recent earnings announcement said that Amazon Prime membership increased 53 percent in 2014, despite an increase in the annual membership to $99 (from $79). Analysts estimate that roughly 45 percent of Amazon’s customers are enrolled in Prime or some 40 million consumers and that those consumers spend roughly 2.5x what non-Prime customers spend ($1,500/year versus $625/year). Prime customers have access to free two-day shipping for more than 20 million products as well as unlimited streaming of its video and TV shows.

Paying for membership delivers consumer loyalty. But it also comes with a pretty big expectation on the part of the consumer since, of course, 99.9 percent of loyalty programs are free to consumers. But buying in creates the kind of “skin in the game” psychological incentive that keeps consumers loyal to that brand first. In their minds, they’ve paid for a benefit – access, delivery, selection, better prices – that they feel an obligation to use.

So long as the program delivers to their expectations, of course.

The No Rewards, Rewards Program

If most consumers are motivated by loyalty programs, then one might just ask why even bother?

Well, there are actually lots of brands and retailers that don’t. J. Crew doesn’t have a loyalty program but has a loyal following. The largest retailer in the world, Wal-Mart, doesn’t have a loyalty program but has programs like Savings Catcher that gives consumers the reassurance that Wal-Mart has their back by always delivering the best deal. Apple doesn’t have a loyalty program but dedicated followers and the largest market cap of any technology company in the world. Hermes and Tiffany’s not only eschew loyalty programs but never even discount their products – yet maintain legions of loyal customers.

This speaks to another basic human psychological dimension – the desire to be associated with brands that consumers trust and in some cases also convey status, prestige and the “cool factor.” And as long as consumers like and trust that brand, and see that others like them continue to do the same, loyalty remains intact.

Will Smartphones And Apps Save Loyalty?

The New York Times had a piece a few weeks back about how smartphones and apps can save loyalty. The article was targeted to small businesses and described how they could get more value out of basic loyalty programs like punch cards by moving them off of paper and making them digital.

In theory, it sounds like a great idea. Smartphones and apps are the great equalizer for small merchants who want to play like big retailers but lack the tools to do so.

And the combination of smartphones and apps can, in fact, help any business implement any number of tactics that could help make loyalty programs work better.

Like giving consumers a head start so that they feel that they are closer to their goal.

And never making them start at square one, even after they’ve redeemed a reward and, in essence, cleared their account balance.

Or gamifying loyalty so that achieving the goal is fun and interesting.

Or conveying status and making rewards visible so that consumers always know what they’re getting and when they’re getting it so that they keep wanting more.

But looking at the latest stats on loyalty, maybe we don’t really need any more app-based punch cards or gamified-delivery mechanisms, even though smartphones and apps are the most effective ways that consumers and brands can communicate.

Instead, maybe it’s time to use data to reinvent the notion of loyalty and the incentives that create a loyal customer.

Starting with the reason that consumers like and want to associate with a brand.

Urminsky and I agreed that most loyalty programs end up subsidizing already loyal customers and eroding retailers’ margins. And that when retailers start to tighten up the loyalty program parameters, and reduce redemption formulas, or change the rules from points per mile to points per spend (as in the case of Delta) or stop offering discounts, that the customers they lose are the ones who really aren’t that loyal to begin with – and those for whom those loyalty programs mask the overall profitability of the program to begin with.

But with data, merchants can identify who their best customers are so that they can (a) get more like them and (b) keep the ones they have in the boat. And do it in a way that delivers value, and status and an experience that is befitting the brand and the consumers they want most as loyal customers.

Urminsky thinks that requires thinking about loyalty as a platform and not a disconnected series of one-off solutions that are limiting and more of the same old, same old. He even goes so far as to call a platform approach to loyalty as a “game-changer.”

I’ll take it one step further. I say that it not thinking about loyalty in that way only traps brands into a false sense of thinking that they’re getting loyal consumers when they’re obviously spending time and money and getting anything but that. And perpetuating the circular loop of more points and punch cards and offers and discounts that disappoint rather than delight. And waste everyone’s time and money.

Fifty-eight percent of consumers can’t be wrong.

Smartphones and apps are a retailer’s best friend today. And so is the data that can help brands large and small make decisions about how to engage their customers and loyalty providers build a platform and an ecosystem that can save the S.S. Loyalty ship from sinking. And, even more important, help brands decide how and when and what and with whom, they should hitch their loyalty aspirations and the ROI that goes along with it.