Loyalty & Rewards

Why Deals Don’t Drive Loyalty

The selling point for Cheers was never the food; it was the fact that everybody knew your name.

Talking the loyalty talk doesn’t inspire consumers to stick with a brand. Retailers, QSRs and any other business that wants to enjoy true customer loyalty must walk the walk as well. The brand must show loyalty to the customer before the customer shows loyalty to the brand.

Bypass CIO Geoff Johnson made this point with a very simple anecdote, which he shared in a recent interview with Karen Webster.

One time, a few years back, Johnson was traveling to Austin for a business meeting. The first leg of his flight was delayed, causing him to miss his connection. Upon deplaning, he was handed a boarding pass for the following day. But the following day would be too late. Johnson needed to get there that night, or he would miss his meeting.

An airline employee noticed him looking disjointed and approached him. Minutes later, Johnson had been taken into a back room to wait while airline staff sorted out a way for him to make it to Austin in time for the meeting. And he made it.

That airline was Southwest, and after that, Johnson said he became a customer for life. His loyalty did not come from the company doing what it was supposed to do — i.e., shuttling him from Point A to Point B, which any other airline also could have done. The loyalty came from the company going above and beyond to show him that he was important to them, both as a consumer and as a person.

As a frequent traveler, Johnson knew he had stumbled onto something unique. And consumers in general have that sense, whatever product or service they’re dealing with. Closer to home, that could be as simple as the coffee shop barista welcoming the customer by name — or, suggested Webster, her favorite smoothie shop throwing in a free shot of protein so she can decide if she likes it.

Rewarding customers for behavior they’re already doing is a great way to get them to keep doing it or increase their activity. But not all loyalty programs are created equal. Johnson said that, as the loyalty economy evolves, a program must be truly unique in order to come across as valuable to consumers. So, what’s working … and what’s not anymore?

The Loyalty Marketplace

Coupon aggregators are both working and not working. For customers, they’re great: Groupon, a prime example of a loyalty marketplace, enables consumers to find discounts on goods and services they otherwise might not have tried.

However, once they’ve tried them, they rarely go back. Their loyalty is to the aggregator, said Johnson, not to this or that specific spa, restaurant or whatever the business may be. So, while they may expose retailers to a brief uptick in activity, Groupons and other coupons don’t generate enough repeat business to be worth it.

In fact, sometimes they can hurt a business more than they help. Offering discounts can lose retailers a lot of money because of that lack of conversion from one-time shopper to repeat customer, and many no longer offer such sales as a result. The strategy is only worth it if the lifetime value of the customers who return outweighs the spend on markdowns.

Johnson said this is how Yelp’s new plan to introduce card-linked offers strikes him — more like a coupon than a loyalty program. The rewards are not based on patronage. They are simply offers to encourage customers to walk through the door.

Webster noted that card-linked offers fall apart because of their invisibility. They are, she said, disconnected from the retail experience.

The consumer opts in to the offers they like, but that’s done online long before physically visiting the retailer — by which time the consumer has likely forgotten which offers they opted in to receive. Since no one at the point of sale will announce, “Hey! You just saved $10!” the only way to know about the reward is by checking a bank app or statement later. In the context of other bank activity, a $5 or $10 reward just isn’t going to look very exciting.

That’s where Johnson said Yelp may have an advantage. It has the ability to surface all those rewards in a single unified mobile app to close the loop on what happened. It could also choose to show a running tally of dollars accumulated through the rewards program.

However, Johnson is careful to note that it is a rewards program only, and not a loyalty one; it is not structured to drive repeat business for individual retailers. So, while it may work out nicely for consumers — and it will undoubtedly drive business for Yelp — retailers are likely getting the short end of the stick in this program.

QSRs

The restaurant space can be a tricky place to generate loyalty, Johnson said. It’s relatively easy for coffee shops: They quickly become part of a customer’s daily routine, sometimes enjoying multiple visits per day — especially in areas where they are densely located.

But other QSRs, especially ones that focus on food more than beverages, don’t lend themselves to the same degree of fervent dedication. Like Southwest Airlines, those businesses are going to have to go the extra mile if they want to have sticking power and drive those daily visits.

Ubiquity is one important factor here. Frequency is another. For example, with the exception of a very small subset of the population, people don’t eat at McDonald’s or Burger King every day, Johnson said; even though these QSRs have the ubiquity factor, it is not considered acceptable to visit them on a daily basis. On the other hand, no one bats an eye at someone who visits Starbucks once (or even multiple times) a day. Thus, the coffee chain has both ubiquity and frequency of visits.

Part of the QSR challenge is that people seek variety at lunchtime. While a coffee routine can be tough to break, convincing someone to try something different at lunch is relatively easy — indeed, the harder task is convincing them to eat at the same place every day, especially in denser and more urban settings.

Another challenge (and airlines face this one too) is whether to reward customers by the visit or by the dollar. Starbucks made the shift last year from giving customers a star for every purchase to a dollar-based system.

It doesn’t make mathematical or financial sense, Johnson said, to reward the guy who comes in to buy a $1.50 tall blonde coffee every day the same as someone who always gets a double soy latte or Frappuccino at a much higher price point.

Delta made waves as the first airline to get away from a miles-based program into a dollar-based one. Both companies faced backlash for the move, but Johnson believes that’s the direction loyalty is headed. After all, nurturing the biggest spenders is just good business.

The Future of Rewards

Ultimately, Johnson said loyalty programs will need to hone in on two things going forward.

The first is good mathematics. Obviously, Starbucks and Delta did the math and found that they could generate more business and revenue with a differently structured approach to loyalty (and that decision was surely driven by data, which Johnson believes will play a major part in future loyalty programs).

The second is unique rewards and offers, including surprise-and-delight elements like that free shot of protein from Webster’s favorite smoothie shop.

If she likes it, said Johnson, then that inexpensive gamble just won the company an extra $1.50 on every smoothie she buys going forward, not only increasing revenue but also maybe pushing her over a cash threshold and forcing her to pay by card, thus providing the business with more data about her.

The goal, said Johnson, should not be simply to bring traffic through the door, but to make the customer feel special — like the company actually cares about them. A coupon or discount code from Groupon, Yelp or elsewhere doesn’t do that, because everyone gets the same deal, and customers know it.

Maybe they’ll play the game, walk through the door and make the one-time purchase. But does that mean they’re loyal? Will they come back? Johnson said probably not. What they will do again is go to Yelp for a restaurant recommendation — and another coupon to go with it.

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Latest Insights: 

The Which Apps Do They Want Study analyzes survey data collected from 1,045 American consumers to learn how they use merchant apps to enhance in-store shopping experiences, and their interest in downloading more in the future. Our research covered consumers’ usage of in-app features like loyalty and rewards offerings and in-store navigation, helping to assess how merchants can design apps to distinguish themselves from competitors.

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