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May 2016

Do our customer reward programs create losers?

On my recent LinkedIn post, It only takes an accountant to run most loyalty programs, photographer and writer Bob Rehak shared a sharp insight:

Bob Rehak comment: "Rewarding heavy users is a hallmark of one dimensional loyalty programs. The airlines have gone overboard with these. They now disincentivize all but the most frequent fliers. The real challenge is coming up with a multidimensional reward structure that incentivizes all users, all the time. Good programs make everyone a winner instead of turning 95 percent of the audience into instant losers."

Our customers come in all types with all sorts of needs, and we need all sorts of behaviors from them. Some of them may buy more frequently, but others may buy higher margin items. Some may buy seldom but send many referrals. And some could make us famous if we gave them the tools. 

A highly structured loyalty program is unnecessary if we just pay attention to the ways our customers reward us, and then demonstrate our appreciation. 

Image from Jo Naylor on Flickr


Tricks in measuring the dollar value of loyalty with Starbucks example

When asked why they don't have a loyalty program, many independent coffee shop owners say "I'm not giving away coffee to people who stop here everyday anyway." They focus on the lost profit margin in a single cup of coffee. 

Unfortunately, their competition, Starbucks, looks at loyalty as an asset they can acquire very cheaply, for just the cost of a cup of coffee every other week. Starbucks shows the better business acumen in two ways:

  1. They perform a cost-benefit analysis, working to evaluate how much more happy customers really spend. (Click on the article link below to learn how.)
  2. They anticipate their competition will try and pull their customers away. Loyalty programs are a cost of doing business now in many industries. 

Advertising Age: How Companies Put a Dollar Value on Loyalty, and Why They Do It, 2016-Mar-27 by Kate Kaye

The My Starbucks Rewards program "is a good benchmark," said Scott Robinson, senior director, loyalty solutions at Bond, which does not work with Starbucks. When the caffeine slinger awards members a free drink following the purchase of 12 drinks, "The perceived cost of that dividend [by the consumer] would be 1/12 but it really doesn't cost Starbucks that to deliver that latte," he said. "They would probably be paying out something like 2% to 5% [of retail price] in terms of cost on their dividend."


How technology is changing customer loyalty

We have two different issues to consider

  1. Is technology changing the design and use of loyalty programs?
  2. Is technology altering customer behavior around loyalty?

The answer to both questions is yes, but we have to notice these changes flow in many different directions, and may be interdependent or independent of each other. For example, a company may offer such a convenient high-tech program that I become their customer based on it. Then their competitors are forced to upgrade their programs. I may discover a loyalty program in an app store on my phone. I may pressure my favorite store to send me offers on my phone. 

A British loyalty services firm named Entice has recently published a fantastic white paper that collects and supplements recent research on loyalty and technology. They provide many examples of companies that implemented new technology to better serve their customers. The most important points:

  1. We have to understand the importance of technology to our customers. 
  2. The best way to understand our customers is to collect data, and technology makes that easier. 

Entice: Technology has transformed customer loyalty tactics, 2016-Mar-2

It’s hard to tell whether or not loyalty will all move to mobile. However, 86% of marketers ranked mobile loyalty campaigns as very effective to effective (according to research from Salesforce), making it likely that the demand for digital rewards platforms will continue to grow for both customers and marketers.

Technology has definitely brought a new level of sophistication to the way brands approach customer loyalty and has made the overall experience of a program much more engaging.

Photo by Barn Images on Flickr


The yin and yang of managing customer relationships, Tellurian example

We might be good at building relationships, but that doesn't mean we are good at building customer relationships. Unlike personal relationships, customer relationships have to be anchored in a business model. If a company bends too much to a customer's demands, it will become unprofitable, unfocused, and unsustainable. 

In a recent interview, the productive tension of supporting customers while staying true to the company's purpose was displayed by the founders of the new LNG company Tellurian. Both the founding partners have decades of business success which show them how to navigate the currents of the marketplace. 

I love the final emphasis on patience: if we fulfill what we promised, customers will rely on us. 

Houston Business Journal: Meet LNG’s new dynamic duo: Charif Souki and Martin Houston, 2016-Apr-8 by Suzanne Edwards

What is the key to successful LNG marketing?

Houston: Credibility. It’s how you treat the customers. It’s a relationship business, and if there’s a routine that the customers have or process they want you to go through, you have to be mindful of that. One has to work it through with the customers and get them confident. They’re not paid to be risk-takers. They’re paid to bring consensus in their own organizations, and you have to help them do that. It can be a bit of a slow dance sometimes.

Souki: I have a different opinion than Martin on this one. Over the last six or seven years, I’ve come to realize something very important about our business. We provide what it takes to light up your homes and offices, heat up your homes, provide your fertilizer and do things that are absolutely essential for the growth of any one of our customers. So, ultimately, they don’t have a choice, which is why I always advise people to be patient. If you are sure you are the lowest-cost provider, they’ll have no choice. They will come to you.

Intertwined trees, photo by John Fowler (snowpeak) on Flickr

Loyalty is not quickly served, even at quick-serve restaurants

Comparing loyalty programs between McDonald's, Starbucks and Dunkin' Donuts is deceptive because they are driven by the customers who already exist. All the major chains quick-serve restaurants have to have a loyalty program because customers expect it. And they have to keep an eye on innovations the competitors are developing, especially if they can be easily copied. BUT they also have to provide a loyalty program that is tuned to their unique customer base. 

Brand preference for a quick-serve restaurant is not primarily driven by the loyalty program. Location, menu, and atmosphere are all probably more important. Loyalty programs are developed to strengthen customer activity, to make it easier for customers to advocate for the brand, and to limit shopping around. 

When designing a loyalty program, we have to segment our customers and decide which behaviors we want to influence. Starbucks recently changed their mind about which customers get the best rewards, and although some customers were hurt, we expect that Starbucks made the decision based on solid evidence about the long-term health of their business. 

The best loyalty programs are grown slowly, by paying attention to how customer behavior develops. 

Nation's Restaurant News: McDonald's building loyalty program, 2016-Mar-9 by Jonathan Maze

...Andres said that McDonald’s new loyalty program would be “more robust,” and would be linked to consumer purchases, based perhaps on the number of visits customers make to the chain’s restaurants every month. Customers would likely have a limited time to take advantage of whatever deals the company offers through the program....

Andres noted, for instance, that a loyalty program could entice customers to come in after they’ve been absent for a while. McDonald’s could use information it has on those customers’ buying habits to do the convincing. 

“If we see a thawing off, we can entice them with their favorite products to come to the restaurant,” he said. “That’s the future of customer relationship management. We think it can be a significant sales layer for us.”

Photo by Miroslav Vajdic on Flickr

What we can learn from the Amazon commitment to fulfilling the brand promise

Amazon's popularity is something of a mystery to me. To me it just seems like a high-tech version of Walmart, creating low prices by exploiting workers and suppliers. I don't deny that Walmart has made life better for millions, and I know that Amazon relieves stress for its customers. For those of us trying to consume less and more thoughtfully, Amazon and Walmart seem like companies to avoid. 

However, I have to respect Amazon since it ranks so highly in customer loyalty studies from Brand Keys and Temkin Group. A recent Harvard Business Review article does a good job of explaining why. It's not that the prices are so low and the convenience are so great; it's that the business operates with fearsome consistency and dependability. When everyone in the company understands and commits to provide what customers expect, we have a brand promise delivered, the most important step of our loyalty pledge

Harvard Business Review: Your Company Culture Can't Be Disconnected from Your Customers, 2016-Mar-18 by Dave Ulrich and Wayne Brockbank

To create a winning culture, it is not enough to have or recognize cultural artifacts... or to shape how people feel, think, and act based on internal criteria.... Rather, a winning culture ensures that people feel, think, and act consistently with promises made to customers and other key stakeholders.... [emphasis added]

Ulrich and Brockbank call this the "the outside-in approach to culture."

Step 1: Define the right culture. Leaders should begin to define the firm’s ideal culture by asking, “What is the shortlist of what we want to be known for by our best customers?”...

Step 2: Translate the ideal customer-centered identity into behaviors for employees. Employees think and behave so that the company’s brand is reinforced in the perceptions of customers and shareholders....

For Amazon, the focus on disciplined customer-centered innovation sends a clear message to potential and current employees. As their website puts it, “If you love to build, to invent, to pioneer on a high-performance team that’s passionate about operational excellence — you’ll love it here.” This agenda signals to employees what customers expect from Amazon. In a recent workshop, all 350 participants had purchased something from Amazon but none really cared about their emotional experience as much as the timely execution of their order. These customer expectations (brand promises) shape employee behavior around operational excellence.

Step 3: Design the right processes, practices, and structures for supporting and encouraging those behaviors. ... [Use] processes, practices, and structures include staffing, training, promotions, measurement, rewards, organization structure, work design, information management, physical arrangements, and leadership development [reinforcing the] employee actions that align with customer expectations....

Min Hsuan Lo photo by Sage Ross from Flickr

How to lose control of your customer loyalty

When we don't feel like investing in our customers, there's always a helpful service company that will take over the work... and use our customer information to compete with us. I feel sorry for those who adopt Amazon payments--Amazon seems to be even more exploitive than other payment processors. 

@CloudExpo: Customer Loyalty: The Big Data Disintermediation Cure, 2016-March 31 by William Schmarzo

Customer relationship disintermediation is becoming the business norm, and successful customer relationship disintermediation is being driven by big data. Companies like Uber, AirBnB, and others are successfully disintermediating existing customer relationships by leveraging superior customer insights to insert themselves between companies and their customers.

Let’s just look at, who provides a service to aggregate all of your financial data (credit cards, banking, brokerage, IRA, 401K, property, etc.) into a single location from which they can not only monitor your financial status, but can make recommendations for a wide variety of financial decisions including credit cards, auto insurance, life insurance, 401K rollovers, and others....

Photo by the US Dept of Agriculture (USDAgov) on Flickr