Loyalty Programs? We Don’t Need No Stinkin’ Loyalty Programs!

Without fear of (much) argument, it’s a fair statement to say that all companies want, and try to generate and achieve, optimum loyalty from their customer bases. They should want this, because study after study shows the financial rewards of having loyal customers. Some companies reach this goal through superior value delivery, built on quality products and services, and positive, consistent customer experiences. For the past several decades, many companies have relied on customer loyalty cards or programs, by which they can track purchase behavior and give rewards for repeat and volume buying activity.

Without fear of (much) argument, it’s a fair statement to say that all companies want, and try to generate and achieve, optimum loyalty from their customer bases. They should want this, because study after study shows the financial rewards of having loyal customers. Some companies reach this goal through superior value delivery, built on quality products and services, and positive, consistent customer experiences. For the past several decades, many companies have relied on customer loyalty cards or programs, by which they can track purchase behavior and give rewards for repeat and volume buying activity.

Customer loyalty programs are especially popular among retailers. During the years, retailers have found these programs to be powerful business tools within their highly competitive markets. But some retailers have completely disavowed loyalty programs, either never initiating them in the first place or canceling them, in favor of reduced pricing. In fact, this has become something of a trend. What’s behind it?

Let’s start with the biggest retailer—Walmart. The company has long claimed that a loyalty program isn’t needed because its prices are so low. Walmart believes that loyalty programs can, indeed, provide excellent information about customers who participate; however, as one Walmart executive put it: ” … some of the loyalty programs are very expensive, and we don’t think that serves everyday low cost and everyday low price.” Lower-than-competition everyday prices has been Walmart’s merchandising and marketing mantra since its inception. But, at least for groceries and sundry products, that often isn’t the case. Supermarket chains like Save-A-Lot and Aldi’s, neither of which has a loyalty program, will often beat Walmart’s item-for-item pricing by a significant margin. And other competitors can use their loyalty programs to selectively pick products, and individual customers, to offer pricing—which undermines Walmart.

As for generating customer purchase data, Walmart has a “scan & go” app for mobile devices, which allows customers to scan their own items as they shop; and this provides the company with valuable information on what customers are purchasing, the length of time they’re shopping in the store, and what offers and coupons might drive future purchases. Walmart uses additional methods of understanding individual customer purchases. One of these is Walmart credit cards. Another is reloadable MasterCard and Visa debit cards. A third is “Bluebird,” a prepaid debit card which functions as Walmart customers’ alternative to having a checking account, with which they can make deposits, pay bills—and shop at Walmart. Like Tesco is already doing in the U.K, Walmart has been considering development of its own bank, which would provide even more customer data.

Asda, a Walmart-owned supermarket chain in the U.K, also has no loyalty program. It’s the second-largest supermarket company, behind Tesco; and, as in the U.S., newer low-priced chains, such as Aldi, are actively competing with Asda. In place of a loyalty program, Asda believes it provides customers with what they want most, a “great multichannel retail experience.” The chain, according to executives, focuses on the key fundamentals: prices, quality, convenience and service. Alex Chrusczcz, Asda’s head of insights and pricing, offers two explanations of how the organization is endeavoring to build customer loyalty:

  • “Aspire to treat customers equally, or you’ll create a fractured brand and shopping experience. If you have someone paying one price and another customer with a coupon paying a different price, the perception of the brand is becoming fractured. Make sure it’s consistent.”
  • “Be pragmatic in terms of technology and analytics. They aren’t a silver bullet. Use these tools and combine them with the experience of your team.”

From my perspective, the second explanation is common sense; however, the first statement is really questionable—even counterintuitive, if a subordinating goal of loyalty behavior is to help drive customer-centricity. Simply put, all customers are not equal in value; and marketing strategies which treat them as such often create lower revenue.

In the U.S., regional supermarket chain Publix has no loyalty program. The company doesn’t have, as a result, the ability to track, at a household level, what customers are and aren’t purchasing in their stores. What Publix does, instead of loyalty cards, is try different alternative approaches to build sales. One of these, for example, was to test a program where shoppers could set up an online account where they could digitally clip coupons; and then, in the Publix store, the discounts they’d set up online could be automatically applied by typing in their phone numbers. Publix also has a BOGO program for their own brands, and accepts competitors’ coupons in their stores.

Some retailers do more than emphasize the sales and service fundamentals. They build genuine passion for, and bonding with, the brand by creating a more human, emotional connection. And, though there are few organizations like this, retailers such as Trader Joe’s are the exception that proves the rule. Trader Joe’s has no customer loyalty program. What they have is enthusiasm, achieved through differentiated, every-changing customer experiences, enhanced by upbeat, helpful employees. This has enabled Trader Joe’s to generate sales per square foot that are double the sales per square foot of Whole Foods. So, another way of stating that Trader Joe’s creates loyalty behavior without a program is to say: The shopping experience is, defacto, the loyalty program.

Now, we come to retailers which had customer loyalty programs, usually of long-standing, and elected to discontinue them. Actually, much of this has been done by one organization, Cerberus Capital Group, the early 2013 purchaser of multiple regional retail supermarket chains from Supervalu (Shaw’s, Acme, Star, Albertson’s and Jewel-Osco). Calling the new positioning “card-free savings,” and reflective of the first strategy stated above by Asda, each of the chains issued statements with themes like “We want buying to be simple for all, so that every (name of company) customer gets the same price whether a loyalty card has been used or not.” Additionally, and again like Asda, these chains have said they will go back to the basics: clean stores, well-stocked shelves, reduced checkout time, clearly marked sale items and creation of a more customer-focused culture. Some of their executives have also theorized that the chains will now adopt a more local-level approach, rather than customer-level, to their decision-making, and that individual store managers will now be more actively involved in driving successful performance.

So, the chains acquired by Cerberus appear to believe that “sunsetting,” or eliminating these programs, is a calculated risk and that they would still find good ways of providing value to retain more loyal customers, as well as incentives for those with the potential to move from purchase infrequency. Most analysts, however, felt that Cerberus eliminated the programs largely because the chains they purchased were either not mining card data, or not effectively analyzing and applying this material for better marketing and merchandising, thus making the loyalty systems too expensive to maintain.

Cerberus has entered into takeover discussions with California-based Safeway, which also owns Vons and Pavilion. If this sale takes place, it’s a good bet that these chains will also drop their reward cards, because Cerberus-owned supermarkets clearly don’t need, or want, no stinkin’ loyalty programs.

Building Customer-Centric, Trust-Based Relationships

More than a buzzword, “being human,” especially in brand-building and leveraging customer relationships, has become a buzz-phrase or buzz-concept. But, there is little that is new or trailblazing in this idea. To understand customers, the enterprise needs to think in human, emotional terms. To make the brand or company more attractive, and have more impact on customer decision-making, there must be an emphasis on creating more perceived value and more personalization. Much of this is, culturally, operationally, and from a communications perspective, what we have been describing as “inside-out advocacy” for years.

More than a buzzword, “being human,” especially in brand-building and leveraging customer relationships, has become a buzz-phrase or buzz-concept. But, there is little that is new or trailblazing in this idea. To understand customers, the enterprise needs to think in human, emotional terms. To make the brand or company more attractive, and have more impact on customer decision-making, there must be an emphasis on creating more perceived value and more personalization. Much of this is, culturally, operationally, and from a communications perspective, what we have been describing as “inside-out advocacy” for years.

Most brands and corporations get by on transactional approaches to customer relationships. These might include customer service speed, occasional price promotions, merchandising gimmicks, new product offerings, and the like. In most instances, the customers see no brand “personality” or brand-to-brand differentiation, and their experience of the brand is one-dimensional, easily capable of replacement. Moreover, the customer has no personal investment in choosing, and staying with, one brand or supplier over another.

A key opportunity for companies to become stronger and more viable to customers is creation of branded experiences. Beyond simply selling a product or service, these “experiential brands” connect with their customers. They understand that delivering on the tangible and functional elements of value are just tablestakes, and that connecting and having an emotionally based relationship with customers is the key to leveraging loyalty and advocacy behavior.

These companies are also invariably quite disciplined. Every aspect of a company’s offering—customer service, advertising, packaging, billing, products, etc.—are all thought out for consistency. They market, and create experiences, within the branded vision. IKEA might get away with selling super-expensive furniture, but it doesn’t. Starbucks might make more money selling Pepsi, but it doesn’t. Every function that delivers experience is “closed-loop,” carefully maintaining balance between customer expectations and what is actually executed.

In his 2010 book, “Marketing 3.0: From Products to Customers to the Human Spirit,” noted marketing scholar Philip Kotler recognized that the new model for organizations was to treat customers not as mere consumers, but as the complex, multi-dimensional human beings they are. Customers, in turn, have been choosing companies and products that satisfy deeper needs for participation, creativity, community and idealism.

This sea change is why, according to Kotler, the future of marketing lies in creating products, services and company cultures that inspire, include and reflect the values of target customers. It also meant that every transaction and touchpoint interaction, and the long-term relationship, needed to carry the organization’s unique stamp, a reflection of the perceived value represented to the customer.

Kotler picked up a theme that was articulated in the 2007 book, “Firms of Endearment.” Authors Jagdish N. Sheth, Rajendra S. Sisodia and David B. Wolfe called such organizations “humanistic” companies, i.e. those which seek to maximize their value to each group of stakeholders, not just to shareholders. As they state, right up front (Chapter 1, Page 4):

“What we call a humanistic company is run in such a way that its stakeholders—customers, employees, suppliers, business partners, society, and many investors—develop an emotional connection with it, an affectionate regard not unlike the way many people feel about their favorite sports teams. Humanistic companies—or firms of endearment (FoEs)—seek to maximize their value to society as a whole, not just to their shareholders. They are the ultimate value creators: They create emotional value, experiential value, social value, and, of course, financial value. People who interact with such companies feel safe, secure, and pleased in their dealings. They enjoy working with or for the company, buying from it, investing in it, and having it as a neighbor.”

For these authors, a truly great company is one that makes the world a better place because it exists. It’s as simple as that. In the book, they have identified about 30 companies, from multiple industries, that met their criteria. They included CarMax, BMW, Costco, Harley-Davidson, IKEA, JetBlue, Johnson & Johnson, New Balance, Patagonia, Timberland, Trader Joe’s, UPS, Wegmans and Southwest Airlines. Had the book been written a bit later, it’s likely that Zappos would have made their list, as well.

The authors compared financial performance of their selections with the 11 public companies identified by Jim Collins in “Good to Great” as superior in terms of investor return over an extended period of time. Here’s what they learned:

  • Over a 10-year horizon, their selected companies outperformed the “Good to Greatcompanies by 1,028 percent to 331 percent (a 3.1 to 1 ratio)
  • Over five years, their selected companies outperformed the “Good to Great companies by 128 percent to 77 percent (a 1.7 to 1 ratio)

Just on the basis of comparison to the Standard & Poor’s 500 index, the public companies singled out by “Firms of Endearment” returned 1,026 percent for investors during the 10 years ending June 30, 2006, compared to 122 percent for the S&P 500—more than an 8 to 1 ratio. Over 5 years, it was even higher—128 percent compared to 13 percent, about a 10 to 1 ratio. Bottom line: Being human is good for the balance sheet, as well as the stakeholders.

Exemplars of branded customer experience also understand that there is a “journey” for customers in relationships with preferred companies. It begins with awareness, how the brand is introduced, i.e. the promise. Then, promise and created expectations must at least equal—and, ideally, exceed—real-world touchpoint results (such as through service), initially and sustained over time, with a minimum of disappointment.

As noted, there is a strong recognition that customer service is especially important in the branded experience. Service is one of the few times that companies will directly interact with their customers. This interaction helps the company understand customers’ needs while, at the same time, shaping customers’ overall perception of the company and influencing both downstream communication and future purchase.

And, branding the customer experience requires that the brand’s image, its personality if you will, is sustained and reinforced in communications and in every point of contact. Advanced companies map and plan this out, recognizing that experiences are actually a form of branding architecture, brought to life through excellent engineering. Companies need to focus on the touchpoints which are most influential.

Also, how much influence do your employees have on customer value perceptions and loyalty behavior through their day-to-day interactions? All employees, whether they are customer-facing or not, are the key common denominator in delivering optimized branded customer experiences. Making the experience for customers positive and attractive at each point where the company interacts with them requires an in-depth understanding of both customer needs and what the company currently does to achieve that goal, particularly through the employees. That means companies must fully comprehend, and leverage, the impact employees have on customer behavior.

So, is your company “human”? Does it understand customers and their individual journeys? Are customer experiences “human” and branded? Is communication, and are marketing efforts, micro-segmented and even personalized? Does the company create emotional, trust-based connections and relationships with customers? If the answer to these questions is “YES,” then “being human” becomes a reality, the value of which has been recognized for some time, and not merely as a buzz-concept.

When Companies Lose Customers …

United Parcel Service suffered staggering customer defection as a consequence of its 15-day Teamsters work stoppage in 1997. The result was that, even after their 80,000 drivers were back behind the wheels of their delivery trucks or tractor-trailers, many thousands of UPS workers were laid off. A UPS manager in Arkansas was quoted as saying: “To the degree that our customers come back will dictate whether those jobs come back.”

United Parcel Service suffered staggering customer defection as a consequence of its 15-day Teamsters work stoppage in 1997. The result was that, even after their 80,000 drivers were back behind the wheels of their delivery trucks or tractor-trailers, many thousands of UPS workers were laid off. A UPS manager in Arkansas was quoted as saying: “To the degree that our customers come back will dictate whether those jobs come back.”

The UPS loss was a gain for Federal Express, Airborne, RPS and even the United States Postal Service. They provided services during the strike that made UPS’ customers see the dangers of using a single delivery company to handle their packages and parcels. FedEx, for example, reported expecting to keep as much as 25 percent of the 850,000 additional packages it delivered each day of the strike.

UPS’ customer loss woes and the impact on its employees was a very public display of the consequences of customer turnover. Most customer loss is relatively unseen, but it has been determined that many companies lose between 10 percent and 40 percent of their customers each year. Still more customers fall into a level of dormancy, or reduced “share of customer” with their current supplier, moving their business to other companies, thus decreasing the amount they spend with the original supplier. The economic impact on companies, not to mention the crushing moral effect on employees—downsizing, rightsizing, plant closings, layoffs, etc.—are the real effects of customer loss.

Lost jobs and lost profits propelled UPS into an aggressive win-back mode as soon as the strike was settled. Customers began receiving phone calls from UPS officials assuring them that UPS was back in business, apologizing for the inconvenience and pledging that their former reliability had been restored. Drivers dropping by for pick-ups were cheerful and confident, and they reinforced that things were back to normal. UPS issued letters of apology and discount certificates to customers to further help heal the wounds and rebuild trust. And face-to-face meetings with customers large and small were initiated by UPS—all with the goal of getting the business back.

These win-back initiatives formed an important bridge of recovery back to the customer. And it worked. The actions, coupled with the company’s cost-effective services, continuing advances in shipping technology, and the dramatic growth of online shopping, enabled UPS to reinstate many laid off workers while increasing its profits a remarkable 87 percent in the year following the devastating strike.

UPS is hardly an isolated case. Protecting customer relationships in these uncertain times is a fact of life for every business. We’ve entered a new era of customer defection, where customer churn is reaching epidemic proportions and is wrecking businesses and lives along the way. It’s time to truly understand the consequences of customer loss and, in turn, apply proven win-back strategies to regain these valuable customers.

Nowhere are the effects of customer defection more visible than in the world of Internet and mobile commerce, where the opportunities for customer loss occur at warp speed. E-tailers and Web service companies are spending incredible sums of money to draw customers to their sites, and to modify their messages and images so that they are compatible and user-friendly on all devices. Because of this, relatively few of these companies, including many well-established sites, have turned a profit. Customer loss (and lack of recovery) is a key contributor. E-customers have proven to be a high-maintenance lot. They want value, and they want it fast. These customers show little tolerance for poor Web architecture and navigation, difficult to read pages, and outdated information or insufficient customer service. Expectations for user experience are very high, and rising rapidly.

Internet and mobile customers, to be sure, have some of the same value delivery needs as brick-and-mortar customers; but, they are also different from brick-and-mortar customers in many important and loyalty-leveraging respects. They are more demanding and require much more contact. They require multi-layer benefits, in the form of personalization, choice, customized experience, privacy, current information, competitive pricing and feedback. They want partnering and networking opportunities. When site download times are too long, order placement mechanisms too cumbersome, order acknowledgment too slow, or customer service too overwhelmed to respond in a timely fashion, online shoppers will quickly abandon their purchase transactions or not repeat them. Further, they are highly unlikely to return to a site which has caused negative experiences.

What’s more, the new communication channels also serve as a high-speed information pathway for negative customer opinion. If unhappy customers in the brick-and-mortar world usually express their displeasure to between two and 20 people, on the Internet, angry former customers have the opportunity to impact thousands more. There are now scores of sites offering similar negative messages about companies in many industries, and giving customers, and even former employees, a place to express grievances. It’s a new form of angry former customer sabotage, which adds to the economic and cultural effect of customer turnover.

For many of these sites, part of their charter is to help consumers find value; and, like us, they understand that customers will provide loyalty in exchange for value. They also recognize that the absence of value drives customer loss, and that insufficient or ineffective feedback handling processes can create high turnover. As one states: “The Internet is the most consumer-centric medium in history—and we will help consumers use it to their greatest personal advantage. We will increase the influence of individuals through networks of millions. We will raise the stakes for companies to respond. We will require companies to respect consumers’ choice, privacy and time, and will expose those that do not.” This may sound a bit like Orwell’s “Animal Farm,” but it does acknowledge the power of negative, as well as positive, customer feedback.

Some businesses seem minimally concerned about losing a customer; but the only thing worse than the loss of high value customers is neglecting the opportunity to win them back. When customer lifetime value is interrupted, it often makes both economic and cultural sense for the company to make an active, serious effort to recover them. This is true for both business-to-business and consumer products or services.

So how does a company defend itself against the perils of customer loss? The best plan, of course, is a proactive one that anticipates customer defection and works hard to lessen the risk. Companies need defection-proofing strategies, including intelligent gathering and application of customer data, the use of customer teams, creating employee loyalty, engagement and ambassadorship, and the basic strategy of targeting the right kind of customers in the first place. But in today’s hyper-competitive marketplace, no retention or relationship program is complete without a save and win-back component. There is mounting evidence that the probability of win-back success and the benefits surrounding it far outweigh the investment costs. Yet, most companies are largely unprepared to address this opportunity. It’s costing them dearly, and even driving them out of business.

Building and sustaining customer loyalty behavior is harder than ever before. Now is the time to put in place specific strategies and tools for winning back lost customers, saving customers on the brink of defection and making your company defection-proof.

Bad Thing! Or Why Segmentation by Consumer Attitudes May Be Dangerous

For years, B-to-B and B-to-C marketers have relied on attitudinal segmentation research to help them group their current customer base, and potential customers as well, for communication, promotion, marketing and experience initiatives. The thesis has been that, by asking a small, but meaningful, set of attitudinal questions, they would be able to develop an index, algorithm or framework equation that ranked these consumers by propensity to buy, both near-term and long-term.

For years, B-to-B and B-to-C marketers have relied on attitudinal segmentation research to help them group their current customer base, and potential customers as well, for communication, promotion, marketing and experience initiatives. The thesis has been that, by asking a small, but meaningful, set of attitudinal questions, they would be able to develop an index, algorithm or framework equation that ranked these consumers by propensity to buy, both near-term and long-term.

These frameworks—they’re arithmetic, so we can’t call them “models”—typically include questions regarding the importance of elements like value for money, acting with the consumer’s interests in mind, credit and payment terms, having knowledgeable employees, offering products which will meet the consumer’s needs, and the like. From these questions, basic segment categorization can be determined; and, once these three, four or five segments are established, we’ve often seen marketers go on to build assumptive plans and conduct further, more detailed, research around them.

The goal of these approaches is to produce attitudinal segments, which the questions can predict with high accuracy, often in the 80 percent or 90 percent range. This creates what economists would call a “post hoc ergo propter hoc” situation, Latin for “after this; therefore, because of this.” It is a logical fallacy, essentially saying that A occurred (the responses to the attitudinal questions); and then B occurred (the cuts, or segments, of consumers). Thus, A caused B. Once the B, or segment creation, stage has been established, further fallacies, such as creating reliable marketing, operational and experiential strategies around these supposed propensities, can be built. It’s a classic situation, where correlation is thought to be the same as causation. As your economics or stat professors may have told you, correlation and causation are far from being identical concepts.

As a consultant and analyst, I’ve seen this result of this application of research and analytics play out on a firsthand basis on multiple occasions. Here’s a recent one. A client in the retail office products market had been using an attitudinally derived element importance question framework for small business market segmentation purposes. The segment assumptions went unquestioned until followup qualitative research was conducted to better shape and target their planned marketing and operational initiatives. Importance of certain products and reliable service were identified in the research as key areas of focus and opportunity for the office products retailer; but, in the qualitative research, power of both focus areas appeared, anecdotally, to be consistent across all segments. And, even though implied supplier roles were suggested to build purchases, this was much more “leap of faith”-based on the established quantitative research segment personas than actual qualitative research findings.

There are related issues with what we can describe as quasi-behavioral measures, such as single question metrics (likelihood to recommend to a friend or colleague or the amount of service effort required on the part of a consumer); or traditional customer loyalty indices (where future purchase intent is included, but also attitudinal questions such as overall satisfaction). It’s not that they don’t offer some segmentation guidance. They do—on a macro or global level; but they tend to be less effective on a granular level, especially where elements of customer touchpoint experience are involved.

And, they tend to have limitations as predictors of segment behavior, a key business outcome for marketers and operations management. When compared to research and analysis techniques, such as customer advocacy and customer brand-bonding, which are contemporary, real-world frameworks built on actual customer experience—high satisfaction scores, high index scores and high net recommendation scores produced likely future purchase results (in studies across multiple industries) which were often 50 percent to 75 percent lower than advocacy or brand bonding frameworks. I’d be happy to provide proof for anyone interested in reviewing the findings.

So, that’s the scenario. The challenge, and potential danger, for marketers and those responsible for optimizing customer experience is that these attitudinal and quasi-behavioral questions are just that—attitudes and quasi-behaviors. Attitudes are fairly superficial feelings, and tend to be both tactical and reactive. And, because they are so transitory, their predictive value is often unstable and unreliable. Quasi-behaviors are also open to many similar challenges. More importantly, attitudes and quasi-behaviors are not behaviors, such as high probability downstream purchase intent based on actual previous purchase, evidence of positive and negative word-of-mouth about a brand based on prior personal experience, and brand favorability level based on experience. These are especially valuable in understanding competitive set, and they have real, and very stable, predictive and analytical value for marketers.

As Jaggers, the lawyer, said to Pip in Charles Dickens’, “Great Expectations,” take nothing on its looks; take everything on evidence. There’s no better rule.” For marketers, that’s excellent shorthand for taking everything on behavior, and perceptions based on documented personal experience, rather than attitudes and quasi-behaviors.