McKinsey Thinks Bland, Generic Loyalty Programs Are Killing Business – And They May Be Right!

A recent Forbes article by McKinsey, “Making Loyalty Pay: Six Lessons From the Innovators,” showed loyalty program participation has steadily increased during the past five years (a 10 percent annual rate of growth), with the average household now having almost 25 memberships. For all of that growing popularity, there are huge questions for marketers: Are the programs contributing to increased sales? And what is the impact of loyalty programs on enterprise profitability?

A recent Forbes article by McKinsey, “Making Loyalty Pay: Six Lessons From the Innovators,” showed loyalty program participation has steadily increased during the past five years (a 10 percent annual rate of growth), with the average household now having almost 25 memberships. For all of that growing popularity, there are huge questions for marketers: Are the programs contributing to increased sales? And what is the impact of loyalty programs on enterprise profitability?

Overall, companies with loyalty programs have grown at about the same rate as companies without them; but there is variance in performance value among industries. These programs produce positive sales increases for hotels, for example, but negative sales impact on car rental, airlines and food retail. And, companies with higher loyalty program spend had lower margins than companies in the same sector which do not spend on high-visibility loyalty programs.

McKinsey has noted that, “Despite relative underperformance in terms of revenue growth and profitability, over the past five years, market capitalization for companies that greatly emphasize loyalty programs has outpaced that of companies that don’t.” This, as they see it, may be indicative of hope among companies with programs that long-term customer value can be generated.

Within the McKinsey report, several strategies are offered for helping businesses overcome the negatives often associated with loyalty programs. Key among these are:

  • Integrate Loyalty Into the Full Experience
    Companies can link the loyalty program into the overall purchase and use experience. An example cited in the article is Starbucks, which has created its program to reflect the uniqueness of its café experience. Loyalty is built into the program by integrating payments and mobile technology, which appeals to its target audience.
  • Use the Data
    This may be the most important opportunity represented by loyalty programs. Data collected from the programs can offer competitive opportunities. Tesco, the largest supermarket chain on the planet, has been doing loyalty program member number-crunching for years through DunnHumby. Similarly, Caesars Entertainment has rich databases on its high-rolling program members. One retailer has combined its loyalty program with a 5 percent point-of-sale discount, building volume from its highest-value customers. In another well-documented example, a retailer has used its loyalty program data to identify future mothers before other chains, thus targeting offers to capture both their regular spend and new category purchases as buying habits evolve.
  • Build Partnerships
    As stated on so many occasions, organizations that build trust generate stronger, more bonded, customer behavior. This applies to loyalty programs as well, where there is ample opportunity to build cross-promotion for customers with non-competing products and services. In the U.K., Sainsbury, the major supermarket competitor of Tesco, has partnered with Nectar, a major loyalty coalition. Nectar has more members than Tesco, and participants can collect rewards across a large number of non-competing retailers. Through partnership, Sainsbury’s offers customers a broader and deeper value proposition; and Nectar also generates data from coalition partners, which it uses to better target promotions to customers.
  • Solve Customer and Industry Pain Points
    Numerous customer behavior studies have shown that people will gravitate to, and pay more for, better service. A perfect example of this is Amazon Prime, where additional payment gets customers faster delivery and digital tracking. This is good for Amazon (estimates are that members spend more than four times more with Amazon than non-members), its customers, and its suppliers, who also get access to Prime customers and the positive rub-off of affiliating with a trusted brand.
  • Maximize Difference Between Perceived Value and Real Cost
    Often, program elements can represent high perceived value without adding much in the way of bottom-line cost to the sponsor. The example cited is Starwood Hotels and Resorts where, through its Starwood Preferred Guest (SPG) program, there is a focus on personal leisure travel rewards for high-spending frequent guests.
  • Allocate Loyalty Reinvestment to the Most Valuable Customers
    Many companies have only recently come to the realization that some customers are more valuable than others; and, to be successful, loyalty programs need to target the higher revenue customers. In 2010, Southwest Airlines revamped its loyalty program to make rewards more proportional to ticket price; and this has better targeted the most profitable customers, as well as enabled the airline to adopt a loyalty behavior metric that is closely tied to actual revenue generation.

Loyalty programs continue to grow, but they are also tending to become more closely integrated with brand-building and multichannel customer experience optimization. But, there is also lots of commoditization and passivity were these programs are concerned—sort of the “If You Build It, They Will Come” syndrome at work. And, of course, there’s a mini contra movement among some retail chains, where they have removed established loyalty programs—or never initiated them in the first place—in favor of everyday low prices and more efficient performance.

Author: Michael Lowenstein

Michael Lowenstein, PhD, CMC, is thought leadership principal for Beyond Philosophy, a U.S.-based international customer management experience consultancy. He's an international conference keynoter and speaker, workshop facilitator and trainer, author and a contributor to two customer loyalty newsletters and portals. He has more than 30 years of management and consulting experience with expertise in customer and employee loyalty research, CEM, loyalty program and product/service development, customer win-back, service and channel quality, customer-driven corporate culture, human resource development, and strategic marketing and planning.

"Marketing Nuggets" will include observations regarding trends, and often study results, representing current, real-world issues of high importance to direct marketers. Those issues include omnichannel communication usage, mobile marketing, content, informal offline and online social communication, consumer behavior, message personalization, internal customer-centric processes and organization, strategic customer life cycle planning, proactive employee contribution, etc.

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