I’ve been trying to analyze modern rewards programs and customer loyalty recently for a project. It’s a complex issue and so it is tricky to tease apart — nothing like trying to defuse a bomb, but intellectually challenging for sure.
At the heart of the issue is a body of research that says rewards, as currently configured, don’t work in the ways we want. It’s complicated by the fact that rewarding customers for making purchases, for instance, does produce what looks like loyal purchasing behavior, though further analysis exposes a flaw.
If a customer continues to receive rewards just for being a customer, then the vendor effectively is selling at a discount. That could roil the customer base, which might be paying full fare. If everyone is receiving rewards just for being customers, then the notion of list price becomes problematic.
It’s appropriate to offer a token of appreciation to customers for positive behaviors, but drawing the line between what’s appropriate and what’s too much is difficult.
Rewards started as a way to recruit the marginal customer, the person who might need a product but who nonetheless did not see value at the regular price point. Offering a small discount did good things in such cases: The approach got new people to try products and, at an appropriate discount level, still made profits.
At some point, however, all that discipline went out the window and discounting in one form or another became a major point of competition. Today, we simply advertise savings opportunities, for example.
Customers have responded in kind, which is to say, not well, if you study loyalty. Rewards tend to support today’s transactions and not much more.
I’ve read a number of papers in business school reviews lately that basically say that even though customers exhibit loyal behavior, like making a subsequent purchase, they’d be happy to change brands or vendors in a second if they got a better deal elsewhere. That’s not loyalty, though we like to pretend it is by rewarding present behavior.
Other papers describe a vendor community that is frustrated with its loyalty efforts and their lack of results.
As an analyst, I have to say that everyone is behaving rationally. Another way to put it: If you offer customers a form of discount, don’t be surprised when they take it. Moreover, if you set up a game in which the well-understood rules are meeting one transaction with another (which is what current rewards approaches do), then don’t be frustrated when people follow those rules.
If you want real loyalty — in which customers preferentially seek out your brands and products, and in which they pay a slight premium for your products because they believe the products are worth it — you’ll need a different game with different rules.
Instead of rewarding purchase behavior as if it were a demonstration of loyalty, we need to go upstream a bit to earlier forms of engagement. Many papers rightly point out that engagement is a predictor of loyalty, but unfortunately in many studies, the percentage of vendors that reward engagement hovers in the mid-teens.
Simply put, we need to raise our sights, and rather than rewarding purchases, we should be rewarding engagement activities.
A vendor gets a lot from engagement if you define it as a customer’s willingness to respond to a survey, advocate for a brand or even solve a problem that includes a brand or a product. This customer input can identify issues as well as unmet customer needs that could drive better processes and new products.
Some vendors prefer not to engage with customers in this way, according to other papers I’ve read recently. Why? Their lawyers told them not to. They’re afraid that if they get a product idea from a customer, then customer claims and litigation could compromise ownership.
Consequently, there’s a tall wall between the vendor and its customers, and the most popular form of communication between them is the reward or discount, which gets us right back to frustration that loyalty isn’t any better than it is.
It doesn’t have to be that way. I’ve worked with large corporations that, at the end of the day, had to admit that their lawyers were simply trying to protect the corporation from the customer by making anti-engagement recommendations. Interestingly, though, when the corporate attorneys were informed that their real customer is that same one the rest of the organization serves, things loosened up, at least in some cases.
Changes in lawyering won’t solve every company’s engagement challenges because there are many more. However, if we take the approach that rewards should be focused on engagement and not on transactions, at least some of the time, we might be able to present an engaging face to customers, one that drives loyalty.