Why loyalty programs don’t actually build loyalty!

Loyalty programs have been the focus of attention of both managers as well as researchers.  In fact, when most companies think of building customer, or partner loyalty, they think of a loyalty program or scheme.  However, increasingly we find that loyalty programs don’t actually build loyalty, or at least not the right type of loyalty (one of my blogs talks about different types of loyal customers).  So what exactly is wrong with loyalty programs and how can we improve them?

Many companies today heavily rely on loyalty programs.  Most think that they will build loyalty, and others use it as a means of getting customer data.  As a tool for getting access to customer data, I think they are brilliant.  You can get all sorts of information about the customer’s spending habits, which you wouldn’t normally get through any other source.  This data can then help you to target your marketing strategies according to the individual customer.

What’s wrong with loyalty programs

On the other hand, many companies are in an illusion, thinking that they will building customer loyalty.  If we break down what loyalty programs really do, we can see that they don’t achieve their stated goal.  Loyalty programs give customers points for every purchase they make.  The higher the quantity and frequency of purchases, the more points you get.  These are then traded in for discounts, and awards, etc.  Looking back at the definitions of loyalty, the higher end of the spectrum focuses on creating positive attitudes, and an emotional bond with the brand.  The lower level of loyalty focuses on repeat buying.  Hence, loyalty programs actually only encourage the customer to come back, and does not form a bond with the customer.

Some managers argue that this repeat purchase will eventually lead to higher levels of loyalty.  That may be true, only if it is accompanied with other factors, as I discussed in my blog on emotional attachment).  The loyalty program on its own will not achieve this.  In fact loyalty programs may be doing the opposite.  Customers become attached to the loyalty program, instead of the company.  For instance, in the UK there is the Nectar card.  This is a loyalty card which can be used by the customers in a number of different companies, ranging from BP and Sainsbury (supermarket) to Ford and Hertz.  Customers who become loyal to the card, would stick with whichever company is associated with the card.  For instance, if the card dropped BP, and instead went with Shell, then those customers who are loyal to the card would switch to Shell.

A similar situation can take place where a loyalty scheme is run by a single company.  For instance, if a customer uses the Emirates Airlines loyalty scheme, and later finds that Singapore Airlines is offering more points, or better rewards, he/she may switch airlines.  In both of these cases, the performance or the quality of the products or services are not considered by the customer.   Instead, the loyalty is towards the points, or the rewards that a customer gets.

How to improve your loyalty program

So what should you be doing to improve your loyalty programs?  Scrapping the loyalty program is not the best option.  The idea should be to improve it to adapt to the ever changing consumers.  More importantly, we need to reward the right things in order to build real loyalty.  For example, giving rewards not just for using the product or service, but also for things like recommending it to others, giving suggestions, complaining about poor services, taking part in customer focus groups, etc.  These are just a few of the behaviors we need to reward to encourage customers to build bonds with the brand.  The main idea is to move the customers from being passive to active, and to take ownership of the brand.

As an example, I worked with a firm based in Manchester, England to improve their B2B loyalty program. One of the things we did was to introduce an incentive for customers to take the initiative to help other customers.  So a customer who was familiar with the system would help out a new customer who may be having a problem setting up the machines or equipment.  In this case, both customers were offered rewards, with the one doing the helping getting higher rewards.  This not only reduced the burden on the tech support help lines, but also build a sense of comradeship between the customers.

There are countless other things which companies can do to improve their loyalty programs.  If your company is doing something innovative, or you’ve seen something which matches any of this, then please do share it.

Can marketing and tourism help in building peace?

This blog will be slightly controversial to some people.  However, I think anything that can help in promoting peace is an idea worth considering.   Before I begin, I just want to reiterate that this blog has no political motive, instead the idea is to discuss how marketing may help in promoting peace in one of the worlds holiest and violent places.

Recently I came across an article in the Israeli press, which talked about how tourism to the country was not improving.  This led me to do a bit of investigating.  The article said that the number of tourists to Israel has stagnated around the 2 million mark for the past 10 years or so.  Most of these are made up of Jews, and Orthodox Christians.  Others simply stayed away because of the security situation.  This has led to a losses for the tourist industry.

While the article talked about an increase in tourism if peace returned, I don’t think they’ve looked at the complete picture.  The holy lands are of importance to 3 of the major religions in the world, Jews, Christians, and Muslims.  The Vatican city gets about 4 million visitors a year!  Similarly, the Hajj attracts about 4 million Muslim pilgrims a year.  Now, if we had peace in the region, the tourist or pilgrim count will not only increase, I think there is a possibility of it increasing significantly.

For instance, if tourist operators would offer a pilgrimage for the Hajj that included Jerusalem, then I’m sure a large percentage of people would want to go.  I think that the holy lands have the potential to reach 10 million tourists within 5 years or so, if we get real peace.  All these tourists would obviously bring in much needed financial benefits to all.  The poverty in the Palestinian areas would surely go down.  Remember, that is one of the things which hardliners use to their advantage when recruiting.  Similarly the economy of the whole region would benefit.  Although the holy lands have had a turbulent past, I think once again real peace can bring about a financial uplift, which would lead to a long lasting peace.

Blog now gets 2500 visitors

On another note, my blog has now received 2500 visitors in the first 2 months.  It appears to be a good figure, considering the target market (i.e. middle - senior managers).  Visitors have generated about 23,000 hits and come from nearly all corners of the globe.  On average, each visitor is coming 3 times to read the blog within a month.  Interestingly 73% are repeat visitors, whereas the remaining 27% have visited for the first time.  The top 5 countries in terms of visitors are 1. UK, 2. USA, 3. The Netherlands, 4. Canada, 5. EU.  Here is a full list of the countries, in case you’re interested.

Australia
Austria
Belgium
Brazil
Bulgaria
Canada
China
Denmark
European countries
Finland
France
Germany
Great Britain
Greece
Hungary
India
Indonesia
Ireland
Israel
Italy
Japan
Jordan
Kenya
Latvia
Macau
Malaysia
Mexico
Netherlands
Netherlands Antilles
New Zealand
Oman
Pakistan
Philippines
Portugal
Puerto Rico
Qatar
Romania
Russian Federation
Singapore
Slovenia
South Africa
South Korea
Spain
Sri Lanka
Sweden
Switzerland
Taiwan
Trinidad and Tobago
Turkey
Ukraine
United Arab Emirates
United States

Floods in Pakistan

Finally, once again just wanted to remind everyone that the floods have not stopped.  Instead they are going down through the Indus river towards the southern province of Sindh.  Researchers now believe that a similar flood wiped out the highly advanced Indus Valley Civilization that existed here several thousand years ago!  I would personally like to thank all those who sent me messages, and those who have donated.

Creating memorable experiences!

First, apologies to those who posted comments, and they’ve only just come up on the blog.  There were quiet a few spam comments, which I had to go through before I found the real ones.  To make things faster, you can register and then post.  Second, the visitors have crossed 2100, with over 20,000 hits.  I now have visitors from all continents, and 50 different countries.  The top visitors continue to be from the UK, USA, The Netherlands, Canada, and the rest of Europe.  Although visitors from the Middle East are catching up.  Will post the full list later in the week.

Memorable experiences, what are they?

Last week I discussed emotional loyalty.  This topic generated much discussion.  Several Linked in groups had this as the number one topic of discussion.  One of the key factors in developing this was memorable experiences.  I thought it would be good to talk about this topic, as it came up numerous times in various discussions.

So what are memorable experiences?  A memorable experience is something which is out of the ordinary.  Something special, or unexpected.  Often we can link this to delight or a pleasant surprise.  When we talked to customers who appeared to be almost identical on paper, one main factor that distinguished the category of loyalty they belonged to was the fact that most emotionally attached customers felt that they had had memorable experiences with the firm, where as those who were only attitudinally loyal had none!

How to create memorable experiences

So what did the organizations do to create these memorable experiences?  Sometimes you don’t have to do much.  One customer was very happy when her flight was upgraded because she was flying on her birthday.  Another said that the hotel left flowers, and a bottle of champagne for the couple on their anniversary.  Amazon used to give out vouchers to people who purchased from them!  Most of the cases of memorable experiences or delight resulted from small acts such as these.  The interesting thing is that these customers remember them, even if this took place years ago.  Moreover, after having such an experience, their perception of service changed.  Most thought perceived the ‘normal’ level of service as very good.  Hence, one act changed the way how the customer looks at the company’s brand, and its services from a totally different perspective.

There were other ways of creating memorable experiences.  One of the most important of these is great service recovery.  Often those customers that were not emotionally attached had things like this to say, ‘we complained, but nothing happened’ or ‘yeah they did give us compensation but it wasn’t worth it.’  Usually the compensation was too little, too late, or did not exist at all.  On the other hand, the emotionally attached had received great service recovery, which was much more than what the customer expected.  For instance, one customer’s food was not done right.  The restaurant apologized right away, replacing the meal with the right one, gave the person a huge discount and then told him that the next time he would get 50% off his bill!  It is acts such as these which result in the memorable experience for the customer.  Some of the main factors are to acknowledge the mistake as quickly as possible, apologize to the customer, and then compensate the customer for the bad product / service, making sure that the level of compensation is more than the loss.

Another interesting method of creating delight or memorable experiences is by delivering a consistently good quality of product or service.  For instance, many Sony customers felt delight with the products, simply because the products always were up to the level of quality that was expected of them.  In this case, the company was not offering a surprise, or something extra, just delivering on the quality they promised.  Overtime, the customers start to feel good about the product or the service, and this results in an overall memorable experience.

All of this does not mean that after one memorable experience, you can disappoint the customer.  The high level of quality needs to continue to the emotional attachment bond to get stronger.  There are many aspects to this discussion, such as employee empowerment, corporate culture, etc.  Unfortunatley I don’t have time to discuss these right now.  However, I would like to find out what you think of delight or memorable experiences, as well as service recovery.  Have you had such experiences.  Or what does your organization do to create these.  If you don’t then why aren’t you?

Pakistan Floods

Last week I posted a small note on the flooding in the country.  Its good to see that a number of people clicked on those links.  Just a reminder, now the area covered is the size of Italy, or the United Kingdom!  Over 20 million are now affected.

Awards in customer experience

I will be the chair of Judges on the UK Customer Experience Awards 2010 (http://www.uk-ce-awards.co.uk/judging/).  The nominations for this year are closed, but you can come and attend the event.  Click on the link to get more info.  I am also on the Chair of Judges for the UK Theme Park and Visitor Attraction Awards 2011 (http://www.tpvaa.co.uk/judging/).  The nominations for this particular one are still open, with only 35 days left.

What makes customers emotionally attached to a brand/firm?

First, I would like to thank everyone for the numerous comments I have received.  I think this particular topic has been of interest to a great many people (my visitors have crossed 1,600 and the total hits over 15,000).  After looking at the various discussions on my blog, and on different Linked in groups, I thought it would be best to discuss what it takes to become emotionally attached.

Emotions vs Emotional Attachment

First, lets get one thing straight, both of these are not the same!  Emotions are temporary states of mind, and can change very quickly.  It is not always true that a positive emotion will lead to a satisfied customer.  In fact, you can have negative emotions (fear, anxiety, etc) leading to positive experiences.  For instance riding on a roller coaster may make some people scared, however the outcome is a positive experience.  At this point in time, it is difficult for us to which emotions will lead to a loyal customer.  However, we can say that emotions that have a positive impact on customer experience will lead to customer loyalty.

Emotional attachment on the other hand is something is takes time to develop.  It is a consequence of all the different interactions, and experiences, that a customer has with a brand or a firm.  Emotional attachment, hence, is a more permanent state of mind, and is difficult to change.  Although, having said this, it does not mean that an emotionally attached customer will not defect.  That can happen, if the company takes advantage of the customer (e.g. provide bad service, over charge for products, etc.)

What makes customer attitudinally loyal?

This stage of the loyalty comes after several interactions with the firm or brand.  Once the customer interacts with the brand, he/she will start to develop a positive image of that brand.  This will lead to the customer having a preference for the brand.  In the behavioral loyalty phase, the customer was indifferent.  He/she would go where ever the cheaper deal, or readily available produce was sold.  However, an attitudinally loyal customer is one that likes the brand.  He/she will prefer this brand over others, and will try to get this brand as a first preference.

From an equity perspective, these customers are more profitable for the firm than behaviorally loyal ones.  First, they will tend to spend more with the firm.  On average these customers spend between 60-80% of their wallet share with the ‘preferred’ brand.  Second, they will try to purchase a wider range of products and services from the same firm.  For example, an airlines customer may also do the hotel booking from the same site.  Third, these customers are generally cheaper to serve.  They know the company or brand, they know the procedures of your firm, and hence can make a purchase decision more quickly, without much help from the company.  Finally, these customer do marketing for you, by recommending it to others.  Hence, you get free marketing, which also happens to be a more reliable source for customers.  More customers trust their friends and family than any other form of advertising.

What takes customers to the next level, i.e. emotional attachment?

While some of the loyal customers move up to the attitudinal loyalty phase, others do not.  Similarly, out of those customers who become attitudinally loyal, some customers move up to the emotional attached phase, others do not.  So what is it that takes some of the customers into the emotional attached phase, while others remain in only attitudinally loyal?  For starters, emotionally attached customers feel that they get an excellent service, or the quality of the products is excellent.  These customers believe that the level of quality provided by this brand is so good that no other company can compare.  Attitudinally loyal think that quality is good, but not better than others.  Attitudinally loyal customers may be loyal to several brands or companies.  However, emotionally loyal customers stick to one brand or one firm and the one they love the most for a particular class of products or services.  These customers also believe that they have had ‘memorable’ experiences with a firm, whereas loyal customers in other categories don’t recall any memorable experiences.  Another interesting fact is that these customers also believe that there have been very few bad experiences.  If they’ve had bad experiences, they have been compensated with excellent service recovery.  In contrast, attitudinally loyal customers feel they’ve had more bad experiences, and these have not been compensated with timely, or appropriate service recovery.  Finally, another very important finding in my research was that emotionally loyal customers do not become emotionally attached right away.  In fact it takes a certain period of time for this to take place.  So, for us to expect these customers to become emotionally attached in the first encounter, this is not going to happen.  The time period varies, but is about 3 to 5 years for most firms and brands.

From a financial perspective, these customers are the most profitable for a firm.  First, these customers spend almost all of their wallet’s share with their preferred brand.  My research shows, this is between 80-100%, which is significantly more than the other loyalty categories.  Second, these customers purchase a much larger selection of products and services from the firm.  So in addition to hotels, maybe they will go for the rent a car, and even book some sigh-seeing tours etc, with the airlines.  Emotionally attached customers are usually the least costly to serve.  Since they know the ins and outs of a company, the cost to serve these customers is very low.  Often these customers refer to the preferred company as ‘my’ company, or ‘my’ brand!  These customers take ownership of a firm.  Hence, these customers are even wiling to forgive some bad experiences.  Moreover, emotionally attached customers do more word of mouth marketing than any other type of customer.  In fact, these customers will go out of their way to mention their favorite brand.  Finally, when asked if emotionally attached customers would pay more money to the same service / produce, the answer was always yes.  However, these customers would only pay a little extra, and not a considerably more amount of money.  While attitudinally loyal customers will switch on a lower price, emotionally loyal customers would rather pay a slightly higher price to get that same great service.

In conclusion, I would like to add that interestingly, we can measure which customers belong to the different categories.  There is 1 tipping, point which takes customers from the attitudinal stage to the emotionally attached stage.  I will talk about this in my future blogs.

Floods in Pakistan

I would just like to add that the recent floods in Pakistan have caused more damage and affected more people than the Earthquake in Kashmir, the Asian Tsunami, and the Haiti Earthquakes combined!  If you haven’t done so already, please do donate to your local charity.  Save the children, the International Red Cross, the DEC in the UK, and numerous other charities are taking donations.

A perfect model for customer loyalty?

If there was a perfect model for customer loyalty within a firm, what would it be?  Or, what should companies strive to achieve within the loyalty domain?  People often ask me these questions, and others like it.  I thought it would be a good continuation from my last blog to share with you what a good benchmark for loyalty would be.

First of all, there is not such thing as a perfect loyalty model.  In a perfect world, all of your customers would be emotionally loyal.  However, it is only in text books that we have a perfect economy, a perfect monopoly, or perfect competition.  Such things do not exist in the real world.  Thus there is no need to aspire to create a perfect loyalty model.  Instead, we should aspire to achieve an optimal, or preferred model.

Before I begin to talk about a preferred loyalty model, I wanted to discuss what most companies look like in terms of loyalty.

For most organizations, the loyalty pyramid looks like the image above.  From a loyalty perspective, most of the customers are behaviorally loyal.  They are there because they are ‘stuck’ to the company due to barriers.  These barriers are price, location, convenience, etc.  A smaller percentage of customers is made up of the attitudinally loyal customers.  These customers like the company, and prefer it, but are willing to switch.  Yet even a smaller percentage of customers are the emotionally attached.  These customers are the most profitable, but they form a very small percentage of the total customers a firm has.  Most of the organizations, I would guess around 99.99% of the companies across the globe, would fall somewhere in this model.  However, this is not the best model.

Companies need to aspire to improve to a ‘greener pasture’.  The preferred model looks something like this:

Notice, in this preferred state, all of the loyal customers are not emotionally attached.  The main reason for this is that it would be impossible to achieve that.  Moreover, no company would want all of their customers to become emotionally attached.  For instance, high servicing customers may not be profitable for a firm, and hence they would not want them to become emotionally attached.

This model describes a preferred state.  Interestingly there are organizations that would be classified in this state at the moment.  These would include sports fans, music fans, and people who donate to not for profit organizations.  The only catch is, all of these organizations are not, what we would consider as ‘normal’ businesses.  However there are some companies that are pretty close to this.  As Jack, mentioned in the comments to my last blog, Apple is one company, which may fall under this.  However, I would add that it would be Apple, before the launch of ipod.  After the launch of ipod, Apple has gained many new customers, and I believe that the percentage of emotionally attached would have gone down considerably.  Despite that fact, Apple still has a large percentage of emotionally attached customers.  Harley-Davidson would be another example of a company that would be close to this model.

From a B2B perspective, even in the preferred state, the emotionally attached customers would be much smaller.  Instead, the attitudinally loyal segment would be the biggest one.  If you read my past blogs, you will understand that its much harder to get B2B companies to become emotionally attached.

The question of how to get to this preferred state still remains to be answered.  I will try to answer this in my blogs, as it is not a very simple one to answer.  However, as far as I can see, most of the firms around the globe, and all the so called loyalty programs that have been developed are NOT moving firms closer to a preferred state.  Instead, these programs are just increasing the size of the behaviorally loyal segment.  I shall also try to blog about the faults with loyalty programs sometime in the future (if I can find enough time).

In the meanwhile, thanks to everyone for the lovely comments you’ve left on my blog, on linkedin, facebook and via email.  However, I would appreciate if you can please post these to the blog so that we can have all the comments and the discussions in one place.