Misunderstanding what loyalty programmes are truly about makes it tough to derive real benefit from them

I meet a lot of business people who appear to have fundamental misconceptions about loyalty programmes – both attendees at conferences and other events I speak at and those simply coming through my door to see what they could do if they wanted to get one of those loyalty thingamabobs that a lot of successful companies seem to have.

And I continually ask myself: With all the good articles and case studies on loyalty now available, how in heaven’s name can people still misunderstand what they are really all about?

All too often they are simply looking for a me-too scheme that will dish out a few rewards to demonstrate to customers that they want to retain them – with as little investment as possible. A lot of times, they just think a loyalty scheme is a tool for pushing out scatter-gun promotions and discounts. Most give little thought to the need for precise targeting or tailoring of messages to really build and grow customer relationships, nor do they understand the benefit of developing a comprehensive platform for segmentation aimed at boosting profitable sales.

The sad truth is I’ve found there are few people – even those putting themselves forward as consultants in the field – who truly get what loyalty programmes are, how to create them, the pitfalls to avoid and how to get the most out of them.

I’d like to think that I and my team do know loyalty, given our 14 years of experience and my own 25 years in running programmes for some very successful clients, including Homebase, Pets at Home, Toys R US and Bonmarche. Peter Wray, a consultant, is another loyalty expert I rate. There are only about three or four other businesses I would trust to know what they’re doing – and yes, it really is that few in my view – including Dunnhumby (founded by Clive Humby and Edwina Dunn) and Carlson Marketing. That’s about it.

Never is this lack of understanding more clearly shown than when businesses come to us to ask for our opinions when they are thinking about a new loyalty programme. I always start with the most critical question: Why do you want to do this? If you enter into something like a loyalty programme for the wrong reasons – or don’t believe in the reason you stated – you will fail. That’s the reality.

One of the key questions for me is: Do you want to link to as many customer transactions as possible? If the answer is yes, then we are on the same page and everything should flow from this – from the mechanic you use (whether you have a loyalty card or not) to the structure of the programme. If the answer is no, I need to know why not because the answer can be fundamental to whether a scheme works or not.

For example, I was speaking to a company recently who took the decision not to have a loyalty card, but to capture customers at the till. There could be reasons for this decision that, on the face of it, make sound business sense. But once I started to look at the reasoning, I could see that this approach would only undercut the potential of the loyalty programme. Their no-card stance was based on cost, not coverage of desired customers. This would mean that, rather than capturing 40%-50% of customers/transactions in its first year, they would be lucky to capture 15%-20%. The implication for the programme is clear: they will be disappointed, it won’t do the job it could do, customers may become disaffected, and they might ultimately close it.

The choice of mechanic is critical because of the impact it can have on a programme’s penetration. If a scheme covers at least 50% of transactions, it then becomes one of the driving forces of the business and the information you generate becomes incredibly powerful. If it’s only 10%, I’m sorry but it then falls into the “so what” category. Suddenly, a small cost saving has undercut the whole investment by limiting the programme’s potential impact. We’ve seen a number of businesses make this critical mistake.

The heart of this issue is the fundamental misconception that a loyalty scheme is about loyalty – rewarding customers. It’s not. In reality, it’s about data – tying transactions to customers, understanding patterns of behaviour and then responding effectively to those based on the insights gleaned. For all our clients we generate a dynamic Single Customer View (SCV) database, which is fed by their transactional data from their stores and their ecommerce sites, so that we truly have a complete view of all customers – those that spend through one channel or via both.

This comprehensive approach is the only way you can make the kind of decisions that drive the real benefit a loyalty programme can provide: the expansion of profitable relationships with loyal customers over the long term.

Blog Categories