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#5: Why Do Loyalty Programs Fail?
Episode 523rd September 2021 • Make Business Matter • Aaron Shields - The Cult Branding Company
00:00:00 00:14:29

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Most loyalty programs don’t work, yet many companies still continue to use them. Join me, Aaron Shields, as I explain why most loyalty programs fail and how you can create true loyalty.

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Aaron:

Hello, and welcome to the Make Business Matter podcast, where we help you turn purpose into profit and customers and employees into passionate fans. I'm your host, Aaron Shields, partner and director of research for The Cult Branding Company. On this episode, I'll answer the question: why do loyalty programs fail? And, I'll also look at how to effectively drive loyalty for your business.

Aaron:

Loyalty drives profitability in three primary ways. One, repeat business: loyal customers tend to buy from you more often. Two, retention: loyal customers tend to show less interest in your competitors. And, three, word of mouth: loyal customers tend to create new customers for you.

Aaron:

But, loyalty also builds resilience, which has sort of become the buzzword during the pandemic. Growing a base of loyal customers adds an element of resiliency to your business, especially in down markets. For example, Amazon had strong sales during the fourth quarter of the economic downturn in 2008 and during the current crisis. And, Amazon actually has their customers buy into their loyalty program, but they give their customers something they actually want. Whereas many companies can't even give their loyalty programs away for free.

Aaron:

The problem with loyalty programs is that most loyalty programs aren't about loyalty. They're based on this outdated idea of loyalty that focuses solely on behavioral loyalty. Currently, loyalty research has gone beyond thinking of loyalty in this one-dimensional way and instead sees loyalty as encompassing, attitudinal, cognitive, and behavioral dimensions. In other words, loyalty, isn't just how people behave towards the brand. It's also how they think and feel about it.

Aaron:

A person can be loyal from the perspective of behavior because they currently see no other option: the same reason they may also say they're satisfied because they don't see an alternative that would make them more satisfied, but they're ripe to switch if someone meets their deeper human needs better. For example, taxi companies before Uber had a high degree of loyalty, because there was no other option, but customers would prefer a different service and many switched over to using Uber and other services like Lyft because they provide a better experience.

Aaron:

A huge problem is that customer satisfaction surveys don't uncover the hidden desire to leave. Customers will rate that they're satisfied if there isn't another option for them to switch to, even though they do have a deep inclination to leave because that company isn't fulfilling them to the level they actually would like. And so instead of trying to build great relationships by understanding what motivates customers to do business with them at a deep human level and then doing more of that to build trust and ultimately create loyalty, most companies skip these attitudinal and cognitive dimensions of loyalty and focus solely on programs to encourage behavior.

Aaron:

The loyalty to these programs is mostly based on what researchers term switching costs: making it hard to switch from one loyalty program to another due to the perceived costs, whether it's monetary, psychological, and time-based that it would incur to switch over and start with a new program. Companies focus on the switching costs because they know that their loyalty programs look pretty similar to their competitors and lack of distinct advantage. They reward their customers in the same monetary and monotonous ways instead of doing what they should be doing, rewarding the best customers in ways that reflect why they love the brand in the first place.

Aaron:

But, that requires deeply listening to customers. And when companies act like narcissists for their own benefits, it becomes hard to listen. These companies are essentially trying to trap their customers in bad relationships by forcing them to stay in these loyalty programs for purely behavioral reasons.

Aaron:

It's not surprising that so many of them end up with lackluster results from their loyalty program. And it's hard for companies to get out of these loyalty programs, to stop them, because customers would get disappointed and upset if all the points they accumulate suddenly disappeared. So many companies continue on with their loyalty programs, despite seeing no benefit, just to not upset their customers, rather than actually try to reconfigure them to actually get results that are beneficial to both the company and the customer.

Aaron:

So why does this happen? It's primarily because companies treat customers as resources to be mined. This desire to treat customers as an object whose resources are to be mined to the greatest extent possible has also led most companies to spend more time and resources on acquiring new customers instead of taking care of existing customers. There's this relentless focus on acquisition because that's where today's dollar is going to come from as opposed to the long-term health of the company. And, how to create that long-term sustainability for the company ends up getting ignored in favor of getting today's dollar.

Aaron:

Just look at the number of companies offering great incentives to new customers, but offering no appreciation beyond upselling them with some weak deal for being a "valued customer" to customers that have been with them for years, and it becomes obvious how little effort is put into maintaining relationships. Customers end up being treated like numbers instead of people. Stanley Marcus the old president of Neiman Marcus said this best: "Customers are people; consumers are statistics." That was in his book Quest for the Best.

Aaron:

Even when it comes to so-called loyalty programs, the customer is treated like a consumer. The focus is on tactical strategies to sell, sell, sell, rather than understanding why some of their customers are loyal and how to duplicate that behavior. This is why most loyalty programs fail to provide something a customer wants—much less reward the behavior the company is seeking—which should be connected to the business purpose.

Aaron:

It's also why attrition and acquisition are both increasing at many companies. They're finding better ways to get new customers to buy, to the detriment of figuring out how to keep them. This is no different than what erodes personal relationships. The main reasons relationships go south are selfishness, narcissism, a lack of balance, and the relationship, the relationship not being a priority and issues of trust. When customer relationships are treated as one-sided—when there isn't any effort to try and benefit the customer at least as much as the company benefits from the customer—there's no reason for customers to view a company with anything but skepticism and a lack of trust.

Aaron:

This is the heart of the issue: you can't build loyalty without trust. Yet many companies start to try to build loyalty programs without first building trust and without fixing these broken one-sided relationships where it's just trying to take, take, take from the customers instead of providing something of real value.

Aaron:

So how do you do loyalty right? Loyalty begins with trust and it doesn't happen overnight. Trust builds up over time by customers seeing that you have their best interest in mind over and over again. They don't mind that you have your own interests, just like in any relationship, but they want to see you care about them in a reasonably equal way.

Aaron:

Loyalty happens when they develop cognitive and emotional attachments to a business, as a result of trust being built up over time. These cognitive and emotional attachments reinforce their behaviors and get them to both think of you first and purchase from you more frequently.

Aaron:

Loyalty requires being proactive instead of reactive. It's not about being slightly better than the competition or waiting until enough customers complain before you fix it. It's about understanding your customers' tensions and desires better than they do. And, constantly trying to push further towards those ideals. Reactive seems the norm in business. But, when you react, you're often too late. And, that all starts with deeply listening to and understanding your customers and caring about their needs as much as you do your own.

Aaron:

To do loyalty right, you have to reward the behavior you seek. And, what you seek should be what the customer wants.

Aaron:

There's a 2016 article in the Journal of Retailing by professors Ignacio Osuna, Jorge González, and Mario Capizzani and they looked at buyers and non-buyers of a brand. And, what they found is that the buyers of the brand were five times more likely to redeem a 10% off coupon at the brand than customers who did not purchase that brand were to redeem a 20% off coupon of the brand. So, coupons work better with higher buyers of a brand rather than non-buyers. It incentivizes customers to make a purchase during that time period, more so than it gets people to actually try a new brand.

Aaron:

And, you see this reflected in other research. In How Brands Grow, Byron Sharp talks about how the number one factor for people to sign up for a loyalty program is mental and physical availability of the program. And, people have more mental availability for brands they already buy. So they're more likely to enter into a loyalty program for something that they already buy. And, that loyalty programs are really good at recruiting buyers—whether they're heavy or light buyers—but they're not good at recruiting non-buyers, even if those non-buyers are heavy buyers of the category. Because of that mental availability, people don't tend to enter into a relationship—a program—that they don't already have some relationship developed with, because there's a lack of mental availability. And, there's also a lack of trust. They don't know if they want to use that brand anymore. So they don't want to spend the time enter, actually entering into the program because they don't know if the rewards they would get from it will actually benefit them because they might not like the product.

Aaron:

So, creating loyalty programs that reinforce the behavior of existing customers is the best path to take for building a loyalty program and treating them as a relationship-building device. And, also as a way to gain more knowledge of the customers so you can understand their buying patterns rather than treating them as solely an acquisitional strategy.

Aaron:

And, this is really marketing at its heart, finding what customers want. We talked about this in episode one, when I was talking about Peter Drucker and it's what Amazon has done really well. They know that customers want convenience. And so they have customers buy into a program, Amazon Prime, that basically provides them an extreme version of convenience, you know, free two-day shipping, movies on demand, and other perks that bring things immediately to the customers.

Aaron:

And, this is something Jeff Bezos talked about to Bloomberg Businessweek back in 2004. Bezos said, "We take those funds that might otherwise be used to shout about our service, and put those funds instead into improving the service. That's the philosophy we've taken from the beginning. If you do build a great experience, customers tell each other about that. Word of mouth is very powerful. And, that's paid great dividends for Amazon: focusing their marketing budget on developing a program that provides customers with what they want.

Aaron:

Loyalty stems from the purpose of your business: How are you changing the customers' lives? What tension are you solving in those customers' lives better than anyone else? What do the customers you're creating need to make them better customers of your product and service? How do you solve their needs better than anyone else, So that they choose you first and choose you more often?

Aaron:

There are five steps to building true loyalty. First, understand what drives your customers. Learn how they think feel and behave towards your business. This isn't easy, but if you can discover these customer insights, you'll be better positioned to create loyal customers.

Aaron:

Loyalty programs allow you to get data from your customers because you have their contact information and their buying patterns. So, you can understand them better. And, also obsess about your customers: talk to them, ask them questions, read their comments about you and your products, and social media, read blog posts related to your brand. Most of all, truly listen to what your customers are saying.

Aaron:

Second, be relentless in serving your best customers better than anyone else. Give your loyal customers plenty of reasons to stay with you and no reason to leave. Push your organization to continually find ways to make your customers' lives easier and better. Obsessing about the customer must permeate throughout the organization.

Aaron:

Third, find ways to wow and surprise your customers. Do something extraordinary and unexpected for your loyal customers. Instead of playing with word-of-mouth marketing programs, focus on better serving your customers and word of mouth will happen naturally.

Aaron:

Fourth, focus on what your business does best. If you try to be all things to all people, you'll end up being nothing to everyone. Be bold, be unique. Differentiate your business around your strengths. What happens with most loyalty programs? They're generic; they try to speak to everyone as opposed to the people that are buying from them a lot already.\

Aaron:

Fifth, deliver on your brand promise consistently. First, determine what your business stands for. Then, be relentless in your dedication to deliver on your brand promise each and every day.

Aaron:

To recap, loyalty drives profitability in three primary ways: one, repeat business; two, retention; and, three, word of mouth. And, it also builds resilience: by having loyal customers, they're more likely to buy from you when times get tough.

Aaron:

Most loyalty programs fail because they aren't about loyalty. They're about entrapment instead of creating a mutually beneficial relationship between the company and the customer. Most loyalty programs are just designed to get the customer to spend more and more and more and more and make it hard for them to leave the loyalty program rather than actually creating a trusting relationship with the customer. Loyalty begins with trust and trust begins by understanding what your customers want and meeting those needs over and over again.

Aaron:

To create loyalty: One, understand your customers. Two, be relentless in serving them better than anyone else. Three, find ways to wow and surprise your customers. Four, focus on what you do best. And, five, deliver on your brand's promise consistently.

Aaron:

In the next episode, we'll answer the question: how do Cult Brands develop passionate fans? We'll look at the seven golden rules that all Cult Brands follow to develop extreme loyalty.

Aaron:

If you've liked this episode, please help me out by subscribing to this podcast. And, if you've already subscribed and like what you hear, please leave me a rating and a comment.

Aaron:

Thanks for listening. I look forward to hearing from you. Until next time, I'm Aaron Shields and I hope you go out there and make business matter.