Loyalty Loops

A new emphasis on loyalty was launched in the late 70’s with airlines and hotels. The basics for these programs used to be a simple formula: offer a good product and service, delivered reliably at a fair price with some advertising mixed in to remind consumers why they should choose your brand. Exceptional customer service and a good loyalty program could seal the deal by rewarding users with miles, cash back, special rewards or VIP treatment.

As we enter the second decade of a new millennium, this just isn’t enough. Companies must do everything they used to do and also ensure that their value proposition remains attractive to a more cost-conscious population. Expedia, Travelocity and Kayak now show travel pricing that used to take hours to track down. If you're dissatisfied with your in-home phone service, you can choose from a number of providers. Many industries--like autos, airlines and banks--built their models on the consolidation of products, services and information. They could use hidden profit margins from that chain to fund exceptional service and other loyalty efforts. But now consumers are disaggregating those bundles. Companies that funded loyalty via hidden prices or from post sale service have to change. What should you do?

First, acknowledge that this is the new world order. An auto salesperson recently explained that he had lost a sale after three meetings and numerous calls, because the customer used the Internet to find the same car for $100 less ten miles away. Was the selling expertise worth $100? Was the customer unreasonable? Either way, the customer's ability to split his car buying into three phases (information, search and purchase) is clear.

Maybe you used to be able to carry a 15% premium to generic brands, but now generics are better and ingredients are on the package for every consumer to see and compare. If you don't have the value proposition to back up your pricing, your marketing and loyalty programs had better be exceptional. Short those and you have nothing left but your reputation. And that won't last forever. Get your value proposition right or prepare to compete as a commodity.

Second, integrate loyalty thinking across the consumer experience. Loyalty isn't a program or a function in your org chart. It is the combination of all of your consumer-facing efforts. Are your physical and digital spaces coordinated? Is the value you provide for premium pricing clear? Do you advertise a value price and then add key items via "a la carte" pricing? Are policies on the side of the consumer or tilted to maximize profit?

You should periodically ask yourself why customers choose your business, and take a look at your segmentation schemes. Are you still bucketing customers into "newly acquired," "repeat" and "lapsed"? Those categories won't cut it in this ultra-segmented world. Look at how you are tracking customer behavior and check market share, customer retention, selling price, market basket and something like Net Promoter Score, which measures "promoters" and "detractors" and shows trends via key competition.

If your collective measures are trending positively, figure out why and go on the offense. If your measures are trending down, consumers are seeing you as less valuable and you should prepare for attacks from nimble competitors. Don't drag your feet in figuring out your value proposition problem and fixing it as fast as possible.

The purchase decision process has long been understood through the metaphor of a funnel (Figure 1), where consumers begin with a large number of potential brands at the wide end (awareness) and directed down through shrinking choices at the stages of familiarity, consideration and then buying. At each one of these touchpoints, traditional marketing has always worked hard to be present in order to influence your decisions. P&G produces daytime TV programming to reach the audiences most likely to buy their products (hence “soap operas”). More recently, Amazon.com offers relevant recommendation to buyers poised to checkout on their online system.

 

But, as research shows, by McKinsey and others, the times, they are a-changing! KL&P calls this the era of the Loyalty Loop. The consumer decision model is now more dynamic and informed, thanks to the online world search. The old purchase decision funnel is now looking more like a loop (Figure 2). The touchpoints might have shifted and will no doubt continue to shift. This makes it essential that your loyalty systems are well-oiled to allow you to keep your hard-earned customers. Because keeping a customer is easier than acquiring one. Today, it's just a lot harder to do. Pay as close attention to your Loyalty Loop as you do to your new client acquisition programs. You’ll see that focus pay off in serious revenue.