Loyalty Programs: A Thing of the Past?

For as long as anyone can remember, companies have relied on the tried-and-true loyalty program to keep customers. You know how it works: The airline, the hotel, the drug chain, etc., gives customers a nifty-looking VIP card and, with it, the chance to earn bonus points that accumulate until the “valued customer” can redeem them for some goody or other. But in an age rapidly redefined by digital technology, I’m prompted to ask: What, exactly, are all these companies really accomplishing with old-fashioned programs like these?

Not as much as they think.

The bad news is that the days of bribing and tricking customers with points are over. The good news? A huge opportunity has opened as a result.

Why is the traditional loyalty program failing to measure up? Look at the numbers. A typical retailer might make over half of its revenue from 10-15 percent of its customers. For those buyers in the top tier, the loyalty program is a really sweet deal. They bank a boatload of points that they can spend on some valuable rewards. If the retailer is lucky (and skillful), these customers remain loyal and spend increasing amounts of money at the store or on the company’s Web site.

So far, so good. But what about the rest of the customers? How about the 85 or 90 percent who plunk down the other half of the revenue? In that category, there’s no doubt a sizeable group that spends a moderate amount of money. Let’s say it’s $500 a year per person.

Multiplied by the sheer size of the group, that’s not peanuts. But because a few hundred dollars a person isn’t sufficient volume to really rack up much in the way of reward points, these people don’t have much to get excited about. So there you have it: For this moderate-spending group—a massive number of people—the loyalty program does nothing.

And because it does nothing, this group is easily lost to competitors, a major problem when you consider that it’s a lot more expensive to attract a new customer than it is to serve an existing one.

The financial implications here are enormous. A major retailer that can persuade, say, 10 percent of its customers to increase their spending from $500 per year to $1,000 (dollars they may already be spending, but with the retailer’s competitors) is looking at potentially hundreds of millions, even billions, in additional revenue.

The obvious question: What’s a company supposed to do about it? The smarter ones have learned to combine the traditional loyalty program model with digital intelligence—using analytics-based systems to identify existing customers who are really into whatever it is that the company sells or services.

For example, a videogame brand will isolate gamers who might only spend a few hundred dollars per year, yet consistently spend it all on the latest video games and gear. Or an apparel maker will identify fanatics who love the label enough to buy most of the clothes in the spring or fall collections. I call these groups “passion pools.” You can call them anything you want, but they’re the customers a brand has to identify.

Once it does, it’s fairly easy to find ways to connect to them in ways that’ll promote loyalty and increase sales. It could be with traditional tactics (in-store events, say), or it could be via social media (sending a brand’s Facebook fans exclusive information about a new product or giving them access to limited releases). The methods vary, but the point is that loyalty programs have to evolve from something that’s merely transactional into a more personalized, sophisticated initiative.