The pitfalls of loyalty programs
These programs come in many shapes and sizes, from getting a tenth coffee for free, to getting a discount on an international flight, but they all serve similar functions: to reward customers for consistently using a business’s service.
Myer, for example, rewards customers in its Myer One program with two ‘shopping credits’ for every dollar spent, which they collect on a reward card that can be used to purchase items in-store or online.
Wesfarmers has the highly successful Flybuys scheme, which enables Australians to earn points across a range of stores, including Coles, Kmart, Target and eBay, in exchange for rewards.
However, not all loyalty programs are created equal, and not all are executed well.
At the QSR Media Conference last week, four industry experts came together to discuss the issues involved in these programs, and what can be done to solve them moving forward.
What loyalty means to a business
One of the key pitfalls of loyalty programs, according to Adam Posner, founder and chief executive of The Point of Loyalty and Directivity, is a lack of focus.
This is usually led by a misunderstanding of what loyalty really means to a business.
“Businesses don’t know what their objectives are and what they want to get from [their loyalty program].
“You’ve really got to define what loyalty means. Everybody that I research says loyalty is all about the transaction coming in more often and [customers] spending more,” Posner said.
Though there are examples of loyalty programs leading to higher profits – Guzman y Gomez sees a 30 per cent increase in transaction value and basket size when customers use its app – they don’t always lead to immediate results.
“[This is the] issue of loyalty and loyalty programs. You’ve really got to separate the two,” Posner said.
“Loyalty’s an outcome, [and] a loyalty program is a tool to drive whatever loyalty means to your business.
“When you define what loyalty actually means, then you’ll know what a program can do to drive those outcomes.”
Ken Russell, head of digital at Craveable Brands, which owns Oporto, Red Rooster and Chicken Treat, believes this level of ambiguity can reach all the way down the corporate ladder.
“You’ve got to have amazing digital products you can put in the hands of consumers, and for your crew as well.
“If your crew are facing constant challenges and are not able to answer those…it can really hinder your loyalty program.
“That’s something we’ve been really focused on improving…to make sure that our crews are able to answer any question.”
Additionally, if systems aren’t set up to detect fraudulent use of reward schemes, businesses could become easy targets.
“There are a lot of very tech-savvy students out there that will certainly do what they can to get that free five-dollar burrito,” Russell said.
Is data the end-all, be-all?
Customer loyalty programs can give businesses an immense amount of data to sift through. This data can lead to a greater understanding of where and when customers are most likely to purchase a product, and how to encourage them to do so.
But it’s important to be able to turn data into information and figure out how to act on that information in a safe, sustainable way. The first step, according to Posner, is to get permission.
”Privacy is becoming a big issue,” he said. “I don’t have to give you too many examples.”
For instance, facial recognition technology is a hot topic in the US, with the recent launch of Amazon Go, a staffless grocery store that tracks customers by their faces and charges their Amazon account for any item they leave with.
But in a study conducted by Posner’s firm, which asked consumers whether they wanted stores to recognise their faces to serve them the perfect offer based on loyalty program data, most respondents disliked the idea.
“Interestingly, only about 18 per cent of the respondents said ‘that sounds cool’. A very high percentage said ‘that’s creepy’,” he said.
It can often be a fine line that separates cool and creepy, and it is important for businesses to understand how to remain on the right side of that line.
Guzman y Gomez CMO Lara Thom believes businesses can fall into the trap of over-relying on data, and that in order to succeed, they need to “at a broad brushstroke understand consumer behaviour”.
“We use data as a guide, but it’s not a definitive rule,” she said.
“We lead the business, and we lead through data, but we definitely don’t let it define who we are. We’re still founder-led and there is a lot of gut in what we do.”
When customers revolt
There is also the potential that a loyalty program will simply not deliver what is expected.
“We poll a lot of what happens overseas, and I think in multi-site retail in general we are behind the times in what can be achieved through loyalty programs that are aligned to the objectives of the board, to the shareholder objectives, and very much so consider the overall customer experience,” MobileDEN general manager Gavin Gorazdowski said.
“I think there is a lot of work to be done [in Australia].”
Posner sees a different consequence of not meeting customer expectations.
“If you look at some of the case studies of brands or businesses that have changed their program, namely Woolworths four times, or others that have removed their programs…[there’s] backlash, especially if the customer has inherent value in it – collected points, or whatever – they believe it’s theirs,” he said.
Woolworths, when updating their loyalty program from Qantas Points to Woolworths Dollars in 2016, famously removed the ability to earn rewards from Big W – something their customers had traditionally been able to do.
Customers protested the change, and Woolworths had no choice but to reverse course, allowing customers to earn Woolworths rewards at Big W once again, while reintroducing the ability to convert accumulated Woolworths Points to Qantas Points.
These changes were made primarily as a result of customer backlash, and left many long-time loyal customers angry and confused.
“The risk is if it gets too big, and you decide to change it, or remove it… big risk,” Posner said.