It’s a common enough question asked of agencies: we need a loyalty programme – can you help us? And whilst financially the temptation is to say “yes” straight-away, the more appropriate and responsible response is “Why? Why do you want a loyalty programme?”

For many, it’s because they want to grow and deepen the relationship they have with customers, whether that’s by reducing churn or increasing metrics such as average spend or purchase frequency. For others, there’s a recognition that loyalty programmes are a treasure-trove of data that can mined, manipulated and used to influence customer behaviour.

But that doesn’t adequately answer the question: “why do you want to build a loyalty programme?” Rather it answers the question: “what business objective do you want to achieve?”

This is more than just about semantics and language. It goes to the heart of what drives customer engagement. Because many of those business objectives can be achieved without a loyalty programme.

Most schemes don’t deliver
The reason for asking ‘why’ is very simple: evidence, and lots of it, suggests loyalty schemes don’t always work. For sure, firms like Qantas, Woolworths, American Express, and Myers have all built highly successful rewards programmes. A combination of their size, frequency of engagement and in the case of Qantas the presence of a broad collation partners, have all helped them succeed. But it seems that by and large they buck the trend.

According to Directivity and Citrus, less than 50% of people feel more loyal to a brand because it’s loyalty programme. Worse still, the same research suggests that less than a quarter see value in their membership.

It’s easy to dismiss such discouraging numbers as small survey size (it isn’t, by the way) or because it reflects what people say they do in research v what they actually do real-life. Yet a recent McKinsey study of 50 leading US and European firms with a loyalty program showed the financial truth behind these responses. Weighted average revenue growth was the same or slower than those without. More tellingly, the cost of implementing, managing and fulfilling a loyalty programme saw EBITDA on average 10% lower than firms without.

The causes are many and varied
And that can be caused by any number of reasons. For example, over-investing in the value of rewards, effectively miscalculating the margin-share with customers; or the cost of carrying any redemption exposure onto the balance sheet. It can also be because rewards, when not driven by data, tend to be a relatively blunt tool for changing customer behaviour. Invariably those motivated enough to use them were already predisposed to choose the brand and as such the rewards recognised existing behaviour – therefore eroding value – rather than rewarding new or different behaviours.

If the aim is to create a database that can be regularly mailed offers, incentives and messages, then so be it. It’s effectively a warm mailing-file for driving footfall. But that comes at a cost and most certainly isn’t the same as building an effective and engaging loyalty programme. Nor is it fully using the rich behvaiour insights locked in a customer’s individual behaviour.

In truth, customer loyalty and engagement is a complex business. Even the simple act of rewarding customers can take multiple forms: points, discounts, cashback etc. And that’s before you consider the optimum delivery mechanic, mobile, coupons, plastic card etc. Let alone the much more complex challenge of aligning (often multiple) sources of customer data to transactional sources at a customer level. Because without that closed-feedback-loop, there’s limited opportunity to accurately show how the reward directly impacted sales and therefore ROI.

Looking beyond just rewards
Ultimately, it’s hard to imagine a customer feeling loyal to a brand with poor customer service or poor product performance. Recognising your customer, understanding their needs and serving them as an individual can be a far more effective way of showing you care, than simply giving away cash. Done poorly, it’s the corporate equivalent buying somebody’s friendship. Hardly the basis for a long-term relationship.

Beyond obsessively getting the basics of customer experience right, there are several broad principles for building customer engagement:
Be relevant – optimizing existing customer service messaging and engagements to demonstrate an understanding of the customer is often worth more than price discount. Similarly, timely communications reflecting a recent behaviour, tend to be more engaging than second guessing via a propensity-led marketing campaign

Be sticky – offering ideas that simplify and make customers’ lives easier are often valued and often help make the relationship harder to break. For example, the simple introduction of Direct Debits, makes it harder for a customer to switch providers.

Be social – we’ve always talked to our friends and neighbours about our experiences, it’s a natural human behaviour to share. Social media now amplifies the reach and impact of those conversations. Enabling people to engage to share their experiences can greatly increase their value to the brand. Whilst providing experiences – e.g. jumping the queue; shop the sale the day before the masses – are elements that can be incorporated into a broader marketing plan.

Be valuable – rewards, discounts, cashback etc, whatever form they take, incentives remain an important tool for rewarding specific behaviours. The trick is to balance the economic cost with the value created through a measurable change in behaviour.

No doubt, loyalty programmes work for some companies. And for sure, there’s a role for rewards as part of a concerted and coordinated programme of customer engagement. But in isolation, or as the primary tool for driving customer engagement, it’s questionable just how much value they will genuinely create.

So next time somebody says: we need to build a loyalty programme, ask yourself why? Have we done everything possible to engage with our customers and are we ready to make the most from the data insights it will create.

Business Insider Australia