March 27, 2009

The classic brand loyalty program offers a combination of rewards and recognition. The bottom-line objective of the program, however, is retention—to ensure that a customer continues to purchase a product or service and remains loyal to that particular brand. First airlines, and then hotels, used loyalty programs to offer incentives to frequent travelers, but today brand loyalty programs are just as common in financial services and retail.

One of the fastest-growing brand loyalty markets is financial services. Credit card companies in particular have adopted the rewards model with increasing frequency. In some cases a credit card will be linked with a specific airline; in other cases, the credit card rewards its “members” with miles that can be used on any airline. Some credit cards also offer merchandise, cash back or other incentives that build up with credit card use. Some even promise customers they can get preferred seating at events or restaurants.

Brand loyalty is big business. More than 1.8 billion memberships exist in US loyalty programs, averaging 14 memberships per household, according to 2009 research conducted by COLLOQUY, a leading provider of loyalty marketing, publishing education and research. COLLOQUY estimates about 44 percent of these memberships are “active.” Among the general US population, 57 percent of respondents claim to belong to a loyalty marketing program. This compares to 86 percent of Canadian consumers who participate in loyalty programs, according to another research study conducted by COLLOQUY in late 2007.

But do these programs work? Kelly Hlavinka, partner of COLLOQUY, tells Brandchannel: “From the results of our clients’ programs, loyalty programs are indeed effective at increasing visit frequency, increasing the amount spent annually and retaining customers. The current economic environment may heighten the importance of a company’s loyalty program. For the consumer, participating in a loyalty program can help them stretch their limited budget a little bit further. For the company, retaining your best customers that have enrolled in your loyalty program is more important than ever.”

For hotels, loyalty programs seem to be paying off. Jill Noblett, senior vice president of loyalty and direct marketing for Wyndham Hotel Group, discussed the chain’s loyalty program at a “Loyalty Leaders” session at the Direct Marketing Association Conference in October 2008. She says the chain works “to deliver the message that points earned are an enabler. You can take that vacation or visit one of our fabulous resorts with your expenses covered by redeeming points. What guests earn during their stays also provides them benefits—like a Home Depot gift certificate to use to fix up the kitchen—long after they return home.” Noblett says, “we’ve seen a correlation between redemption and repeat stays.”

For retailers, buying brand loyalty may be more of a challenge. The research conducted by COLLOQUY “suggests that typical two-tier pricing and discount-based rewards—the model that dominates high-frequency retail environments—simply don’t engage consumers,” the company says. “The retail discount reward is now a commodity.”

Aubyn Thomas, senior vice president of marketing services for credit and loyalty for Macy’s, also spoke at the aforementioned Loyalty Leaders session. “Because consumers are very selective in what they buy, we’re relying far more heavily on our Star Rewards program today than ever before,” she says. The economic environment makes it especially challenging for retailers to reward customers appropriately. As a result, Thomas says, “…we’re turning to less-costly experiential ways of reinforcing customer relationships. So instead of thinking only about discounts and coupons… we’re now thinking about experiences. For example, an experiential reward might be first-class travel to see the Macy’s Thanksgiving Day Parade in person.”

While brand loyalty programs are designed to reward customers with tangible benefits, there is also a “softer” side to customer engagement. “The key to sustaining positive results from loyalty programs is a blend of economic and emotional rewards,” says COLLOQUY’s Hlavinka. “Smart companies strive to move beyond simple economic incentives to incorporate meaningful recognition benefits.”

Wyndham Hotels’ “ByRequest” program is an example of this recognition. “It’s high touch and provides guests with a personalized experience on property,” Noblett says. “ByRequest members can complete an online profile and tell us, ‘I want a certain type of pillow,’ ‘I want a snack and beverage in my room when I arrive,’ ‘I want a certain number of hangers in my closet.’ A manager on property welcomes ByRequest members and ensures that their preferences are met. How nice for a business traveler… to be able to check into a Wyndham and get that kind of special treatment.”

Still, a significant percentage of consumers do not participate in loyalty programs. As reasons for their lack of participation, they cite such economic factors as the need to spend too much and not wanting to pay a program fee, according to COLLOQUY’s research.

There are other non-financial demotivators that brand marketers need to understand. Consumers cited “boring rewards” and the feeling that “all loyalty programs look alike” as reasons for not belonging to a loyalty program. Additionally, there was a high percentage of what COLLOQUY refers to as “category churners—people who had previously played the game and dropped out.” According to the company, “While dropping out of a program is a common consumer experience, the number of consumers churning from the entire category of loyalty programs should raise alarms for loyalty marketers. Clearly, we’re not doing enough to keep customers engaged.”

All audience segments offered as a primary reason for non-participation the “lack of compelling rewards.” Almost half of non-belongers said loyalty programs look too similar. A third issue is the amount of churn: it appears that, regardless of audience segment, people join and then drop out of loyalty programs in relatively high numbers.

Those disappearing high numbers represent lost brand engagement opportunities—a high price for brands to pay in such challenging economic times.

By Barry Silverstein is a freelance writer/marketing consultant and co-author of the McGraw-Hill book, The Breakaway Brand.

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