SEEING BEYOND THE LOYALTY ILLUSION: IT’S TIME YOU

SEEING BEYOND THELOYALTY ILLUSION:IT’S TIME YOU INVESTMORE WISELY.ROBERT WOLLAN, PHIL DAVIS,FABIO DE ANGELIS, ANDKEVIN QUIRING

In today’s hyper-competitive businessenvironment, leaders are working hard tofind and free up capital to drive growth.Looking at all the investments they makein the name of loyalty and customersatisfaction is an often overlooked andunderestimated place to start.The truth is that traditional loyaltyprograms are costing significantly more,and delivering significantly less, than manyexecutives realize. To reclaim the loyaltyvalue that is slipping through their fingers,business leaders are starting to rethinkwhat loyalty means for their customers—and for their business.2

57 percent spend more onGROWING PAINSbrands or providers to which theyare loyal. That means 43 percent spendthe same or less. And more than a third (36percent) consider loyalty irrelevant to theirspending.Investments in loyalty are booming.More than 90 percent of companiescurrently employ some form of customerengagement or loyalty program.1 In theUnited States, alone, loyalty programmemberships grew at a rate of 26.7 percentfrom 2012 to 2014. There are already 3.3billion such memberships, or 29 per UShousehold.2 And that number is rising.71 percent claim loyaltyprograms do not engender loyalty.661 percent switched someThis focus on loyalty is costing more thanmost business leaders realize. Businessesspend billions each year for non-cash loyaltyincentives.3 Even more, and potentiallyor all of their business from onebrand or provider to another in the lastyear. Not surprisingly, the propensity toswitch is 6 percentage points higher amongcustomers for whom loyalty programs havea negative or negligible effect. But evenconsumers who spend more on brands towhich they are loyal switched 17 percentmore often than those who spend less. Andthe clincher? “Loyal” customers who spendmore are 9 percent more likely to retracttheir loyalty altogether.7greater, costs are hidden in the “loyalty” lineitem within programs that simmer in thebackground, consuming investments at asteady pace, year after year. Once activated,they are difficult and time-consuming toshut down. So they rarely are.Investments in loyaltyare booming.77 percent of all consumersadmitted they now retract theirloyalty more quickly than they did threeyears ago.8Given the high cost, is the business casefor loyalty investments sound? It depends.Accenture has found that members ofloyalty programs generate between 12 and18 percent incremental revenue growthper year than non-members.4 However,there are several indications that loyaltyinvestments, in their current form, are notgenerating all the value they could. Ourrecent research confirms that for growingnumbers of consumers, many loyaltyinvestments are simply missing the mark.23 percent demonstrate anegative or non-existent reaction tocompanies’ loyalty efforts.9 And that numberis rising, particularly among youngerconsumers who will be critical to drivingrevenue growth in the years ahead. Thesobering truth is that for nearly a quarter ofconsumers, all that spend is actually hurtingthe relationship.3

customers and monetize experiences. ThisThese findings suggest that as loyaltyinvestments have grown, our understandingof how customers behave and how theyview loyalty has not kept pace. It’s time forcompanies to rethink loyalty and maximizethe value of today’s most loyal customers.Without a course correction, investmentsin loyalty are likely to be wasted in theyears ahead—diluting margins, drainingprofitability, driving less-than-expectedgrowth, and decreasing customer valuealong the way.effort involves breaking the cycle of givingthings away and rethinking the many waysin which money is invested in things thatdon’t offer a payback. Rewards, for example,simply dilute the sale price. Pivot thoseinvestments to value-added experiencesthat are not free. Developing prioritizedservice channels is one example.TURNING OFF THE LOYALTYAUTOPILOTMany airlines are fundamentally changing amainstay loyalty perk: the frequent flier mile.For the past 30 years, airlines have rewardedloyal customers with redeemable milesbased on the distance they traveled. Now, inan effort to optimize revenues, carriers areissuing rewards based on the amount theirloyalty members pay to fly. The move makessense financially. Passengers that pay higherfares are more profitable. The change in theprogram is intended to attract, serve andretain those high-value customers.10LOYALTY, REINVENTEDLeaders who recognize their loyaltyprograms aren’t delivering the resultsthey desire have the opportunity, if notthe obligation, to rethink how, why andhow much they are investing in loyalty. Webelieve companies can do five things tomaximize the value of loyalty and free upcapital to invest in other growth initiatives.Justify every investment, with an eyetoward margin growth. The first step tomaximizing loyalty value involves eliminatingprograms that do the opposite. Identifyevery investment made in the name ofloyalty (including rewards and capabilityinvestments) based on their ability todrive margin gains. Then apply ZeroBased Budgeting to isolate and shut downinitiatives or loyalty program elements thatare margin-dilutive. Once less valuableprograms are eliminated, companies canuse their freed capital to re-architect theirremaining loyalty programs to engageDouble down on new customer acquisitionthrough retention. Our research revealedthat loyalty programs aren’t generatingas much of a sales uplift as many leadersbelieve. On the other hand, they do adecent job of keeping customers engaged.And that’s important, since customerswho are fully engaged tend to referothers. Rather than investing in initiativesaimed at directly increasing the walletshare of loyal customers, companies canbenefit from placing greater investmentemphasis on leveraging the goodwill andword-of-mouth generated by the loyalbase as a source of “warm” acquisitions.4

That means recalibrating investments tofocus on retaining customers with highlysatisfying experiences and leveraging theirconnections to acquire new customers.That’s where the hidden pools of loyaltyreturns lie.our research revealed they are more likelyto have a negative reaction to a company’sattempt to earn their loyalty. Therefore,it is critical that companies understandMillennials’ impressions of loyalty andthen tailor language and experiencesto their values and behaviors. Across allcommunications and loyalty investments,address what Millennials like and dislike, andwhat types of promotions and rewards theyare likely to embrace or shun (see sidebar).Learn the Millennials’ loyalty language.One group that warrants personalizedattention is Millennials. This segment nownumbers 1.8 billion globally and is expectedto have a lifetime value of 10 trillion.11Unfortunately, Millennials aren’t enamoredwith most current loyalty programs. In fact,TAILORING LOYALTY TO THE YOUNGMillennials’ values and behaviors set them apart. Without understandingthese differences, companies will be unable to deliver the relevantloyalty experiences that this lucrative group values most.WHAT DO CONSUMERS VALUE?HOW DO CONSUMERS yendorsementsLower pricesQuicker to switchproviders andbrandsMore forgivingSupporting causesPrivacy/data securitySpend less withbrands with whichthey are loyalSpend more on brandswith which they are loyalPersonalizationProduct/servicequalityShare positiveexperiences withfriends and familyKeep satisfaction tothemselvesInnovativeexperiencesSingle point of contactfor issue-resolutionUse more channelsto interactUse their preferredchannel to interactAccess toexclusive offersor partnershipsUrgency of issueresolutionSeek flawlessperformanceagainst high (andrising) expectationsSeek adequateperformance againststatic expectationsSource: Accenture Strategy Global Consumer Pulse Survey, July 2016.5

Recognize that actions speak louderthan words. Given that customers’ loyaltyfeelings are no longer the predictorsof buying behaviors they once were,companies might consider expanding theirsensing capabilities to include customers’actions. Our research found, for example,that more than half of the most loyalcustomers actively recommend brands toothers. And 14 percent express their loyaltyby publicly endorsing or defending thecompany via social media.12 These tangibleactions demonstrate a customers’ affinitymore than a self-reporting measure of“satisfaction” ever could. Redouble effortsto strengthen loyalty behaviors andencourage advocacy.launched its PAYBACK card program in sixcountries (the program is called “Plenti” inthe United States), which rewards customerswho purchase from select partners andacross multiple channels. It provides a fullservice, including IT and financial platformsand even data monetization approaches forcompanies that want to gain greater controlover their loyalty costs. Since launchingPAYBACK in Germany in 2000, 28 millionconsumers and 650 partners have signedon. Annual sales generated by the cardnow exceed 27 billion (US 28 billion).Tellingly, 95 percent of all reward points areredeemed, which suggests that customersfind the program relevant and valuable.13LOYALTY IS DEAD.LONG LIVE LOYALTY.Advocacy is an increasinglycritical indicator of true loyalty.Advocacy measures open upnew possibilities for companiesto treat their best customers likethe brand champions they are.Loyalty still matters. It always will. But today,as the correlation between customers’loyalty sentiments and purchasing behaviorscontinues to weaken, it’s becoming clearthat the old loyalty rules no longer apply.Business leaders can re-evaluate theirloyalty investments and adjust to the newreality with a strategy that focuses onmaximizing value. Those that make thenecessary changes will not only achieve anew form of competitive advantage, but freeup capital that can drive additional growth.View loyalty as a team sport. Buildingloyalty is necessary. But it’s also aninvestment. Loyalty leaders invest in“listening architectures” to capture,analyze and act on customer feedbackacross internal silos in near real-time.It also may make sense to work withpartner organizations to create lowercost acquisition channels and sharethe advertising and operating expensesassociated with loyalty programs. AmericanExpress has found that a collaborativeapproach to loyalty pays off big. It has6