How Loyalty Programs Can Help You With Retention and Acquisition
Make New Friends, but Keep the Old
The Leaky Bucket Syndrome
When we start talking with clients about loyalty programs, one of the first things we ask is “What do you want your program to do for you – what are your objectives?” More often than not, we hear that the client is having a problem with churn – established customers are leaving as fast as (or sometimes faster than) new ones are coming on board. The bucket is leaking faster than the client can refill it. Naturally, there are two approaches to fixing this problem – stop the leaking or fill the bucket faster. A loyalty program is a great way to stop the leak if the program sponsor uses individual customer data to get the right messages and benefits to the right people at the right time. Filling the bucket, on the other hand, has different challenges. A loyalty program can address this problem, but only under certain circumstances.
Loyalty Programs for Acquisition
Customers don’t often choose a retailer or provider because it has a great loyalty program – they look for price, convenience, service and reputation before they start thinking about loyalty program benefits. For that reason, loyalty programs are most often used as a way to retain customers rather than as an initial selling proposition to acquire new customers.
In the early days of frequent travel programs, airlines and hotels would give away generous enrollment bonuses in order to grow membership, but that practice has faded. Why has it faded? It’s a question of quality vs. quantity. Why would I want a database of 10 million members if only 2 million members have the potential to be good, ongoing customers? Yes, I’m filling my bucket, but there is potentially a lot of dead weight there. I want to allocate my funds toward those who have a high lifetime value, so I am going to reserve any early bonusing for activation not just enrollment. Once someone has activated, I should be able to tell pretty quickly whether they’re in the 2 million or whether they’re in the 8 million; before that, I have no way of knowing whether someone is worth an investment.
Though loyalty programs are not often part of the initial selling value proposition, there are some exceptions.
Let’s face it, credit cards are a commodity product. Without the bells and whistles of reward benefits or affinity branding, credit cards have to compete solely on cash back, annual fees and interest rates, which can be instantly matched by competitors. Issuers need something to sweeten the pot, to convince people that it’s time to switch. The challenge of credit card acquisition is made more difficult by the fact that there are few obvious inflection points – how do you know when someone is in the market for a new card? Issuers therefore need to be out front and center with offers where the value of the benefits in the perception of the member is higher than the cost to the issuer – a classic loyalty program value proposition with disproportionate value to the member, which we call reward leverage. In the U.S. today, the majority of credit cards issued have points and rewards associated with them.
Card loyalty programs – whether the “currency” is airline miles or a proprietary set of points and rewards – typically offer a very high bonus for new cardholders (to address the dead weight problem, many of them require activation and spend). Offering that bonus in the form of airline miles or points helps the issuer on the cost front – it is cheaper to buy 50,000 or 60,000 airline miles than it is to buy an airline ticket for a new cardholder. Point-earning with a card gives the issuer the added benefit of inertia – once someone is using a card, the points and rewards make switching more difficult for the cardholder.
In the last few years, auto insurers have started touting their ‘loyalty programs’ that eligible customers automatically receive. These programs, such as Progressive’s, are not traditional loyalty programs in the form of points and rewards, but they do offer a classic feature of loyalty programs – benefits based on information the program sponsor collects over time, namely driving records and longevity. The tangible benefits of accident forgiveness or reductions in deductibles are positioned as emotional benefits – recognition of the driving skill of a valued customer rather than a quid pro quo payout of “buy x, get y.” Emotional benefits can be equally as powerful – or even more powerful – than tangible benefits. And they reinforce one of the strongest selling propositions for an insurance company – reassurance that the company will take care of you. Once again, these programs deliver disproportionate value to the member in the form of recognition and reassurance.
Elite Status Competitive Match
If a company has a program with strong published benefits for top customers, it can use those top tiers as an acquisition tool. This is typically done as a competitive match – if an airline is trying to steal high value customers from a competitor, it can offer immediate or quick-qualification matching status. This type of initiative is disproportionately beneficial to the member and has indirect value to the program sponsor in the form of reduced acquisition costs. This approach is, however, a double-edged sword, because it is very easy for a competitor to match or one-up.
Refer a Friend
In our final example, we again see indirect value to the program sponsor. As we noted above, companies have learned that enrollment bonuses alone are usually problematic. Refer-a-friend programs, however, are different. They have two advantages for the program sponsor: 1) existing customers do the hard work of finding prospects, so the program sponsor avoids those costs and 2) new customers who are referred are more likely to be better prospects because of similarities to and affinities with the friend who referred them. As with enrollment bonuses, refer-a-friend bonuses more often than not require some form of activation, so the sponsor can avoid dead weight.
Using a loyalty program to acquire customers is certainly worth considering, but proceed with caution unless the following are true:
- There are few ways to differentiate your product besides price, so you are in search of an alternative boost to your value proposition
- You can create a loyalty value proposition that is difficult to match
- You can create a set of benefits with value that the members sees as higher than what it costs you to provide
- A loyalty approach can give you sufficient indirect benefits
If you’d like to talk through the pros, cons and implications of using a loyalty program for acquisition, drop us a line: firstname.lastname@example.org. We’re here to help.