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What Does Customer Loyalty Really Mean?

Steve ManattOctober 20, 2014

Let’s start this post off with the definition of the word ‘loyalty.’  According to the Merriam-Webster dictionary, loyalty is “the quality of being loyal to someone or something” or “a strong feeling of support or allegiance.”  I raise the issue of loyalty to discuss why many loyalty programs are inherently flawed.

First, let’s do a quick little exercise.  Take out a piece of paper and pen, and off the top of your head jot down which loyalty programs you are a part of…  Ok, great.  The top of my list started with United Airlines, American Airlines, Delta and Southwest.  Did you know there are 2.65 billion loyalty program memberships in the US?  That’s 21.9 programs per household.  However, the average household is only active uses 9.5 of them. Now you can begin to see where I am going with this…

Loyalty programs originally started out in the B2B space when marketing discovered that suppliers who form close relationships with their customers have better relationships, hence tend to be more loyal and give them more business. Research also claimed that loyal customers helped make the company more profitable as it reduced servicing, price sensitivity, increased spending and favorable recommendations to potential customers. But the term loyalty has been distorted over time, and with increasing competition, both companies and consumers have taken the concept out of context.

We all know that acquiring a new customer is much more costly than retaining a satisfied consumer, so the concept of loyalty programs seems to make good sense, however there are many challenges that have emerged with the evolution of these programs.

Companies:

  1. Believe they can buy their consumer’s loyalty.
  2. Believe they can replace a mediocre product offering and sub-standard customer service with a loyalty program.
  3. Don’t understand the cost of their loyalty programs and participate simply because competitors have established programs.
  4. Don’t understand how to harness their programs to make true value creation, including: data collection, customized programs and segmentation.
  5. Have created such complex schemes that customers, in many cases, never receive any benefit.

Consumers:

  1. Are enrolled in too many programs.
  2. Have evolved into the entitled mentality, believing that they need rewards programs to do business with a company.
  3. Have learned to extract rewards without actually being a loyal customer.  There are hundreds of websites that show consumers how to obtain extra points and even play companies against each other for rewards they did not earn.
  4. Are burdened with keeping track of dozens of programs and remembering who they are actually ‘loyal’ to.
  5. Get frustrated with the complexities of programs they will likely never reap rewards from.

Let’s think back to a time, long, long ago, before loyalty programs existed.  How did businesses actually thrive?  Simple.  They provided quality products and superior customer service.  I’m sure we have all heard of a company called Apple.  How many times have you used your Apple loyalty reward program?  That’s right, never.  Why not?  Simply because Apple has consistently delivered a quality product AND service that has people waiting in line for days for the release of new products, so that a loyalty program is not needed.  This is such a simple concept, yet so many companies miss the mark and believe that they can replace their mediocre product and sub-par customer service in lieu of a complex and likely unachievable rewards program.   The funny thing is, Apple has broken the barriers of price sensitivity and consistently has more expensive products than its competitors, all without a loyalty program.

Rewards programs can and do play a significant role in creating positive experiences. Providing discounts, coupons and freebies while focusing on developing an emotional connection with your customers is a more effective method of engagement. Your ability to reach your customer’s hearts and encourage your customers to talk about your brand and keep them buying again and again, is facilitated by listening and responding to their needs, and consistently delivering quality products and customer service.  If these programs are simply based on the quantity of discounts or paying for patronage, they will not endure.  Therefore, to continue to add value to their programs and keep customer interest, companies must continue to improve and enhance their programs.  This can lead to a costly, never ending cycle that can be very harmful to the brand’s reputation and profit margins.  Engaged customers are more than satisfied and more than loyal; they are emotionally connected to the company. They go out of their way to associate with your company; they actively promote your business, and support you during good and bad times. In the end, they make you more money.  Apple has learned to surprise and delight and engage their customers, which is why they have become loyal.

Both companies and consumers are seeking a relationship, one they can engage in and extract value.  An engaged consumer is much more likely to share positive experiences with their friends, hand over personal details and become a repeat customer.  As long as consumers are extracting value from the company, they are willing to hand over almost any piece to data the company may request.

Loyal consumers are the lifeblood of many companies, and as you can see, this post barely scratches the surface of what loyalty programs are, how they have evolved and how they should be positioned.   Keep a look out for part two, where I will dig deeper into these programs and discuss how companies can begin leveraging what they know about their consumers.