Loyalty programs have been on the move. When the market was going great guns, we saw many loyalty programs turn into spend based programs, much to the chagrin of many in the miles and points community. The economy has surely taken a turn for the worse. Given that, what changes do should we expect in the near future?
Loyalty Programs: What exactly drives customer loyalty?
Early in my career, I was fortunate to be involved in primary and secondary data collection and analysis. It gave me the opportunity to interact with customers and understand their decision making process. Sifting through market research reports gave me access to some great academic research on prominent marketing trends.
The most recent research report produced by McKinsey and Company delves into the future of loyalty programs. The recent market disruption due to Covid-19 may force some changes but at a conceptual level, the analysis throws up some interesting findings.
Full Report: Driving Customer Loyalty
Loyalty is on the Wane
We often discuss about how companies have been devaluing programs and getting away with it. While most bloggers are first to point out negative changes to these programs, the companies running these programs know that our community remains a very small segment of the population. In today’s world that’s ubiquitous with all sorts of devices, people’s attention spans have become even shorter. What does it mean for loyalty? It means that people are much more prone to switch and the concept of being loyal to a program doesn’t quite mean the same any more.
Today’s consumers are the ultimate surfers, hopping between channels, devices, and sites
as they shop. Loyalty programs are static by comparison, relying on increasingly outdated rewards and the redemption strategies of the past.
Ecosystems Matter
For far too long, programs have remained static and haven’t moved as fast as consumer preferences have changed. Programs are now moving towards creating an ecosystem. In this ecosystem, they offer the customer with many options. Take the example of Hilton Honors. You have the option of redeeming points for Amazon purchases or convert them into airline miles. We often advise against such redemptions because in most cases, the redemption values aren’t lucrative enough.
Brand Partnerships & Alliances
However, if the data informs a hotel chain that a majority of its customers would love to have more options, then it’s better for the chain to offer those options. In a way, if low attention consumers are a majority of your population, then they’re more likely to redeem those points with other partners. What’s the caveat here? The partnering brands must have a positive association. If they don’t, customers would not want to be a part of such an ecosystem.
We see early signs of this happening already. Of the Financial Times’ top 25 brands of 2019, more than 40 percent have partnered with at least one other consumer brand to improve the customer experience and drive increased engagement. Indeed, as industry boundaries continue to blur, consumer and loyalty strategy will require a broader frame of reference.
In short, your ecosystem approach will only work if:
- The brand you’re partnering with is complementary to your brand
- Your customer has a positive association with the partner brand
The McKinsey report studied 50 loyalty programs and here’s what they found:
We looked at a basket of 50 loyalty programs from top brands and found that just 18 percent have experience-led programs, 6 percent have connected offerings, and 2 percent have ecosystem offerings
Still plenty of room to improve and grow
Rewarding Experiences
We’ve seen brands move a lot towards offering experiences. This is backed by solid research and proves why some travel loyalty programs are offering options for customers to redeem points at concerts. In today’s era, consumers have become more demanding and are looking beyond just some basic benefits. This graphic further illustrates the point.
Consumers want much more beyond basic benefits
- Rational Benefits: Am I getting a good cpp value on my redemption?
- Emotional Benefits: Is my redemption truly memorable? Think about flying in business class or staying at an ultra luxurious suite on a special occasion. Moments that you always remember.
- Social/community benefits: How do my redemptions tie in with what others are doing? Is there a social aspect to the redemptions? Many brands often develop social media gamification programs in order to create a sense of community among customers.
The Pundit’s Mantra
How does this apply to travel loyalty programs? As well see a general slow down of movement, expect travel brands to offer more options for customers to make redemptions. From a CPP (cent per point) point of view they might not be the best, but it helps the business to wipe off liabilities from the balance sheet. Also, if customers are still skeptical of travel after a few months, they’d be more prone to redeeming them for other things like shopping or concert tickets.
While ecosystem centricity may be the future, it’s success hinges on three factors. Firstly, do programs have robust cross-marketing initiatives and partnerships in place in order to engage the customer? Secondly, do customer touch points offer the customer enough options to become a deeply embedded part of the ecosystem? Thirdly, do companies have sturdy IT infrastructure to implement these cross marketing initiatives effectively?
If all of the three conditions are satisfied, we may see further expansion of redemption options by loyalty programs.
This report sheds an interesting trend. Instead of simply analyzing and adopting to customer behavior, loyalty programs are now being proactive and are looking to influence customer behavior in the direction that they desire.
What do you think will be the next big change announced by an airline or hotel loyalty program? Let us know in the comments section.
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