Loyalty and the cost of business
By Ko de Ruyter, Debbie Keeling and David Cox
In order to obtain a balanced perspective on costs, it is important to map the impact that a programmatic approach to managing customer loyalty has on the success of the business by driving down the cost of business. So, let’s revisit briefly how this works. Simply put, loyalty emerges when companies meet and exceed the needs of their customers, when it creates trust in its product and brand, so that they will likely purchase again at future occasions. What is important is to gain a more in-depth picture of some of the mechanisms to understand why customer loyalty is beneficial, or as some would argue, essential to the success of the firm. The classic leaking bucket metaphor is often used to explain the cost and benefits of a loyalty strategy. (New) customers may flow in and fill the bucket and lead to higher profits for companies. However, many old buckets (and companies) have holes. Customers may flow out and losing valuable customers obviously has a negative effect on profits. And let’s not forget, customers who flow out of your business will tell their family and friends. Mending the hole and keeping customers from leaving through a retention strategy ultimately costs less than for ever trying to acquire new ones. So, loyalty as a proven mechanism to retain customers is directly related to the cost of business.
However, in these challenging times, businesses need to carefully balance loyalty and the cost of business. Central to this balance is the realization that members also consider cost as a factor in determining their wish to engage with companies. Finding a balance means finding ways to increase efficiency where possible so as to minimise the impact of cost pressure on customers. Loyalty programs can do this by examining fulfilment solutions. One way is to make sure that existing infrastructures that require significant investment (e.g., an on or offline program catalogue or card payment partner) are sufficiently maximized or repurposed.
At the same time, loyalty programs will also face cost rises and program managers need to look for ways to manage and retain the loyalty of their members and keep membership high on their priority list. It is a good idea to revisit the member experience and journey from a convenience and consciousness perspective. In our experience, the majority of members have a preference for convenience, e.g., when it comes to choosing or even returning and exchanging rewards. The convenience of your program needs to sync with the busy lifestyles of your members, who no doubt also experience cost pressures in their own business. While you have no control over those, it is important to remember that what you do in your program can still make a huge difference to the business of your members.
Another way of keeping your program top of mind with your members is to adopt the attitude of a start up and constantly look for ways in which you can personalise the member experience, from adding a personal touch to member comms to targeted campaigns in your program. As more members are likely to adopt an every-penny-counts attitude they will have no tolerance for suboptimal experiences with your program. Your service or help desk must be well prepared to responsively deal with member queries.
Most of the above is based on thinking inside the box of your program. As desperate times require new measures in restoring the balance between customer loyalty and the cost of business. One such out-of-the-box measure may be to move away from a points-based program and experiment with paid loyalty. A recent McKinsey report shows that members of paid loyalty programs are likely to spend twice as much on the program’s brand offerings than members of (fremium) points-based programs. Paid programs require their members to pay a participation fee. This fee may be a one-time upfront entry fee or a recurring subscription fee. Does paying a premium increase the value of a program and further reduce the cost of business? As a large number of these premium programs emerges the evidence is encouraging. A well-executed paid loyalty program has a positive impact on the member experience and the lure of belonging to an exclusive club around a brand or channel relationship is perceived as a value-generating proposition by members. Generally, there are two important reasons to take into account when considering the launch of a paid loyalty program to weather the cost of business crisis. The first is whether you wish to attract segments of high value customers with premium rewards that simply would be too costly to offer for free. On the other hand, if you operate in a highly fragmented market in which practical considerations (e.g., 24-hour service support availability) may override brand preferences when your offering is business critical to your clients. In these circumstances it makes sense to consider offering a paid program offering.
So, these are a number of ways in which your loyalty program can help face the increasing cost of business. They reflect structural and perhaps strategic measures that you can take to make your program more attractive to your members. However, as we pointed out, your members are feeling the strain and stress caused by the wide array of crises and their loyalty will likely not just be formed by what make sense and cents. How you engage with your members on a personal and emotional level, whether you show empathy and understanding of their cost of business and living will ultimately determine whether you are able to keep being considered a trusted business partner. This is what we explore in the next blog.
