Chap 11 – Why Loyalty Programs Don’t Work

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This will be my last chapter review of “How brands grow”.

Actually they are 13 chapters, but I will not cover the last two.

In the 12th based on the analysis and laws described in the previous chapters the author defines several tactics for brands in order to compete efficiently.

In the last one Byron summarises in one place all the laws discussed across the chapters. 

So what is the 11th chapter about?

This chapter is about loyalty programs.

I loved the author’s definition of them: 

“They are structured marketing efforts that reward, and therefore encourage, loyal buying behaviour, which is potentially beneficial to the firm”*

Photo by Steve DiMatteo on Unsplash

The goals of this program should be:

  • increase customer retention
  • increase purchase frequency 

Loyalty programs work, but according to the authors, results are weak and there is also no evidence that outstanding business results are driven by loyalty programs. 

As for the retention chapter also here the author is very sceptical, but also here I started reading papers and I will read some specific books that go in the opposite direction. 

Without digging Hegel and his dialectic out from its grave, it is fundamental to get a different perspective on the same argument thus building a rounded opinion and a solid knowledge.

What kind of loyalty programs exist?


Starting from the basics, what kind of loyalty programs exist? 

On that I found a very comprehensive list made by Dr. Sima Ghaleb Magatef Dr. Elham Fakhri Tomalieh in their research “The Impact of Customer Loyalty Programs on Customer Retention”:

  1. Points system, the most common: you buy stuff and you get points that you can redeem for prizes or other benefits.
  2. Tier system, which starts from a base level: you join the program and you get some discounts, but as you start buying more you get higher benefits and discounts. An example is the Booking Loyalty program “Genius” Booking.com | Genius loyalty programme | travel rewards & discounts 
  3. Charge an Upfront Fee for VIP Benefits, think about Amazon Prime, you pay an annual fee and you get access to a “Prime Delivery”
  4. Non-Monetary Programs around Your Customer’s Value, this is definitely particular to explain. Two examples are Ecosia and Forest App

Ecosia is a search engine. They will plant trees around the world when you click on the ads from a search that you made.

Forest app is a productivity app that will plant a tree after you unlock some productivity goals.

  1. Partner with another Company to Provide All-Inclusive Offer, think about the subscription program from telco companies. You pay a monthly fee to get your mobile plan plus the mobile phone. 
  2. Loyalty card program, the classic and evergreen supermarket card. In the UK one of the pioneers of these cards was Tesco with the Tesco Clubcard. On datacamp.com in the podcast section I really enjoyed listening to the story behind it. If you want you can find here Data Science at the BBC | DataCamp. So basically, you get the card, you get access to special offers and discounts, in that way the retailers can better understand consumer choices and build a strategic database. An example of this is described in the 7th chapter of “Power of Habit” by Charles Duhigg, “HOW TARGET KNOWS WHAT YOU WANT BEFORE YOU DO When Companies Predict (and Manipulate) Habits”. In this chapter Duhigg details how Target leverages his customer database to anticipate the products they want based on previous purchases.
  1. Frequent Buyer Program, immagine when you order on ecommerce and they give you free delivery if you reach a specific threshold. Or another example is when you subscribe for a specific product on a monthly basis and then you get a special discount. 
  2. Gift Card or Certificates. In the past they were not so common, but now are everywhere, in particular in the supermarket from the premium one to the discount. They are a good choice when you don’t know what to give to your friend but you  chose in advance the brand or the marketplace. 
  3. Return Policy for Loyal Customers.
  4. Payback money to loyal customers, the American Express model: you can get 1 cent back for every point you earn. So when you redeem 50,000 points you can payback a £500 ticket plane
  5. Discount over time or volume of goods, think about Sticker Mule. It’s a company for printing stickers, t-shirts and other things.

They will give up to 80/90% discount when you reach some orders volumes

  1. Bundle goods, the classic example is the Tesco meal deal: the sum of the individual items is higher compared to the amount you will pay through the Bundle promotion. You choose the bundle offer and you buy the items all together, obviously the individual item costs less than the bundle offer. In that way the retailer can increase the sales transaction value even though they lose some margins. It’s ideal when your strategy is based on volumes.

After this overview of all the kinds of loyalty programmes that exist it is also important to  characterise customers based on their purchase behaviour.

I think the following segmentation and considerations suit better for Point System, Tier System or Loyalty Card Program.

It’s quite hard to see any connection with bundle or All inclusive offers, but maybe I am just not aware of some evidence-based examples.

Grouping customers by their purchase frequency level

We can group customers by their purchase frequency level (light/heavy) and their level of loyalty to a brand (low/high)

Based on these definitions you can understand which customer segments are most and less desirable to join a loyalty program, but also which are the most likely and unlikely to join a loyalty program.

Remember our goal is to grow sales, through the customer base increase and the individual customer purchase frequency increase.

Light and Heavy buyers table

Let’s break down the previous table. 

In the top left quadrant we have the majority of consumers, light buyers that usually also buy other brands

As they are the base of the consumer population loyalty programs will attract some of them, but their purchase frequency will be very low to be qualified for any reward.

Very loyal consumers will join the programme but it will not change their behaviour because they are already loyal. Professor Sharp highlights potential negative effects in this specific situation because it gives away rewards but gains no change in behaviour in return”.

Ideally the most interesting segment to attract for a loyalty program is the “heavy buyers”/ “not very loyal” customers, because they have a high purchase frequency

Based on Sharp thoughts these people are very aware of other competitors’ offers and, also important, rewards can be not so interesting to change their choices and behaviours.

On this last point I am just thinking about how some activities like the rewards from American Express or the Genius Loyalty program from Booking can change consumer behaviour.

Sadly I don’t have any data for that, but as a consumer who uses both I feel very “locked” to these two services and it’s hard for me to use other cards or online travel agencies. 

In the chapter professor Sharp stresses another important aspect, the key driver of loyalty programs is mental and physical availability, more than the appeal of the rewards. 

And this makes a lot of sense for me, if the app of a loyalty program is easy to download, if at the shop they gave me an immediate discount I will quickly join the program. These factors will influence my choice much more than the reward itself. 

So what is the point of a loyalty program? 

Data.

This I have been certain of since the beginning of this post and the author confirms my intuition. 

With loyalty programs you can build a customer database. Obviously, based on what we said previously you have to bear in mind that the customer base is skewed to already loyal heavy buyers. 

Moreover you need specific resources in order to extract value from the data (for example optimising the stocks, improving the ads efficiency based on a better knowledge of the demand).

The end of an incredible journey

With this chapter I am closing this small huge project I started in December 2021 during my free time.

It was an incredible journey and I am really thankful to my manager Lawrence who suggested this reading and to my English teacher who spent hours and hours with me helping to refine my English fluency. 

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