Rewards are easy to promise but hard to deliver because of the emotional resonance of wanting to feel rewarded. While retailers see it as a discount, from a consumer perspective, whatever you got isn’t really enough. Loyalty is even more emotionally complicated. In a recent US survey, 73% of consumers thought that loyalty programs meant that the brand is loyal to them, while 66% of brands thought it meant the customer was loyal to them.
Digital transformation hasn’t changed most loyalty programs much. New behavioral metrics from IoT and increased digitization have been used to apply the same logic but in a more complicated way because it is easier to collect and manage. i.e. more points, more levels, and more frustration.
“You cant get there from here” – Saying from Maine, USA
The shining light in rethinking loyalty is Amazon prime which has chosen simplification over gamification to deliver over 100 million subscribers paying $99 each per year. Prime members spend close to 3 times what non-prime members do and are growing at a rate between 35% to 40% per annum as estimated by Citi. Prime users do not experience emotional satisfaction.
The Amazon insight:- Shipping costs frustrate customers and reduce transactions. If customers pre-pay for a shipping service, their loss aversion to losing the value of their investment will reduce their interest in shopping around and increase their overall spend.
The ease of execution and ability of customers to join makes complex points and levels look like a 1990s solution to a 2020 problem. The program is inherently egalitarian i.e. to be a prime member you just have to pay.
“what i love about coca-cola is that even the president cannot buy a better coke than” – Andy Warhol
Gamification of loyalty programs through points and levels is rapidly losing its allure. This doesn’t mean that customers are any less loyal or more prone to shopping around but rather that the idea of being awarded points for being a “good” customer is getting harder to justify. Loyalty programs have changing rules, cut off times, points expire etc etc etc. They are expensive to maintain needing not only to manage a mountain of potential liability sitting on balance sheets but also a lot of administration to maintain accurate balances, partnership, provide client care and of course, handle complaints.
If airlines adopted Amazon’s model — they would arguably improve their margins and the effectiveness of their programs. Frequent travelers would pay a cash amount in advance for a year’s worth of benefits, discounts, lounge access etc. Even regular business travelers, who current schemes are targeted at, or companies would purchase perks for in return for lower cost flights or just to look after key executives.
Irregular travelers, who are not budget constrained, would continue to buy business class seats which come bundled with all the perks or add on their preferred perks to their low-cost flight (e.g. choosing seats at a premium, business lounge access, arrivals lounge access etc). While most people claim that “free flights” are the reason they want airmiles — very few who have tried to claim their miles have actually had an experience that grows their loyalty versus disappointed them. Rewards are easy to promise but hard to deliver because of the emotional expectation that comes with wanting to feel rewarded.
The lessons from Amazon are:
- Changing our perspective by providing preferential experiences at a price versus as an earned status.
- Not seeing digital channels as a way to streamline historic complexity (i.e. make collecting points and managing loyalty systems easier) but rather as a way of democratizing valuable experiences and creating new value points
- Understanding the low points or friction within your process and turning that into a new product opportunity
By Nevo Hadas – Nevo is the Founding Partner of &Innovation, now DYDX
