by Lionesses of Africa Operations Department
Loyalty programs are all about one thing - keeping and increasing your top value customer base whilst avoiding the race to the bottom through cheaper pricing (which as we know, has no winners, although Walmart would probably beg to differ). If through skillful marketing you are also able to persuade customers that they are ‘saving up’ for the free cup of coffee or flight or… in the age of inflation and high interest rates, then that’s a serious home run!
Everyone seems to be doing it, so it must be easy - right? Indeed, anyone can launch a Loyalty Program (‘LP’), but that’s not the point. The difficult part is making it work for you, which means it must work for your customers and that involves creating loyalty that works both ways. That is the difficult part.
In those industries with large competition, similar products/offerings and freedom of movement, such as the airline industry or cell phones, or indeed, coffee, they must all look at banks with huge envy. We simply do not change our banks at the same rate as many other ‘service’ providers. This was one of the reasons that the mobile phone industry moved into mobile money - how could they make their customers more ‘sticky’ as in the banking industry? Moving in on the low hanging fruit of the banks that had in many cases, taken their customers for granted, seemed obvious.
The banking industry hit back by demanding more regulation on these pesky newbies and although that is a discussion for another day, it showed just how spooked the industry was. Although it not surprising that the banks went down that route, very few other industries have such a hot line to Government, so there had to be other ways available, not only to fight off newbies, but also to differentiate their offering, and LPs are one such route.
LPs have been in the news this year as Starbucks celebrated the return of inflation by increasing the number of cups that had to be drunk to earn a free hot cup of milk (sorry) coffee. Starbucks was one of the pioneers of LPs way back in 2008, and one of the world’s most successful, (here). By the end of 2022 it had 27.4 mil active loyalty members just in the States, and that’s not all - for all of you struggling with Cash Flow, these loyal members loaded their Starbucks cards upfront with a massive US$2.5 billion (yes billion with a ‘B' and in advance too!). A licence to print money.
So why play with this? Why endanger this cash-cow by changing anything. Just wrap it in cotton wool and leave it well alone.
Starbucks realised that thanks to new Gen-Z tastes, over 60% of their sales were in cold drinks such as iced teas and cold coffees, not hot drinks. So they reduced the cost of those from 150 reward stars to 100, whilst increasing the cost of a ‘free’ cup of plain hot coffee or tea from 50 stars to 100 (here). Sounds sensible - but what the management had forgotten to check was their book on Behavioural Economics. Within this is the term ‘Loss Aversion’.
Loss aversion simply put, is that the pain of losing is psychologically almost twice as strong as the pleasure of gaining. So everyone focussed on what they were losing, in spite of the fact that 60% of sales proved they as a whole would be better off!
Does your LP offer free shipping as Amazon’s does? That is a cost that has to be priced in, not least because customers joining your LP might have previously lumped or added to their purchases to just squeeze into the free shipping bracket. As Amazon found to their cost following the change, even a $0.50 toy for their child had free shipping. Their data quickly showed the change. The values of individual orders fell, but the frequency increased. They had moved their high value customers - the ones who would buy more just to squeeze into the free shipping bracket, into low value ones. DOH!
This means that one has to move away from asking how do we make our customers more loyal, but instead ask as the Harvard Business Review (‘HBR’) say here: “What kind of loyalty do we want our customers to have, and do we want to have for our customers?” Creating a two way flow of loyalty - and this is central to any successful program.
Airlines have been moving away from ‘miles’ earning miles, to ‘cash spent’ earning miles. How does this make a difference? Those who travel long distances, pay more and generate more profit for the airline and so are rewarded over those who fly short distances on routes that are highly competitive. They are slowly moving their loyalty to those long distance golden customers - this is why the short haul airlines hardly have a loyalty card, and if they do it’s for a dusty sandwich with sell by date 1904 (Melanie only allows us to fly Ryanair - can you tell?), it just does not make sense where the first thought of 98% of travellers on those routes is ‘how cheap?’, followed by (obviously) ‘can I squeeze my huge bag into the overhead….’, - or does it?
Ryanair’s LP team looked at what their customers wanted.
Get on the plane first so that our oversized overhead bag can be squeezed in (without the air stewardess noticing).
Free seats.
And what did Ryanair need?
A low cost access to interest-free, upfront money (who doesn’t?!).
Their LP? “For a €199 annual membership fee Ryanair Choice offers members free seats, fast-track and priority boarding for frequent fliers.” - see, so simple and not a sandwich in sight! Ticks all the boxes and ties in their real value customers, the frequent flyers that all low cost airlines need to consistently fill their planes to allow them to survive.
As the Harvard Business Review state: “Organizations need to identify the loyal behaviors that most deserve explicit recognition, reward, and investment. How should loyalty from the best and/or most valuable customers be recognized and rewarded differently from that of typical or average customers?” (here). If you do that, you will move yourself closer to your most valuable customers, increase their spend and create an almost unbeatable wall to any upstarts or newbies wanting to muscle and disrupt your business.
Ryanair’s most valuable customers have paid a ‘membership’ fee - why would they ever fly with another low cost airline if they can fly with Ryanair and move closer to their ‘free’ seat. We don’t have the numbers that joined, but for us, this is exactly what an LP should be. Loyalty gained on both sides.
If it works, it works very well as HBR found (here): “On average, we found that customers spent more than twice as much per month after subscribing to the retailer’s loyalty program.”
This is also why crowdfunding programs can be incredibly successful. Launching a new product, need new customers and cash upfront to develop and bring to the wider market? Crowdfund. You get cash upfront and customers who as new shareholders are seriously willing you to succeed, plus they also get future discounts on products they want. As an extra bonus, you also get a wide diversified shareholder base, not one very strong, occasionally grumpy investor sitting on your board…
Talk about locking in loyal customers and creating wins for yourself!
Study the market, know your customers, investigate their buying habits, put yourself in their position - get your hands dirty and join the queue, and never ever assume. Although it seems everyone is doing it, this does not mean creating a successful LP is easy. One of the few times when the saying: “If it was easy, everyone would be doing it” is not as clear as it seems.
Stay safe.