Key takeaways

  • Customer loyalty and loyalty programs are different and misunderstood concepts, with the ‘loyalty effect’ of these schemes highly variable.
  • New technologies are enabling any organisation to drive insights from customer and third party data, reducing the need for data sourced from large-scale loyalty programs.
  • Offering better experiences and ongoing engagement may stand a better chance of inspiring true customer engagement and advocacy.

I’m continually gobsmacked to hear that customer loyalty and loyalty schemes are often seen as one and the same. Look up the Cambridge English Dictionary entry for customer loyalty, for instance, and the second listed example is a ‘program offering rewards and incentives to regular customers’¹.

In reality, this relationship is much more complicated. Loyalty programs don’t necessarily foster customer loyalty, if they ever did to begin with. What’s more, customer loyalty itself – described as the purchasing of products or services from the same company for an extended period of time – has likely rarely existed as it’s been defined, either.

Customer loyalty and loyalty programs have been fundamentally misunderstood. Combined with changing consumer attitudes, shifting market forces and improving digital technology, the concept is well and truly at a crossroads.

After decades of plastic wallet-filling membership cards, points, savings and incentives, we must now ask: what does a loyalty program of the future look like? Should existing loyalty programs continue in their current form or be discontinued – and should new market entrants seek to introduce one at all?

The loyalty

Academic research has shown customer loyalty to be largely illusory, tied to other forces such as market penetration and sales volume². It’s known as the ‘double jeopardy’ effect: the larger volume a brand has in the market, the more frequently the brand is likely to be purchased by a single customer.

This runs counter to the traditional idea that brands of any size can cultivate devoted fan bases through clever marketing or branding, sustaining customer purchasing of that product over the long term.

The double jeopardy effect extends to loyalty schemes. Rather than help grow unwavering brand loyalty, as the name implies, these programs instead leverage incentives to foster transactional preference, while serving other useful purposes such as collecting customer purchasing data.

The business
of loyalty

Until recently, the large market share and mature data collection capabilities of these loyalty schemes has ensured their success. As my colleague Richard Blundell wrote earlier this year, some schemes have grown into formidable businesses in their own right, spanning multiple retailers and channels, and issuing points as a form of currency. Examples include Coles Group’s Flybuys , Woolworths’ Everyday Rewards, or any of the aviation industry’s air miles programs.

At some point along this growth trajectory, however, the tail begins to wag the dog. The more emotionally engaging offerings, such as free travel, become fewer and further between, giving way to rational dollar-based savings and discounts that dilute the emotional attraction of the scheme in the eyes of many consumers.

Meanwhile, behind the scenes, these discounts become expensive to maintain, while partnering retailers or brands grow wary of the perks of the loyalty program being associated mostly with the scheme itself.

To top it off, the full suite of consumer purchasing data remains the property of the loyalty program, turning it into a potentially expensive insights intermediary between organisations and their customers.

The data analytics

Disrupting this status quo is digital technology, which has sent the unit costs of customer data collection and analysis through the floor.

Advancements in analytics and cloud infrastructure can empower brands and retailers to collect and analyse their own point-of-sale data, augmenting it with the offerings from third-party consumer intelligence providers such as Data Republic, Quantium, Nielsen or many others.

Pairing these services with a technology stack such as those from Microsoft, Oracle, Salesforce or Adobe, a retailer or brand can build its own in-house analytics team, synthesising its sales data against industry benchmarks in real-time and displacing the long-held market advantage of large loyalty schemes.

The retailers’

If a retailer or brand no longer needs a loyalty program to capture and analyse customer data, and the actual loyalty effect is illusory, should they keep paying for their existing loyalty program? Thanks to game theory, the answer, generally, is yes.

In the aviation industry, where virtually every ‘traditional’ airline has a frequent flyer program, removing a loyalty scheme would not be a wise point of differentiation in the short term (especially given the emotional resonance of free air travel). In the grocery sector, meanwhile, shelving a loyalty program would give a strategic advantage to competitors retaining their own loyalty scheme.

Thus for organisations already supporting loyalty programs, careful cost-benefit analyses and thorough game theory-informed research should be prerequisites for deciding whether to retain scheme membership. On the other side of the equation, loyalty program owners can continue to augment their scheme’s brand value by having other companies join the program.

But for those that don’t yet have a loyalty scheme, or they have one and it’s not their own, it may be time to consider other options.

The future
loyalty experience

When conceiving future loyalty experiences, there is considerable opportunity to use ‘test and learn’ methodologies, where different actions are tested in a disciplined manner, audience impacts are measured, and the results are used to refine these actions over time.

These methodologies can be combined with a customer-centred design ethos placing brands in customers’ shoes, helping to understand what’s really important and to drive consumer behaviour that aids both brands and customers alike.

The result could be a next-generation customer ‘rewards program’ that does away with the cards and points, fostering in its place emotional value, engagement and organic referrals, all without the ongoing cost of regular discounts.

What could this look like? Consider a fashion store. Rather than offer air miles or points accruing to a discount, the retailer’s engagement program could unlock privileged access to the next season’s collections – accessible both in-store and digitally. Further, with the aid of social media monitoring and other digital listening tools, the brand could identify its most vocal advocates online and ‘recruit’ them as ambassadors of this new engagement scheme.

of difference

Given the widespread use of loyalty programs across different industries, there won’t be a one-size-fits-all approach to improving engagement. A fashion retailer’s reinvented loyalty program will differ from a provider in the financial services, which in turn will differ from grocery chains, or airlines.

Nevertheless, organisations should reexamine how their loyalty schemes create engagement, and how new technology offerings can improve these engagements in the future. With the aid of newly available data and analytics capabilities, organisations should research and isolate what disproportionately drives the purchasing of their products and services, then dial up on them.



Philip Otley

Philip Otley is a former partner in PwC Australia’s Experience Centre.

More About Philip Otley