What Price Loyalty?

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Between the explosion of miles-based programs and the expensive telecommunications customer-acquisition wars of the 1990s, loyalty programs providing incentives in exchange for business have been under the microscope for at least a decade. With corporate revenues beginning to rise and the pressure to grow quickly returning, tread carefully before investing in customer compensation plans that do nothing but hand back revenues. "If you look at loyalty as a program you'll get bid down, always looking at how you can sweeten the pie," says Don White, executive vice president of marketing services firm Quaero. I think many companies are beginning to recognize this and understand that the investment they have to make is not just in rewards programs, but in creating a better customer experience." Loyalty programs have been seen as an attractive alternative, or perhaps simply a necessary evil, during a time when perceived product superiority is difficult to achieve and maintain. "In the past companies used to compete and differentiate themselves on their products, and the product expertise is what [elevated] a firm like IBM," says Harvey Thompson, author of Who Stole My Customer? "But customer defection has become easier, and customer attrition has become the number one issue in the minds of CEOs. "Frequent flyer miles or points are easy to copy and isn't true loyalty, but just another form of price-based competition, and [customers] will leave as soon as they find another card with more points or an easier way to get those airplane tickets," Thompson says. Mainstream rewards programs already show signs of being competitively pressured into a steady state where companies are giving away very similar benefits, unable to pull back because of the threat of lost business and unable to give more because of high costs. "Most credit card issuers have figured out they can afford one percent...it's a step function. Loyalty programs get to a certain stage [after] there are some innovations, but everybody catches up to an equilibrium," White says. Thompson says that the key to effectively competing for loyalty is ensuring the quality of the customer experience, not the quantity of customer rewards. "In the last five years there has been a surge of emphasis on service...in every customer touch point, trying to provide value to customers that differentiates." It is "extraordinary service" experiences that capture and hold customer attention and loyalty, and raise the bar for competitors. White concurs. "You can't make customers more loyal by giving them more points or rewards to do business if the other parts of the interaction are broken," he says. "I think more companies are realizing now [that they need to] use technology to improve the customer experience and add value beyond bribing customers to continue to do business." Those companies that have chosen to compete on minimal service and either low prices, high product availability, or both (such as retail discounters), are forced to make up for service gaps by becoming multichannel masters--and notably tend not to run conventional loyalty programs. "What's happened is that customers really value having options, and for different needs and wants the same customer sometimes wants to go into the store, sometimes wants to use the phone or Internet, and sometimes is only after the lowest cost. And to be successful a company has to offer all those alternatives," Thompson says. Although he sees some value in limited applications of loyalty programs, such as the emerging "coalition" loyalty networks established by large airline carriers or a league of small-town shops, Thompson suggests steering clear of the quick-fix appeal of rewards and looking to improve service. "It's about getting away from transactions and creating a long-running relationship."
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