The Problem with Loyalty Programs

Companies measure customer commitment by their transactions. But that often has little to do with how people genuinely feel about the business

From the earliest days of commerce, merchants have rewarded their most loyal customers with perks—from the baker's dozen to S&H Green Stamps. But in the modern era, customer-loyalty programs become an industry all their own.

We owe that to American Airlines (AMR). Kick-started by the 1981 advent of American's AAdvantage program, total U.S. consumer membership in loyalty-marketing programs today is more than 1 billion strong—an average of more than four programs per adult. Nearly 90% of Americans participate in some type of rewards program, and most are enrolled in more than one.

But are loyalty programs really all they're cracked up to be? Sure, they generate incremental transactions, but what happens to loyalty when the loyalty program stops? Do these programs generate true loyalty or just behavior that looks like loyalty?

It's kind of frightening that we can be reduced as consumers to the sum of what's in our wallet. I emptied my own pocket and found that I carry seven cards from companies that track and reward my purchase behavior.

Fuzzy Picture

I feel genuine loyalty to three of those brands. Two others capture many of my transactions not because of any loyalty I feel but simply because of the benefits they give me. And two I use occasionally because I have a lot invested in them—given the way they've treated me over the years, they actually elicit mild contempt from me each time I do. Not exactly what the loyalty program is designed to generate.

And that's my point: If each of these marketers judged my loyalty strictly by my behavior, they're going to the wrong idea about why I'm loyal. That's the problem with loyalty programs.

Fred Reichheld is an expert on loyalty marketing and the author of The Ultimate Question (Harvard Business School Press, 2006). He cites the example of a grocery store that mistakenly thinks its regular customers are loyal, when in fact they hate the store and shop there only because it's convenient (see, 1/30/06, "Would You Recommend Us?"). Using data alone, he says, "It's hard to tell a good transactional customer from somebody who's a true promoter." He's right.

Matters of the Heart

"Loyalty," as it's defined in practice by loyalty marketing programs, is primarily a measure of behavior—share of wallet, if you will. But making decisions by share of wallet alone is a dangerous game.

Think about a company's most active loyalty marketing program members. It's possible that many of them are the least genuinely "loyal" customers the company has. As the data flows in and the company increasingly tailors the program toward those whose behavior can be bought, it may be neglecting truly loyal customers who don't need to be bribed.

I would like to suggest that at least as important as share of wallet is share of heart, or what might be termed "equity." If loyalty measures behavior, equity measures attitudes. Properly balanced, loyalty should increase equity and equity should drive loyalty. But they're not the same thing.

Loyalty is how I relate to American Airlines and Hilton (HLN). I use both companies frequently, for reasons of calculated benefit more than any long-term affection. In contrast, equity is how I relate to Southwest Airlines (LUV) and Hertz (HTZ)—I would do business with them whether or not they gave me any points or miles. Which two companies are better off with respect to my long-term profitability?

Equity Leaders

Reichheld says there are four basic behaviors of loyal customers: They come back for more, they increase their purchases, they bring their friends, and they invest their precious time for free (see, 8/1/06, "What Not to Do with Net Promoter"). Most loyalty program managers no doubt think their programs pass these four measures. But in my mind, it's those last two words that make all the difference: for free.

Think about your favorite sports team. Fans are immensely loyal to sports teams. I even heard of people in Philadelphia who took out second mortgages just to follow the Eagles to the Super Bowl a couple of years ago. Sports teams have equity.

Or consider your political party. If you're like most people, you've been a member of the same political party for years. You almost always vote for its candidates, you have probably donated money to it, and you may have even volunteered your precious time—yes, for free. Political parties have equity.

Now make a list of your favorite brands. You pay more for them, go out of your way to acquire them, and recommend them to your friends—all for free. Every brand has some level of equity, but some have more than others. And the key to boosting equity is to increase affection—the feeling that drives behavior rather than just the behavior itself.

The Wrong Road

Doug Briggs, former president and CEO of QVC, had the right idea: "We don't bombard customers with special offers or coupons to build loyalty, because it's easy for them to switch to the other guy's coupon. We focus on customer communication and satisfaction. For us, it's about building trust and developing long-term relationships. If QVC has earned a customer's trust, we believe they will buy—over and over again."

I think many companies have gone too far down the road of focusing on loyalty at the expense of equity. Loyalty is admirable, but it can also be a burden. I'm so afraid of forgetting about or losing the rewards I've "earned" that it's just one more burden I have to deal with. But affection is always positive.

If you focus on share of heart, you will get share of wallet. The reverse may not always be true.

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