Customer Loyalty & Loyalty Programs
Who says there’s no loyalty anymore? Much has been written over the years about how customer loyalty is dead. It’s not dead, it’s just more complicated.
Consumers have more choices than ever. Companies and marketers can speak to customers and potential customers directly. Customers do research before they buy. Much has changed. But not everything.
How customers make decisions hasn’t changed.
You’re Selling to People
Loyalty programs do two important things. First, they keep customers buying from you. Second, they track purchases and identify high-value customers.
Revolution of Loyalty Programs
The challenge of customer loyalty, or customer retention, is not new even though it’s often written about as though it’s a new phenomenon. Loyalty programs have been around for over 200 years.
In the late 18th century, American merchants began handing out copper tokens when customers purchased merchandise, which could later be used for discounts on their next purchase. It was a basic concept to incentivize people to buy from a particular merchant. Today, we recognize it’s less expensive to retain a customer than it is to attract a new one. This token system was an effective method to retain customers and move product.
In 1891 Milwaukee based retailer Ed Schewster & Co improved on the idea by creating stamps, much like postage stamps, which could be exchanged for merchandise from their stores.
Thomas Sparey, a silverware salesman, saw the success of Schewster & Co and innovated the idea. It was the first major innovation for loyalty programs and set the stage for modern programs. Instead of the stamps being tied to just one store, he set out to start a program where customers could collect stamps from multiple stores. He contacted an acquaintance, Shelly Hudchenson, and started Sparey & Hudchenson Co in Jackson, MI.
They approached multiple retailers to issue green S&H stamps to their customers. Customers would get 1 stamp per 10 cents spent then paste the stamps into booklets – 50 per page, 1200 stamps per book. Customers then redeemed those books for merchandise from a catalog.
The S&H business model was simple – they would sell reels of stamps to merchants. S&H would use that revenue to purchase household merchandise at wholesale prices then sell those items in exchange for the stamps at retail prices. The difference was their profit. Here’s a nifty thing – 30% of stamps would go unredeemed.
The popularity of Green Stamps sored in the 1950’s. They went from $30M to over $190M in 1955. S&H was printing 3 times more stamps than the post office and redeeming 1 billion per week. That success spurred other loyalty programs including Canadian Tire Money in 1958. S&H had revolutionized customer loyalty and created an industry.
NOTHING LASTS FOREVER
The 1970’s brought hard economic times. Loyalty programs decline substantially because of the recession and the emergence of large discount retailer chains.
The retail industry wasn’t the only one facing hard times. The airline industry was being turned on its head.
Airlines were deregulated and had to actually compete against each other. New airline companies were popping up and American Airlines was in trouble. They necessitated the loyalty program in 1981 with the Frequent Flyer program. An old idea reinvented and made new again.
American Airlines offered frequent flyers “Loyalty Fares”. They then expanded the idea so customers would collect points that could be used to for upgrades to first-class and discounts on economy routes. People loved collecting the points. We all know a person who loves collecting points. It was so successful that all other airlines rushed to make their own.
The success was in part because people were familiar with getting future discounts from their purchases. The difference between Frequent Flyer miles and Green Stamps is that the airlines could track their customers spending. Customers would, and still do, give up valuable information to get a deal. That’s valuable data and it changed everything!
They changed a simple incentive program into a system to collecting purchase data that is used to get to know their customers individually and tailor special offers. That’s huge!
They weren’t done yet. In 1987 American Airlines approached American Express to create a co-branded credit card that would allow consumers to earn reward miles from their purchases. AmEx said no. OUCH! American Airlines then teamed up with CitiBank and created one of the most profitable relationships ever. People could earn Miles from everyday purchases. People were already addicted to collecting Frequent Flyer Miles, now Citi and American just made it easier to collect more. Feed the beast!
The Citi and American success inspired other programs like this. In England, Kieth Mills launched Air Miles in 1988 – you might have heard of it. Like a good historian, his innovation was from back in time. Air Miles wasn’t tied to just one company, such as a single airline and single credit card. Instead, it was many retail companies in a marketing pool. Air Miles collectors do divert much of their spending to retailers offering the Miles. Most importantly, the retailers get important data from their customers.
In 1991 Air Miles came to Canada and within 6 months gained over 2 million members. Air Miles has grown from there to over 11 million today.
Loyalty companies sell points to retailers, then airlines will sell inventory (seats) to those loyalty companies, and the loyalty companies keep the difference as their profit.
An interesting aspect is that airlines and hotels will sell seats and rooms to loyalty companies which are largely considered distressed inventory. Meaning, seats or rooms they wouldn’t have sold at full rate anyway. This is a multi-billion dollar source of revenue for many large companies.
Revolution and Innovation
Retailers started loyalty programs to incentivize customers to come back to them in the future. Today, retailers will offer in-house loyalty points and discounts – or offer points from a loyalty company – to incentivize customers to start shopping with them over competitors and to get useful data from customers.
Offering rewards, or making customers part of an exclusive club, is powerful. Giving a discount or special offer that others do not is a unique way to use scarcity. Customer purchasing can be tracked and special personalized offers can be made to individual customers. That data can also be used to motivate customers to keep them coming back or try higher margin products. Loyalty pays.