The Evolution of Loyalty Programs
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A presentation I made to ANA Conference in August 2017 that discusses the evolution of loyalty programs. Discusses emergence of technology to solve basic issues and the need for coalition programs to evolve since many stand alone programs can not survive. At the end, I make a prediction about American Express' Plenti program that proved accurate.
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The Evolution of Loyalty Programs
- 1. The Evolution of Loyalty Programs EdVittoria August 10, 2017 ANA Conference, Minneapolis, MN
- 2. Loyalty Program Rationale • Basic Marketing 101 - concentrate on your best customers and have them become your advocates • A transparent, discounting program to motivate increased sales and repeat visits
- 3. It Must Be Easy To Sign Up To Self-Identify as a Member To Earn and Use a Reward
- 8. Multi – Entity Earn Single- Entity Burn In 1987 Dining Hotel & Car Banks Shops
- 9. Up to 2/3 of all miles earned are not from flyingAA Source:AmericanAirlines 10-K
- 18. 3 Program Structures Single-Entity Earn and Burn Multi-Entity Earn / Single Entity Burn Multi-Entity Earn and Burn
- 20. Buy Earn Repeat
- 21. Boring….
- 23. Status vs. Rewards Fly 25,000 miles Free ticket Silver Status • Upgrades • Mileage Bonus • Waived Baggage Fee • Priority Lines *estimate from The PointsGuy, 2017 $300 $815*
- 28. Why didn’t DigitalWallets Meet Expectations? • Mobile Payments prioritized • Loyalty program pushback • Emergence of 2 simpler form factors
- 29. Back to Basics • No more keychains loaded with cards • Digital wallets not catching on • How can members easily self-identify and earn rewards? Hint: Radio Shack was on to something
- 30. TwoSimpler WaysTo Self-Identify and Earn Rewards A phone number will do just fine to self-identify for earning Most grocery programs SMB programs Staples, CVS Linking your existing credit cards even simpler
- 31. Card Linking Turned Meals Into Miles 94,000 Restaurants
- 34. Spring’s Shopping Mall Strategy Mall ABC Mall JKL Mall PQR Mall XYZ 50-60 malls live today with deals for up to 400
- 35. Mall Loyalty withSpring Mall program tracks members’ card spending across mall automatically Shopper earns $10 reward for every $250 spent without self-identification at every store, and rewards sent as credits back to card Malls gain new insights into actual shopping behavior
- 36. Recognition for Mall Shoppers Some malls offer reserved parking spaces near the primary entrances for top spenders
- 37. Using Malls to get to Retailers Mall ABC Mall JKL Mall PQR Mall XYZ
- 38. Card-Linked Networks Single infrastructure for Multiple Currencies Coalition Program Single Account Single Currency For ALL Partners Card-Linked Network Single Account Individual Currency For EACH Partner
- 39. Ed’s Hopes and Predictions Airlines Hopes: Rolling year qualification periods Easier status qualification in non-hub cities Multi-ticket itinerary redemption bonus Predictions Better mileage redemption valuations on more profitable routes Higher % of fares won’t earn miles Fewer sold miles
- 40. Ed’s Hopes and Predictions Small Business Programs Hopes: Vendor survival (investor patience) Integration in coalitions for exposure Acquisitions by Google/Apple/PayPal and not traditional financials/payments players Predictions Acquisitions by traditional players
- 41. Ed’s Hopes and Predictions Plenti Hopes: Add a card-linked solution for easier earning and more partners, especially local SMBs 2-3 more grocery chains, Uber/Lyft? QSR: Dunkin, Subway, Pizza Hut Improved app: location based live redemption Predictions If no significant partner expansion in next 6 months, AmEx will shut it down by end of ‘18
- 42. InSummary Loyalty program structures must prioritize ease of use and value Recognition is more critical than just rewards Technology can solve problems but may not be “better enough” Key to Loyalty Success: Ongoing evolution
- 43. Questions?
Editor's Notes
- It’s great to be here with all of you today. Thank you for having me. I’d like to build upon many of today’s speaker’s comments about loyalty, as I have worked in and around loyalty programs over the past 20+ years Many of you here are active and passive members of numerous loyalty programs, probably 30 or more, and you likely have a clear opinion of which programs you find more relevant than others and why My goal here today is to shed a little light on the evolution of loyalty programs and take a look at how new technology and platforms are changing the landscape
- A loyalty program, when done right, is just basic marketing 101. Concentrate your marketing expense on your best customers and have them become your advocates. Give those customers a transparent, discounting program to motivate increased sales and repeat visits. The transparency is important because it provides the consumer with a clear understanding of what they can earn and what they need to do to earn it
- And when you build your program, It Must Be Easy. And no, I’m not necessarily saying it will be easy on the program manager. It has to be easy for the member in 3 key areas: It has to be easy to sign up. To self-identify as a member so that your actions or purchases are captured To earn and use a reward - think about using airline your airline miles for a free flight So let’s start with the basics
- The old punch card - I’d like to say this is a relic of the past, but small businesses everywhere still rely on them Why? – because they still somewhat work for a segment of shoppers who were already likely going to shop 5 times who now have a little incentive to reach that magical 10th, free cup. If you can remember to carry and present the card on every visit, it’s relatively easy for the member and store But what happens after the member gets to the 10th cup? The store owner is ambivalent – they don’t like giving anything away for free, but given their margin on the 9 qualifying cups of coffee, the cost of this free cup is irrelevant. But now what – will that customer start a new card and get nothing back over the next 9 purchases?
- More importantly, does the store owner even know who the customer is? It’s hard to build customer loyalty when you don’t even know their name.
- This is a basic example of a Single-Entity Earn and Burn program The single entity, Coffee Hut, offers the customer an incentive for additional purchases, and when the customer reaches the milestone, they receive a reward from that entity There are 2 primary downsides to this model First, only a small sub segment of customers will ever earn a reward, likely less than 10% And second, they’re only appealing to their sphere of existing customers, or the yellow circle
- So let’s think a little bigger about another Single Entity Earn and Burn program, or at least it was one when it launched in 1981, the American Airlines AAdvantage program Even though it was miles-based, it still followed a typical 10th one free model, meaning that many customers would never earn that reward if earning miles could only come from flying So as the consumer demand for airline miles became so great, others wanted to use them as rewards too
- This drove the launch of the Multi-Entity Earn Single Entity Burn model Other related companies like hotels and car rentals rewarded their customers’ purchases with airline miles And over time completely unrelated companies like credit card issuers and shops starting doing the same
- In fact, as much as 2/3 of all AAdvantage miles awarded each year are not from flying American This “side business” proved to be many airlines’ primary profit generator for years But it came at cost as true frequent fliers were not feeling the love – but we’ll touch more on that in a few minutes Let’s first discuss what this did for loyalty programs in general
- If you’re one of those green circles, you’re starting to feel like there’s a bit of an imbalance, those arrows are only going one way. You’re rewarding your customers with another brand’s currency, and your competitors may be doing the same This was especially true for the larger partners like hotels, car rentals, and credit card issuers So, most of them launched their own point currencies, the more popular of which were soon being sold to other 3rd parties
- And soon, we were bombarded with multiple point and mile currencies
- And then it was like that old commercial, “they told two friends and they told two friends and they told two friends”
- This was further exacerbated by the emergence of loyalty management companies convincing every consumer facing company that they needed a loyalty program Now, that’s not a terrible idea. As I said at the beginning, a good loyalty program is basic marketing 101 for stores and services. But what was the impact on consumers joining so many programs?
- With thousands of programs launching, a significant overlap of customers occurs and 2 key issues emerge: First, the novelty declines causing member acquisition to become more difficult, and as a result, more expensive
- And second, just having a program is no longer the differentiator. Your customer may also be your competitor’s customer. Does anyone actually “own” a customer?
- This drove the market to a third model, one where multiple partners benefit from both the earning and burning of the point currency This Coalition model also addresses some of the problems I mentioned Easy, one-time sign up for multiple retailers New member acquisition costs decline as partners benefit from shared exposure to each others’ customers More reward novelty – redeem points at any partner, any time
- Plenti is a coalition program launched in 2015 by American Express, separate from their card business XX All the brands you see here offer their customers the opportunity to earn or burn Plenti points for their purchases. Point earning varies by brand XX But 1,000 points = $10 to be redeemed at any of them. This is the ExxonMobil App allowing you to redeem points at the pump.
- OK, so we’ve covered the three structures: Single Entity Earn and Burn, Entity Earn with Single Entity Burn, and Multi-Entity Earn and Burn Now, let’s build upon this
- As we discussed, there is a limited effectiveness to the stand-alone punch card,
- Loyalty programs that only reward their members on the Buy X, Earn Y, and repeat model will only reach perhaps 30% of their potential There’s too much work for most members and for too little benefit More importantly, it just makes your program
- The tangible reward, whether it’s a free cup of coffee or a free airline ticket, has become the entry stakes of successful loyalty programs.
- Your best customers want more than rewards. They want to be recognized. Recognition… has become the differentiator of successful programs
- I’m going to assume that most of you are active flyers and likely Silver, Gold, Platinum, etc So which do you value more? The hard currency of earning miles for a free flight or reaching the next status level? Well, the estimated value of silver status is almost 3x the value of a free ticket This is also why, with some limited exceptions, airlines only sell standard miles and not the elite qualifying miles
- And this holds true with other leading loyalty programs in retail, such as Sephora, Neiman Marcus and others The recognition or “experience” value can outweigh the tangible rewards Ok, so we’ve seen programs evolve to understand the importance of recognition in addition to their currency rewards Now lets look at how technology has evolved loyalty
- Because frankly… things were getting ridiculous. Do you know someone with one of these?
- Surprisingly, early attempts to digitize the punchcard and the overloaded keychain of membership cards were not as popular as expected – as a marketer, this is a great lesson in the dangers of assuming consumer adoption Yes, the digital versions of the punchcard and card wallet provided some organizational advantages to the user and better data collection options for the loyalty program provider, but the fact was that it was still not “better enough” for the majority of users And, the push to drive users to digital actually alienated some consumers who just weren’t ready
- Don’t worry, Apple’s on the case! Apple launched Passbook in 2012 and later re-branded it Apple Wallet But with a few exceptions, notably Starbucks and the travel programs, the adoption of digital wallets to store and maintain your loyalty cards was far slower than expected One reason is digital clutter. I’m still trying to understand why boarding passes and other event tiles I add to Apple Wallet don’t automatically delete after the event? And it’s a three click process to delete each one? This just shifted the clutter and the nuisance from the keychain to the phone. But there are a few other reasons for why digital wallets didn’t meet expectations
- Apple and Samsung have been more focused on promoting payment capability This is a real miss as giving consumers the ability to automatically link a loyalty card to the payment process is advantageous to both consumers and the store, and a competitive advantage vs using plastic Given the slower than expected consumer adoption of Apple Pay and Samsung Pay, both players should do more to encourage loyalty card integration and usage There’s also some pushback from the programs who fear losing their customers interaction within their own apps But I think the main reason digital wallets have not improved on the physical card is the emergence of 2 simpler form factors
- So, consumers don’t want heavy keychains And not enough were finding value in digital wallets So what did so many loyalty programs start offering their members? Do you remember back in the day when Radio Shack would ask for your phone number every time you made a purchase? It drove us nuts back then, but now that consumers are getting something in return, they’ve become much more willing to say or punch in their phone number before a purchase
- It’s become fairly standard at many supermarkets, and many of your local small business programs are doing it too. Even some of the larger programs, from Staples to CVS, will happily take your phone number instead of requiring you to present a card So, reciting a phone number works just fine for linking a purchase to your loyalty program account. Of course, redemption of rewards usually requires an extra step to minimize fraud. But the method I believe is the absolute easiest to both earn and burn rewards is through the linking of your credit and debit cards. This one-time registration will ensure that every qualifying purchase you make is tracked automatically without the burden of self-identifying, and your rewards can be received as credits right back to your account
- Card linked programs are not new. Rewards Network launched over 30 years ago and continues to power all of the major airlines’ dining rewards programs You register your cards once, choose the program in which you want to earn more miles and pay your bill at any of their over 90,000 participating restaurants. Easy bonus miles. It’s so easy for the consumer, that some restaurants get frustrated when they’re paying for miles the consumer doesn’t even realize their getting But this brings us back to our Multi Entity Earn Single Entity Burn issue. Some of these restaurants, especially in markets dominated by local repeat business and not much tourism, started to wonder how rewarding airline miles or hotel points was increasing their own brand loyalty
- And so, over the past few years, we’ve seen a surge in card-linked restaurant loyalty programs where the rewards offered tie back to the restaurant Empyr is powering several programs including Yelp’s and Living Social’s among other, with each focusing on specific markets. Here’s an example of Spring’s site for Chicago restaurants with different offer options: Could be standard $5 back when you spend $25+ Or even a reverse Groupon-type offer where you can buy $20 of food for $10 in advance But most of these restaurants are also running ongoing offers/benefits by tracking your repeat purchases automatically from your linked cards without having to retain the card numbers themselves
- The more recent and interesting development has been the expansion of card linked programs into retail, but not necessarily from the retailers themselves Card linked platforms have emerged as the easiest way to track individuals spending across groups of retailers or even all retailers. It has allowed Ebates to expand from an online shopping portal to now also awarding cashback for in-store purchases Thanks Again is an airport based program allowing you earn points for purchases all over the airport Acorns rounds up your purchases on linked cards to the nearest dollar and deposits the difference into a savings account But the one that I’d like to spend a few minutes on is Spring, who is working with leading shopping malls across the country
- In 2015, Spring embarked on an aggressive strategy to approach shopping malls They’ve signed 4-5 major mall companies representing more than 400 malls in the U.S., of which almost 60 are running live programs today There are 2 pieces to this strategy. The first is that it allows the shopping malls to offer a loyalty program of their own
- A card linked solution is critical to a mall loyalty program because there is no easier way to track mall wide spending It’s easy for the shopper – no need to identify yourself at every store, your spending is tracked automatically, and your rewards credit right back on your card For the malls – they finally have insight into which customers drive the sales, the frequency of their visits, number of purchases per visit, spend per visit, etc.
- And for those “better” customers, what almost every mall shopper values most, a great parking spot
- The second piece of Spring’s strategy is to leverage all that data being amassed in their mall programs down to the individual store level, which they then can use to open discussions with national retailers Retailers are given the opportunity to target offers based on this data Spring doesn’t replace the retailer’s existing loyalty program. It becomes a better customer acquisition or activation tool for that retailer when their own loyalty program isn’t enough. And the mall operators love this because it makes the store purchase more rewarding than the online purchase
- So one of the advantages of a Coalition program, like Plenti, is that it enables you to have a single account and a single currency across all partners. XX The card linked networks also are a single account, but the individual stores run their own programs and currencies Ultimately, I believe these two models have to come together and leverage the advantages each provides
- In closing, I thought I’d share some Hopes and Predictions about some of the programs and categories we discussed today Starting with the Airlines, I hope we see the following: a move to rolling year qualification periods, easier status qualification for members not living in hub cities and mileage redemption discounts when redeeming for multiple tickets on the same itinerary. Maybe those wont happen, but I think these might: the airlines profitability has improved and so I think they might improve the mileage redemption valuation from the current 1-1.2 cents per mile to over 1.5 cents on more profitable routes. I also think we’ll see an increasing % of fares sold that don’t earn any miles and as the appeal of miles declines vs the appeal of elite qualification miles, we’ll also see a decline in third party demand for miles.
- Moving on to some of those smaller small business players and card-linked networks I hope the market gives these guys a chance for success, but hitting scale is such a challenge I’m hoping for one of 2 things; either they integrate their technology with some of the larger programs or they get bought by the larger tech players who can fund their national expansion. What I’d prefer not to see, but I worry will happen, is that they will get bought by a traditional payments company, and history has proven repeatedly that such acquisitions and integrations delay or outright kill the innovation momentum.
- And finally, the Plenti program I think AmEx did a great job launching this program 2 years ago but have suffered since then to grow improve it They’ve chosen a partner integration solution that is too complicated and costly for many retailers, and it’s future relies on adding several more partners that either bring everyday use or desirable redemption options. They need more grocery and QSR options I think the combination of a card linked solution option and a more functional app could transform the program My concern is that without significant expansion by the end of this year, we may see Plenti call it quits by the end of 2018
- And on that optimistic note, let me summarize: Loyalty program structures must prioritize ease of use and value Recognition is more critical than just rewards Technology can solve problems but may not always be “better enough” And finally, the true key to Loyalty Success? Ongoing program evolution to make it easier, more relevant and more rewarding.