Friday, March 11, 2016

Loyalty Program? You Don’t Need No Stinking Loyalty Program

Loyalty is a hot topic in many industries, especially the restaurant industry. Starbucks recently overhauled its loyalty program. McDonald's is reportedly about to roll one out. But if your company is considering launching a loyalty program, allow me to make the case that your time and effort are almost certainly better spent elsewhere.

What Is a Loyalty Program?
I'm defining "loyalty program" as a program that rewards customers with freebies for making purchases at a business. 20 years ago, this was often handled with a punch card: "Buy nine scoops of ice cream and get the tenth one free." Today, this is very often handled digitally.
 

The rise of digital loyalty programs has muddled the definition of a loyalty program. Free rewards are often mixed with other features like online ordering or mobile payment. If you take away only one thing from this post, let it be this:
When it comes to "digital loyalty programs," do not confuse the benefits of added convenience measures like online ordering with the unproven tactics of rewarding customers with freebies for frequenting a business.
The Wrong Reasons for Wanting a Loyalty Program
Let's look at the most popular reasons businesses probably want a loyalty program. I'll poke holes in every one of them:
  1. "A loyalty program increases sales."
    In the ground-breaking book How Brands Grow, author Byron Sharp scientifically proves that across nearly every industry, loyalty programs do not increase sales by a meaningful amount. You can read the book for yourself, I highly recommend it.
    Here are two more anecdotes: Chili's restaurants launched a loyalty program in 2015. The program rewarded customers with freebies for frequenting the restaurant. While the loyalty program figured into 16% of transactions, the company revealed that it did not lead to sales increases (source).

    I recently sat in an executive round table discussion with some of the biggest restaurants brands in the country. Every one of them talked about how they had recently made big bets on rolling out a loyalty program. When I asked them if the loyalty programs had led to increased sales, each one either said no or that they couldn't prove that they did. 
    Add these anecdotes to Byron Sharp's empirical evidence and you have a pretty compelling case that by and large, loyalty programs do not materially increase sales. There are exceptions, but the odds are definitely against your loyalty program.
     
  2. "A loyalty program will give us valuable customer data."
    This is true. But you do not need a loyalty program to gain customer data. There are plenty of other ways to do so. Offering a small incentive to customers for signing up to receive emails is a great way to gain data. So is offering a mobile payment solution. You don't need a loyalty program to do either of these.

     
  3. "Everyone else has a loyalty program."
    There are some industries in which loyalty programs are so ubiquitous that they are essentially required in order to compete. The airline and hotel industries fall into this category. But for most industries, this is not the case. Even the travel industry would agree that the biggest flaw in their loyalty programs is that past purchase behavior doesn't always indicate future behavior and frequency.

     
  4. "A loyalty program will reward my best customers and keep them coming back."
    Of all the reasons your customers are loyal, earning free stuff is not at the top of the list. Byron Sharp has proven that. Instead, your customers will be loyal if you focus your attention on offering incredible products and services. Exceeding your customers' expectations over and over again is what drives loyalty, not giving away freebies.
Focus on Convenience Instead of Freebies
There are better ways to drive sales than offering freebies to your best customers. One of those ways is giving customers more convenience. I define convenience as "eliminating friction in the buying process." Let's look at two reasons why added convenience measures lead to sales growth:

  1. People will pay for convenience.
    This has been proven time and time again. Look no further than the early days of Amazon Prime. Amazon charged customers a premium to receive "free" faster shipping. See this post for three more examples.

     
  2. Removing friction in the buying process leads to increased sales.Again, there are plenty of examples, but my favorite comes from Disney. Disney has a mountain of resources at its disposal, but they have chosen to invest them heavily in offering customer convenience through their MyMagic+ technology platform and the MagicBand. The MagicBand makes it extremely convenient to buy things within Walt Disney World. You pay for everything with your magic bracelet no need to carry cash or a credit card around. After it launched, Disney Executives specifically cited the platform as a key reason for increased sales. 
Add This To Your To-Do List
It's time to re-think loyalty programs. If you already have one, focus on adding measures of convenience to truly increase sales. If you don't have one, consider adding measures of convenience before offering freebies to your best customers.

There's never a lack of ideas.