Returning from the days of the handshake deal and five cent coffee comes loyalty marketing. Brands today are treating customers like friends and everyone’s winning. In an increasingly flat and transparent economy, brands that act towards satisfying long-term relationships with consumers can expect big payouts. Who says nice guys finish last?
American business has developed an insane imbalance between obsessive customer acquisition and negligent customer retention. –American Express Incentives Service
The principle of customer loyalty has been very kind to some companies. Take Apple’s record-breaking earnings release for last quarter. The tech giant offers dazzling products and constantly seeks to introduce some new gizmo that requires our immediate attention, from the Apple watch to Apple Pay. But the only reason these releases warrant hype or attention is customer loyalty.
Apple’s iPhone earns a startling 87% loyalty, a huge profit driver. We all know someone who religiously pre-orders every new iPhone model. Such extreme loyalty inspires confidence in other buyers – Apple sold 74.5 million new phones last quarter – without lifting a finger. Aside from the occasional TV commercial or billboard, Apple lets its customers do the advertising for it. And they do. You’ll find tech forums and comment sections plugged by Apple evangelists’ rave reviews.
Most companies can’t be Apple. Not everyone can offer consistently unique products that enchant consumers. But it would be good to pull a page from the Apple book: emphasize loyalty-building over traditional marketing techniques.
Marketing is now a word that conjures feelings similar to door-to-door salesman. It imparts the image of a one-sided approach, a decidedly mis-weighted relationship where marketers spend their time talking at customers instead of with them. This dynamic is not ideal. Social media has given every customer a soap box and a loudspeaker from which to decry any company mistreatment.
Loyalty is, after all, an emotional commitment.
In business, loyalty first necessitates communicating brand values that customers then choose to affiliate with. With more options than ever, consumers seek brands that share and reflect something about their own priorities and beliefs. Smart companies provide consumers this meaningful exchange they so crave. We all must buy – but we’d rather use our purchasing power to reinforce the views we have of ourselves and the world.
When companies display a focused and value-driven message, consumers respond. The best way to establish and promote common values is creating highly specific content that reinforces the brand. It’s like when you first meet someone: similarity breeds familiarity. And a profitable, sustained friendship hinges upon mutual respect and continuously shared values.
Chipotle is a good example of loyalty marketing practices. Positioning itself as fast food with integrity, Chipotle offers hormone and antibiotic-free meat, cheese from pasture-raised cows, and local produce. The socially conscious angle comes down to more than just the food (although you should pay attention to what’s being served).
With the recent Cultivating Thought initiative, the brand prompted writers such as Paulo Coelho and Jonathan Franzen to produce text for the company’s cups and a separate microsite. This idea came about when author Jonathan Safran Foer had nothing to read at lunch one day. This loyalty to customer time and enjoyment isn’t making the company any money directly. Rather, it’s an investment in an implicitly long-standing and fruitful relationship. This act of good faith is well-aimed at the ‘thinking person’ Chipotle hopes to retain as it’s ideal customer.
The Principle: Give First and Give Well. Then Receive.
Customers return to Chipotle and Apple because their loyalty reassure them that they’re succeeding in being a certain type of individual. Customers crave affirmation that they’re making smart choices but also meaningful ones. A company that utilizes generalized marketing to shout at people from atop a platform will likely not find success.
Meaning is derived from connection and connection occurs between equals. Companies that roll up their sleeves and interact with customers in a way that customers appreciate will see results. In order to do this, the company must be like its customers enough to share a conversation with them every day. This level of thorough engagement necessitates a passion and enthusiasm for both mission and product. A genuine excitement to share brand values is crucial in loyalty marketing.
Anything a brand can do to create actively loyal customers is great. But they should be the right customers. Because the right customers are the most valuable. You’ve heard the adage: the top 20% of customers tend to produce 80% of the profits. Research confirms that not all customers are equally profitable and thus do not warrant equal attention. It costs businesses 5-10x more to acquire a new customer than to sell to an existing one. And on average current customers spend 67% more than new customers.
Customer spending tends to accelerate over time; longer-term customers are more efficient users of the products and services they buy and have lower operational costs; long-term satisfied customers provide more referrals; and longer-term customers are less price-sensitive than newer customers. –Frederick Reichheld Bain & Company
Alongside loyalty-oriented messaging, another great way to develop quality customers is with a loyalty program. What began as a customer identification tool is now a means to give more back to the best customers, guaranteeing future loyalty. The modern rewards program was launched in 1981 by American Airlines.
A 2015 Colloquy Customer Loyalty Census states that the average American household holds membership to 29 loyalty programs but uses only 12 of them. According to The Center for Retail Management at Northwestern University, 12%-15% of these customers are loyal only to a single retailer. Meanwhile, this small and loyal percentage group generates between 55%-70% of these companies’ sales.
Benefits of a loyalty program
- Shift – acquire new customers
- Lift – increase the spending of existing customers
- Retention – improve the natural churn rate of customers
- Profit Mix – shift spending to higher margin products
Here’s a great in-depth post about the various types of programs that increase customer value.
A good program contains:
- Simplicity – make my life simple, not too much information
- Benevolence – understand my issue, take my side
- Trust – doing what’s right, honouring promises
- Transparency – rates and fees are clear, comparisons available
But even with high inbound customer loyalty, sometimes a new approach is required. A 2015 study of leading global brands found that online cart abandonment rates reached 75.6% across retail, fashion, and travel. Abandonment was often the result of sticker shock – taxes, fees and shipping prices. Market evolution has produced entitled consumers who value and expect transparency as well as convenience, value, and meaning.
Amazon Prime is a loyalty program solving this problem in an unconventional way. With Amazon Prime users get free, two-day shipping on millions of products with no minimum purchase, amongst other benefits. Amazon provides enough perceived value to frequent buyers to make them feel like they’re benefiting. Analysts predict Amazon loses $1-2 billion a year on Prime. This loss is offset by transaction frequency and customer loyalty. A 2015 report from the Consumer Intelligence Research Partners shows Prime members spend $1500 per year on Amazon, compared to the $625 per year of non-members.
In the same way that content appeals to the values of customers, reward programs appeal to the psychological pleasure points of recognition, special treatment and rewards. Recognition pays in valuable, intangible benefits for the ego and any businesses that consistently provide this boost benefit. This also reduces consumer choice-making anxiety which improves the buying experience and reinforces the correctness-of-choice consumers crave.
Think of airline mileage programs. Preferential boarding and reduced-wait lines appeal directly to the esteem of individuals, catering to the ego and how customers want to be perceived. The value and convenience of pre-boarding and shorter lines is evident, especially for routine travelers.
Loyalty marketing is a balance of value, convenience and meaning for customers. Investing in loyal customers allows companies to increase profits, reduce loss and improve overall image to retain their most loyal. Being a customer is integral to modern life. Brands that understand their customers human need to reinforce their perspectives and personalities through their purchases will shape the markets of the future. More and more consumers realize that they can choose a company that behaves like a friend – with benefits – instead of someone that just takes their money.