Why loyalty schemes are breaking

Essay • 4 min read

Loyalty schemes are breaking - they are too functional and offer little value. Using data to improve the customer experience will drive greater loyalty.

Why loyalty schemes are breaking

The future of loyalty will look very different to what it has over the past 20 years. The debate is growing about how effective loyalty schemes are. And there is mounting evidence that younger, more digitally savvy consumers are less brand loyal and more motivated by digital customer experiences. With digital assistants on the horizon the way we engage with brands and the drivers of loyalty are likely to shift significantly.

What’s wrong with loyalty?

Since reading Byron Sharp’s How Brands Grow (2010), I’ve had a healthy skepticism for loyalty schemes’ ability drive brand loyalty. Sharp’s critique showed that loyalty schemes only rewarded those who were already brand loyal and does little to improve re-purchase with non-loyal customers. A recent report from Accenture, Seeing Beyond The Loyalty Allusion, is also very critical of loyalty schemes. The study shows that many loyalty schemes are missing the mark with 71% of consumers claiming loyalty programs are not motivating them to be loyal. What’s more, the report reveals that “Loyal customers who spend more are 9 percent more likely to retract their loyalty altogether”. With investment in loyalty schemes increasing, including Hilton and British Gas recently, these critiques of loyalty are not cutting through. Or if they are, those businesses investing in loyalty schemes, are more driven by the data assets they generate.

Why might loyalty be eroding?

Loyalty programs collect a lot of data. The lack of trust in how businesses use personal data is likely to be having an impact. Forbes recently ran an article that showed 81% of Europeans feel they don’t wholly control their online data. This is a problem for brands collecting data because 69% of consumers worry that brands may use their data for purposes other than those advertised. Those “advertised purposes” can obviously include loyalty schemes.

Another reason is that modern consumers aren’t driven to purchase by collecting more “points”. An interesting study by EY that shows how 54% of Singaporean consumers expect high quality digital experiences before they commit to purchasing. Consumers are demanding, and motivated by, exceptional customer experiences. This is challenging for existing loyalty schemes as they tend to be more transactional rather than experiential.

Another study among Singaporeans shows that 80% are actively withdrawing their loyalty from brands as consumers shift their brand allegiances more frequently. The focus on the behaviour of Singaporeans is interesting because they are at the leading edge of digital adoption and so a good indicator for future behaviour in other consumer groups.

Another blow for loyalty schemes is that Millennials are increasingly likely to demonstrate negative or non-existent sentiment towards a brand’s loyalty efforts. The loyalty of Millennials is not unobtainable, but it needs to be convenient, personalised and “in stream” with their digital lives. Gen Z and Millennials are redefining the rules of engagement for brands:

“When it comes to content, younger Millennials and Generation Z are buying into an immediate unedited and raw stream of consciousness. There are big implications for brands when we think about connecting with an audience that claims they can respond to 40 snaps in a minute.”

40 snaps a minute sounded a lot until I read Google’s announcement that 1 billion hours of YouTube video is consumed every day.

From open social to messaging

It’s clear that consumer behaviour is evolving in line with the rapid innovation in digital technology. Facebook, now the incumbent, is fast following Snapchat in how they deliver content and connect people. WhatsApp has launched a new feature that emulates Snapchat’s Stories, for example.

In order to deliver high quality digital experiences brands need to continually iterate. This is made all the more difficult when social activity is moving rapidly towards messaging rather than open social networks. A recent study revealed that 84% of social sharing is done via messaging. They define this as “dark social” because it is hard for brands to track what’s being shared on messaging services.

Changes in the way consumers engage online is important for brands looking to improve loyalty. If consumer loyalty is driven by high quality digital experiences then brands need to deliver those in a way that is helpful and “in stream” with their digital lives.

AI and virtual assistants: The future of loyalty?

If loyalty schemes are faltering and purchasing is driven by relevant, quality digital experiences, how might AI and virtual assistants begin to impact loyalty?

This week at MWC, O2 announced Aura, a virtual assistant where consumers are in control of their personal information. This is an interesting move as it’s an attempt to put their customers in control. Whether or not Aura suceeds, I’m convinced this kind of empowerment will positively impact customer loyalty because it improves relevance, confidence and depth of relationship between brand and customer.

Messaging apps are becoming more like virtual assistants too. There is a big opportunity for on-demand services to integrate with the 85% of global consumers using these messaging apps. One-to-one consumer engagement with brands like Uber, Deliveroo and Spotify can provide “in the moment” experiences. Usage is largely native app based right now, but as we shift into a post app era these “on demand” services are expected to integrate with messaging, and virtual assistants. Traditional loyalty scheme adopters, like retailers, can learn a lot from brands delivering “in the moment” experiences. It is much more engaging and useful than collecting points.

Early research around the comfort levels of consumers using AI driven services shows positive results. A study among US consumers shows that 68% think AI is less biased than humans. And surprisingly, 64% believe that AI-based assistants communicate more politely than humans.

There’s a long way to go for AI and virtual assistants. AI is only as good as the data that trains it. And the results of AI are largely influenced by the biases of their creators. However, what seems to be resonating with consumers is how AI and virtual assistants deliver convenience through instant outcomes. These digital experiences will quickly become normalised. Whether or not your brand directly competes with the providers of these experiences, your customers will expect it. As a result, the future of loyalty over the next 5 years will look radically different to the loyalty schemes of past 20 years.

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