The Disconnect Between Loyalty Teams and Business Leaders

A recent Harvard Business Review report found that…‘58% of executives surveyed believe their organization’s approach to customer loyalty is ineffective.[i]

I found this no great surprise; in my experience, at least 58% of business leaders don’t understand how loyalty works.

This is partly because ´loyalty´ means different things to different people. The term has taken on many connotations over the years. While every businesses person agrees ‘customer loyalty’ is a desirable goal, loyalty marketing is a distinctly-defined specialism. There’s far more to it than simple customer retention.

But it’s also a matter of technical understanding. Loyalty seeks to influence customer behaviour across an entire market – rather than just in direct interactions with your brand. Best practice, therefore, is founded in concepts more commonly discussed in economics and financial services. To the chief marketing officer, much of this sounds like foreign language.

As a result, a lot of mistrust and misunderstanding can permeate down from C-level to the loyalty floor, where it manifests as under investment and misguided strategy.

The purported ‘death of loyalty’, so widely discussed in recent years, can be traced directly back to the disconnect between stakeholders that don´t share a common perspective.

The consequence of all this is that loyalty marketing practices tend to evolve at a glacial pace – simply because it is so hard to gain consensus among stakeholders with different objectives or measurement time frames.

So how to overcome this?

Similar problems affect other business departments, and the advice is the same. Adopt a start-up like approach. Measure performance and ROI objectively so that productive, data-driven conversations can take place about how to optimize long-term results.

With modern, cloud-based technology, this can be done without ripping out legacy systems, without inordinate investment, and with a very reasonable expectation of demonstrable short-term profits.

But loyalty is both an art and a science, and it requires considerable discipline and technology to perform profitably. That, in turn, demands budget, and senior buy-in.

Getting everyone on the same page may be the hardest work for loyalty program leaders.

But it’s critical that this work takes place, so that senior executives – few of whom are specialists, or have time to understand every detail – can catch up, get on board, and empower their teams to succeed based on dashboard-level results.

Misaligned objectives

I fully sympathise with a chief financial officer, faced with signing off $100,000 for points with which to incentivize employees to deliver better customer service, and wondering how long it will take for that value to generate more sales.

Even if the CFO may be able to visualize the steps in the chain, can the chief executive, or the CMO rely on the same framework?

How about the board of directors?

More likely, the board is pressuring the leadership to hit goals such as…

  • find 20,000 new customers by next March
  • show a year-on-year improvement in sales of lawn furniture
  • achieve savings of $20m over the next two years.

This disconnect has been researched and quantified.

The same Harvard Business Review survey of senior execs found that…

‘65% said the main objective [of their loyalty program] is attracting new customers, while 57% prioritized building a stronger ‘emotional connection’ to a brand.’

Of course, loyalty can do all of these things. The trouble is, other kinds of marketing can often do them faster – albeit with less recurring benefits.

A great TV campaign may cost you £1m today, and bring in £3m in sales by the end of the year. That’s great for a fizzy drink, which people can buy on a whim for throwaway change.

The long-term effects – and whether or not short-term investment costs you opportunities for greater profit in the long-run – may never be discussed.

Compare that to an investment in loyalty points.

Relatively few people book a flight on a total whim. More likely, they have a need or a purpose to travel. And even if they’ve recently seen your TV commercial advertising “Flights to Paris only €179”, their immediate reflex will be to search Google Flights for a better deal.

The loyalty that suppresses that reflex, however, may start with points issued years ago – which were then spent, and then led to more earning and burning, which ensured you were the first choice when it came to decision time.

Every business department is guilty of short-termism, but in loyalty, the effect is especially deleterious, because true profitability of a happy customer is measured not in months, but in a lifetime (hence LTV – lifetime value).

This makes it all the more important for loyalty teams to help business leadership understand the value chain of loyalty mechanics: how the right investments, the right strategy, and the right measurement, can not only earn customer loyalty lasting years, but can also fortify your businesses’ market position for decades of future growth.

This can only be discussed when effective reporting and financial modeling is in place, to measure and improve your customer’s accumulative experience of your brand.

The crucial importance of data

Everybody knows it’s more expensive to acquire a customer than to retain one; this Harvard Business Review study puts it at anything from five to 25 times.

The study also found:

‘…increasing customer retention rates by 5% increases profits by 25% to 95%.’

But how do you tie these profits back to loyalty marketing investments?

Historically, this has not been easy.

The legacy loyalty technology stack is typified by expensive, hard-coded software, with very poor data-sharing between other marketing tools. The effect of this has been compounded by different marketing departments in the same business often maintaining multiple CRM and campaign management systems.

So if a loyalty program member abandons their shopping basket just before a purchase – or has a terrible experience with your service team on Twitter – how do you know?

What about other customer interactions across the market?

For instance: if a Tesco customer burns their Clubcard points at Pizza Express, Tesco might discover the customer’s favourite wine, and perhaps even how many family members they have.

That kind of rich customer profiling could be used to issue highly personalized offers which could earn excellent loyalty – but in most similar cases, the Pizza Express redemption would be enabled by a third party, who would probably not share very much useful insight about that customer’s meal.

For years, reams of this kind of data has been generated, and gone to waste.

So despite developments in recent years – a proliferation in agile loyalty software, and emerging case studies of highly productive data-sharing between better-informed brands – it’s perhaps understandable that there has not yet been a widespread fervour for greater investment in loyalty.

Say you wanted to issue loyalty points for customer reviews – or for much better-value Pizza Express redemptions. Why would a CFO sign off on that investment, without data to back up the case?

This problem, specific to loyalty, is worsened by a general problem with business investment in research and development.

A new technology trial may take three years to turn a profit. Managers, understandably, are reluctant to back that project if they may not even be employed by the same company for such a period – especially if their bonus is based on this year´s results.

It’s far more exciting to allocate budgets to quick wins, and add successes to your résumé before you move on.

This universal phenomenon is precisely why companies historically separated operational departments from research and development. The R&D team must be protected from short-term pressures as much as possible, or step-change results almost never get achieved.

Practical steps

It would be unfair to paint a picture of a leadership team that is solely responsible for all woe that befalls the loyalty department – or to blame loyalty teams for not standing their ground.

As with many disconnects, the issue is down to misaligned objectives.

So how to bridge the disconnect? How to produce short-term results, quickly and affordably enough to be able to win investment – but with initiatives that drive genuine long-term loyalty?

These are practical steps both business leaders and loyalty teams can undertake to improve understanding of each other’s positions, and of the factors that determine success in loyalty.

  1. Adopt an agile way of working. Test and trial new ideas at small scale

Testing is increasingly important for every department in every kind of business, because few businesses have the luxury to invest months in developing new strategies.

In a large corporation, it’s easy to become overwhelmed by the bigger picture. But the precise nature of successful loyalty objectives – marketing to an audience of one – makes it all the easier to produce meaningful outcomes for reasonable budgets.

This year’s Loyalty Magazine Awards were full of innovative, forward thinking ideas.

PAYBACK, a German third-party loyalty supplier, and A.T.U., an auto parts and servicing retailer, won the prize for “Best Voucher-Based Loyalty Program”.

During a two-week spell in summer 2018, customers were tracked visiting A.T.U., and data from a range of sources was collated to identify if the customer would be returning to a hot car.

Those who were, received an offer of 1,500 points for air conditioner maintenance. Such relevant, contextual offers were appreciated and A.T.U. enjoyed a 20% sales uplift.

That’s a quick and relatively easy success – not one that cost millions, or that took years to mature.

  1. Free up budgets by ceasing unproductive practices

While it may be tricky securing new investment from your CFO, there are things you could not do in the short term, which will quickly prove profitable.

Cut 25% to 50% of the items in your rewards catalog that have low redemption rates and reinvest in the types of products or experiences that customers desire.

Stop sending paper-based eye-candy to members via the post and invest a bit more in one-to-one marketing based on the customer´s social media profile.

Saving a little money on things that no longer work very well won’t directly heal the disconnect, but it should earn the loyalty department more credibility as the results start to roll in – and importantly some funding to try new things.

Consider Virgin Australia’s ‘Velocity program, for instance.

Velocity’s partners pay for Velocity points at about the value which the customer perceives – and Velocity has reaped the benefits, generating AUD$122 million in ’18/19 and doubling in market cap over 5 years.

  1. Introduce cloud-based technology to complement your existing systems

Legacy technology remains both a significant obstacle and, for the time being, a worthwhile source of profit. It cannot or should not be ripped out overnight.

That said, if any contracts were up for renewal I’d be looking very hard at microservice alternatives, which aside from being cheaper, ought to be easier to chop and change based on constantly evolving market dynamics.

This doesn’t just apply to loyalty.

The most profitable technology investment you can make may not be in a piece of loyalty software, but in getting all your data into a single enterprise CRM in which to store and analyse all customer data.

Or, that profitable investment may be in tools to help your team members, so they can perform at a higher level.

Finding such keystones requires instinct, experience, and testing.

This will make it easier to measure and improve all your marketing, and make calculated demands for investment based on the ability to drive incremental customer LTV.

  1. Read, talk and learn

Your leadership team may not need to understand every detail of loyalty marketing. But they do need to get the basics, especially the supposed ‘quick wins’ that actually harm your chances of success.

These would include paltry investment in rewards, selling points to partners at unreasonable short-term profits (thus driving partners away), only caring about your most frequent customers, etc.

All these make your brand difficult to do business with, and lend advantages to competitors who understand the need to collaborate in order to bend market forces to their advantage.

That said, change in loyalty is happening rapidly.

The Wise Marketer, Loyalty Magazine, Skift and various other content sources are reporting daily on the latest successes by loyalty brands in every sector, offering plentiful inspiration and food for thought for teams planning their next decade of success.

And if one of those stories is about a direct competitor – and if that story happens to land in your CEO/CFO/CMO’s inbox – that certainly wouldn’t do any harm.

Chuck Ehredt, CEO, Currency Alliance

Chuck Ehredt is a serial entrepreneur and angel investor, originally from the United States but living in Europe for the past 20 years. He is particularly passionate about aligning innovative technology and new business models to solve problems and deliver greater value to customers. He founded Currency Alliance in 2015 to make it easier and more affordable for brands to collaborate around popular loyalty currencies, by helping them to share richer customer insight, create better customer experiences and drive up loyalty program engagement.

Click here to visit Currency Alliance.