Loyalty and Business – Do they really mix?

I’ve been researching loyalty in business now for over 10 years! It has been an interesting journey; one with many complexities. It is my researched opinion that loyalty in business is greatly misunderstood as a concept; poorly applied and all too often hidden behind inefficient, expensive and restrictive systems.
The platforms for my views are established on the generic meaning of loyalty and a quote by Martin Luther King Jr. which adds context to both the definition and its general application.
According to the Webster Dictionary loyalty is defined as:
“a quality, state, or instance of being loyal; faithfulness or faithful adherence to a person, government, cause, duty, etc.”
In most societies, the essence of loyalty is formed by intrinsic emotional or psychological traits that lead humans to seek out a sense of belonging and security. However there is an even deeper dimension to loyalty that is essential to one’s ability to seek it out and have it embraced. The early philosopher, Plato best described the achievement of loyalty; “a man who is just can be loyal, and that loyalty is a condition of genuine philosophy”. That is; the premise of loyalty is based on a just and honourable framework.
“Our loyalties must transcend our race, our tribe, our class & our nations; and this means a world perspective.” ~ Martin Luther King Jr. King’s quote touches on the human element of loyalty and the need for it to be just and honourable. It adds context to Plato’s philosophies and provides a more modern perspective on the depth of consideration that must be given to building loyalty.
In business, the building of loyalty is complex. The objective of loyalty in business, given its competitive nature is not necessarily derived from a just and honourable position. The purpose or objective of course is to generate on-going or repeat business for the commercial benefit of the enterprise. Historically this was achieved by providing good products and services. Customers were treated with respect and dignity and repeat business was derived by a sense of benefit to both the customer and the business as a whole.
In 1981 the first full blown operational loyalty system was introduced and with it the perception of loyalty in business changed irrevocably!
Business Loyalty – A Brief History:

On May 1, 1981 American Airlines launched the first full-scale loyalty marketing program of the modern era with the AAdvantage miles program. This revolutionary program was the first to reward “frequent fliers” with reward miles that could be accumulated and later redeemed for free travel. Many airlines and travel providers saw the incredible value in providing customers with an incentive to use a company exclusively and be rewarded for their loyalty. Within a few years, dozens of travel industry companies launched similar programs. The AAdvantage program now boasts over 50 million active members.

American Airlines’ AAdvantage program can trace some of its roots to S&H Green Stamps, which were a popular retail reward coupon issued very commonly from the 1930s through the 1980s. Typically, as a consumer shopped at various grocery and dry goods stores, they would receive a set number of Green Stamps that could be pasted into booklets and redeemed for prizes.

Another early “loyalty marketing” program was created by baking brand Betty Crocker. In 1929, Betty Crocker issued coupons that could be used to redeem for items like free flatware. In 1937 the coupons were printed on the outside of packages, and later the Betty Crocker points program produced a popular reward catalogue from which customers could pick rewards using their points.

The purpose of loyalty programs is to generate loyal behaviour. The incentives offered in all loyalty schemes are to retain existing customers and to entice new ones. With the proliferation of loyalty programs all over the world, its impact cannot be denied.

The Business Loyalty Landscape today:

In 2010 the loyalty marketing space can best be described as saturated. The number and variety of programs around the world can barely be counted. The high net worth customer; typically those with high disposable incomes tend to be in all the loyalty programs from which they’ll benefit. In such cases their purchase decisions are no longer influenced by the points benefit but more often by convenience, services or overall value.

In addition, the landscape for a loyalty operator has changed from the days when early adopters of loyalty marketing generated significant benefits. In today’s climate operators face fierce competition, increasing costs and diminishing consumer loyalty. It is estimated that loyalty programs are costing the operator up to 10% of their gross sales. Such costs run into billions of dollars globally. Operators are forced to come up with greater incentives to continue to influence consumer behaviour. Often they have aligned with other operators only to pay heavy fees for the transfer of points between programs.

In simple terms, loyalty operators today are experiencing increasing costs against diminishing returns. Under normal circumstances a business facing this dilemma would determine that the business is no longer viable and exit. However, loyalty by its very nature makes an exit very difficult. Early adopters of exit strategies can expect to experience a similar but negative reaction to those early adopters that offered loyalty. A consumer in all loyalty programs perceives they are getting a benefit; the benefits unless significantly different will not influence their buying decisions. However, if they are in a program that is withdrawn; other programs will then be perceived to offer a significant benefit and influence the consumer away from the business withdrawing their incentive.

As a consequence, operators of loyalty programs today have little choice but to find ways to reduce their costs with minimal impact on their customers. Typically, operators have increased membership fees to be in programs. They have also made popular redemptions more difficult in order to steer consumers to the lower cost benefits. Some have introduced time periods before points start to expire to help reduce the liability risk. These steps have had a noticeable and negative impact on consumers. Instead of the positive word of mouth the early days of loyalty marketing generated, these days conversations are more often about how they can never take advantage of their benefits when they want to.

Today, loyalty marketing continues to spiral out of control with increasing costs for operators and increasing consumer dissatisfaction. The size of the problem is significant and on a global scale.
I summarize the business loyalty landscape as follows:
Loyalty in business today is not about something just, noble or honourable but rather ‘golden handcuffs!’ Business did not fully anticipate the cost of the systems developed and worst of all, as more operators have come on board, it has become impossible to get out of these unhealthy business processes. They have built a customer perception and expectation that they can no longer meet, however unless every business were to get out of loyalty at the same time, businesses do risk losing customers to those who continue to operate these systems.
Many other aspects of business have hidden behind loyalty systems. True customer service has diminished. Respecting a customer’s right to choose and continually improving your products and services to retain a customer’s business has become lazy in the wake of loyalty systems.
Don’t get me wrong, having good information about your customers likes and dislikes; their buying behaviour per se, is a good and powerful way to do business better. In doing my research I found that in addition to really understanding buying behaviour, it would be a very good marketing system that took into account the behaviours of all stakeholders in a sale! Invariably, it is not only the buyer and seller who have a vested interest in whats being sold!

Therefore, whilst it is my firm conclusion that loyalty to or in business is a myth, the power of good, intuitive and information rich marketing systems have a place. The next phase of my research was to go out and build the ultimate behavioural marketing system. I have done this.. It is called jjAbb. However the purpose of my commentary here is not to push my own business but rather to get people in business truly thinking about their reliance on ineffective and expensive loyalty systems.

I am very happy to engage in discussion or speak to this topic if requested.

Joan MacDougal