The long break in spending habits due to Covid-19 will cause customers to re-evaluate their relationship with brands.
People in Barcelona are buying a lot more ice-cream lately.
From my balcony in the evening, it looks like 2 in 10 are enjoying an ice-cream cone. One year ago, there might have been 2 people in 50.
This isn’t just a casual observation, but a sign of a widespread consumer trend which every loyalty marketer should be thinking about.
Consumers are becoming a lot more deliberate in their pursuit of pleasure – but also a lot more deliberate in other spending categories.
It’s a repeating pattern in other locations where Covid-19 has hit hard. In the UK, the John Lewis Partnership, which operates Waitrose supermarkets, reports that customers are spending more on comfort food, alcohol and world cuisine[i]. The Financial Times reports that people have:
“… turned their focus online and looked to takeaways, digital subscriptions . . . to keep entertained and occupied.”[ii]
Of course, after decades of increasingly easy and affordable travel, no consumer’s ambitions will stop with an ice-cream cone.
After Covid-19, nearly every customer type will be more deliberate in how they spend money.
Some will deliberately seek a fantastic, maybe life-changing experience in the second half of 2020 – to re-enforce the reasons for living in the first place. Others will deliberately spend more wisely than they did during the past decade.
In truth, most customers have always been deliberate, but during the past decade they developed habits to buy routinely from preferred brands (or they deliberately did not).
Now, all that can (and in many cases will) change as they emerge from the lockdown and will absolutely consider new habits. Value will also be interpreted more deliberately.
Whether you are a net winner or loser in this reset depends on your value proposition for each customer – not the general proposition you offer all customers.
Only legacy brands that fear the future want to go back to some type of ‘normal’. Most brands and their loyalty programs need to embrace the future, rush to it, and encourage customers to change habits that will enable more value creation for all stakeholders.
Nearly everyone is now on the same footing: not knowing what to expect, so it is the perfect time to change the traditional structure of your industry, and move up the ladder by creating the marketplace that best serves your interests.
If you don´t believe me, think about your market five years ago – or ten. You see how much change took place without the Covid-19 pandemic? And because you know change is accelerating, you have to create the future and stop looking back.
Crises compress the timeframe for change to take root.
You really need to work on what is possible and not lament the past.
Re-evaluating the value exchange
Loyalty marketing is a mix of science and art, but in its most basic form, loyalty programs are a value exchange. The customer shares information and gives the brand permission to communicate in exchange for better experiences and value.
I hate bashing the industry, but a great many loyalty programs still don’t even have this basic equation right. They don’t use the data that customers provide. They allow the program to run on auto-pilot. They give away too much value to the frequent customers that would have been loyal anyway, and very little to the next 40% of total customers who could be influenced to shift share of wallet.
People naturally want to feel special.
So: what will make people feel special now?
Some of your customers have been sick or lost loved-ones. Others have lost their jobs. And most are worried about how long this pandemic will last. Brands that care about their customers have been proactive in communicating that they recognize the severity of the situation, they have taken steps to address it, and they are optimistic that the future will be bright.
Brands with loyalty programs have had the opportunity to remain engaged with members during the Covid-19 crisis. They’ve found new ways to serve needs through the program, or to express empathy at a time when customers care what a brand is doing to keep customers safe, support employees, and evolve to meet their rapidly changing perceptions of value.
If you don’t have a loyalty program, or most of your customers don’t participate, you lost this meaningful opportunity to keep your brand top of mind. If you have a loyalty program and did not communicate with customers, you have missed an important opportunity to show the emotional side of your brand.
After all, people remember emotions, but only remember transactions when they go badly (because the ‘bad’ transaction creates emotion).
In my case, I belong to about 25 different loyalty programs and only seven or eight have bothered to reach out to me in the past 10 weeks. Two of them talked mostly about themselves, but the others spoke about how they cared about me as a customer, what they were doing to keep their employees safe, and how they intended to keep me safe when I choose to engage with them again. 15+ brands seem to have chosen to not communicate with customers – or at least not with me (and I noticed).
The current situation creates the opportunity to reset the types of relationships we want to have with frequent customers, as well as the 80% +/- of customers who tend to be less frequent, but are still relevant to achieving your growth objectives.
But this long break in habits also gives customers the opportunity to reset their relationships with brands.
It is making people more deliberate.
Ways to build perceived value
When the vast majority of your customers consider joining your loyalty program, they do some simple math. The equation will be something like “If I spend $1,000 with this brand during the next 12 months, what benefits (or reward) can I get?”
Or they might consider “If I buy coffee or lunch at this restaurant 50% of the time in the next month, what will they do for me?” I fully expect customers to now be much more deliberate about these types of decisions.
Loyalty programs must now anticipate this thought process by putting clear, new forms of value in front of the customer.
Some propositions can include a frivolous splurge, but must need to be focused on utility.
One of the ways you can do this is to give out more points, or enable points to acquire more redemption value
The amount of extra value you can offer depends a good deal on your operating margin from selling more products or services.
If you operate a hotel or airline, the margin on incremental revenue from rooms or seats that would have gone unsold is more than 80%.
Restaurants typically have margins in the 50-60% range, while most retail operates on margins in the 20-40% range. Grocery and fuel sectors operate on margins under 15%.
The point is that when a customer calculates whether it is worth joining your program or changing their behavior to allocate more share of wallet to a particular business, the hurdle value is going to be in the 2-10% range. If they cannot anticipate getting net benefits in the 2-10% range, they won’t join, or their participation will be sporadic.
Few brands can easily afford to give back another 2-10%. However, many have already been doing this for decades in another form: offering discounts off the top line price. So, programs need to find more clever ways to make the perceived value of rewards as high as possible while keeping the cost in the 1-2% range.
We wrote about how to create this magic in an article earlier this year – but here’s a summary of ways to increase perceived value in your program, without significantly increasing costs.
1. Create ‘wow’ moments to keep customers engaged
Active collectors of airline or hotel points should be offered an interesting trip for the points they have available (or perhaps with an additional 5,000 mile purchase). This will reward them for collecting points with partners, and encourage them to travel when the occupancy is low.
Such incentives can be customized by member – based on their balance and effort to collect your loyalty currency – but the point (pun intended) is to demonstrate great value and leverage your excess capacity to recapture their motivation. And, it should be focused on the 60% of customers in the middle, not your top 10% or bottom 30% of earners.
Non-travel brands should consider something similar.
Of course, this commentary is for the portion of customers who are ‘savers’ and want to wait for something more aspirational. But other customers want instant gratification, so you also need to have relatively inexpensive (digital) rewards that keep this type of customer coming back.
This ‘instant gratification’ type of customer might even prefer to earn cashback rather than points. Do you offer customers that choice?
What if you converted your discount marketing into a cashback and enhanced loyalty offering? That would increase gross revenue in the short-term and dramatically increase retention – because you are keeping the customer’s value in your ecosystem.
Furthermore, unless you sell very high margin services (like hotel rooms or flights), you should not care which points you give the customer, because points issued should represent a cost of sale. Since you want more of those sales, you should be willing to allocate 1-2% (or more) in points to get them.
And don’t forget, when customers engage, you get the data and permission to continue marketing directly to them.
2. Apply rewards tactically to reduce churn
Depending on the nature of your business, churn is reduced or increased right after a redemption.
In high cost businesses like airlines or hotels, the customer is most likely to churn right after a redemption if it took them more than a year to earn the reward. In lower margin and higher frequency businesses, such as retail or restaurants, the customer’s propensity to increase engagement goes up after they have redeemed (also presuming it was within one year).
3. Increase velocity of earning
There needs to be velocity of earning to keep customers engaged. If they can’t have high velocity with your product or service, you must have relevant partners – in order to remain top of mind and get the data when they do need your product/service.
Velocity of earning is perhaps more critical than the absolute amount you offer because each time they earn, they think positively about your brand – even if they are earning among partners.
If the typical frequency of your business does not enable customers to claim a meaningful reward at least once per year, then the only way you are going to get the majority of customers to join (or remain active) is to collaborate with complementary brands, so that together, you enable the customer to remain focused on their goal.
Put another way: for the vast majority of your customers you either find partners that will issue your points, or you need to issue popular loyalty points/miles from complementary brands.
This can be a hard pill to swallow, but it has worked brilliantly for Avis-Budget, Value Retail Outlets, hotel chains, credit card companies, and boutique retailers.
4. Partner with other loyalty programs
Of course, major travel brands have had many partners for a decade – but they are the same partners: Avis or Hilton, for example, which are mostly relevant to frequent business travelers. When you see the opportunity to earn points in travel programs from non-travel brands, this is mostly through affiliate marketing and not a bilateral partnership.
Brands need to have real, direct partnerships with complementary brands so all stakeholders can benefit optimally from the collaboration. This allows customers to earn more points because no middleman is taking a cut. Both partners benefit from better customer insight, and the earning transactions take place in real time, which dramatically improves customer experience.
Why would you care which loyalty currency your customers earn if it gets them to shop more frequently and increase basket size?
Click the graphic to expand
The precise mix and balance of these tactics will vary from business to business.
What’s important to recognize is that many loyalty programs have scarcely evolved beyond issuing a flat 1% in points on transactions.
That 1% in points cost may lead to a 3% uplift in sales, but it could be more if the incentives are tailored to specific product lines or special offers.
If you have been stuck with the same level of participation for the past few years, you need to try something new – because the more deliberate customer emerging from this crisis may defect.
Something for everyone
Are you offering compelling reward alternatives that enable 75% of your customers to redeem every year, or to be recognized as special by inviting them to an amazing experience?
It is easy to read over this question and move on, but this is kind of the key to success in growing your active membership base.
Stop and think about that for a few minutes. It is fundamental.
Can most of your customers earn a meaningful reward every year?
Most brands invest exclusively in rewarding the 10-20% of customers who are most frequent.
This is worrying, because getting the next 30-50% of customers to join should be of paramount importance.
If the customer does not join your loyalty program, you have almost no way to contact them to explain how you are dealing with Covid-19, taking care of your employees and creating a safe environment for the customer to return as soon as possible.
And in the post-Covid recession, you’ll also lose one important way of making sure your business survives – and doesn’t get shaken out of the recovering market.
Among your mid-tail and longer-tail customer, there will be some – perhaps even many – who resemble your best customers. You simply don’t know which ones until you find the key to get them to join, and then start analyzing their data.
There are not a lot of people like your top 5% of customers, but I’ll bet that, of the second quartile and third quartile of customers, half of them resemble those in your top 5-15% bracket. They simply haven’t yet been motivated to become more frequent with your brand.
The key to getting them engaged is offering them more choice in how their loyalty value can be put to use.
Some will want instant benefits, others will want to earn your loyalty currency with partners, and others will want to exchange out to a more aspirational program. Since exchange has very wide appeal, but few customers actually do it, offering this can be transformational. Yet because you control the exchange value, the cost can be minimal.
Rewarding frequent customers is very important, but if you are under-invested in enticing the mid-to-long tail to shift share of wallet, then I’m certain your program ROI is less than it should be.
Offering something for nearly everyone is also key to reducing churn.
Stars aligned for forward-thinking loyalty programs
The observations shared in this article are based on insights gleaned from serving nearly a hundred brands that everyone would recognize, and hundreds more that are strong in their local market but less universally known.
As the Covid-19 pandemic passes into new phases, you will encounter a new attitude and ethos among your customers. The insights shared above will help you be ready to meet their value expectations.
In fact, this pandemic has aligned the stars for your benefit. Customers have broken long-standing habits during the past two months, your internal stakeholders are more open to change, and technology is more easily accessible.
So, push to redefine your value proposition and ensure there are at least some elements that are relevant to nearly every customer.
When you treat everyone the same, even rewards end up being treated as commodities.
But it doesn’t take that much effort to find some way to treat each customer as valued.
Value creation through collaboration is almost immediate, there is very little friction, and the risk is tiny – so you really need to extend collaboration with complementary brands because of the extra value you can create for your customers. And, they will notice.
You will be measuring the benefits within months if you do.