the history of loyalty - rewards programs · the modern loyalty program was not designed to reward...

FROM TRADING STAMPS TO OMNICHANNEL LOYALTY®

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THE HISTORY OF LOYALTY PROGRAMS

WRITTEN BY HOWARD SCHNEIDER

Over the past 120 years, “customer loyalty” has evolved from a personal relationship between storekeepers and shoppers, to a

20th Century monologue delivered by mass media, and back to a new kind of one-to-one

relationship - a dialogue driven by empowered consumers. This whitepaper will break it down

into several distinct eras.

Let’s start at the beginning.

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MASSADVERTISINGIN THE 20TH CENTURY

The rise of mass media placed the radio, magazine and TV between marketers and customers. Corporations delivered one-sided messaging to the masses, with crude if any segmentation or targeting. Loyalty programs arose to disintermediate – to help marketers re-connect directly with their customers, seeking to counteract the skepticism that eventually characterized the consumer’s view of advertising. The very first loyalty programs were simply “gifts” from merchants – mostly supermarkets and gas stations – to their customers, to establish an opportunity cost for shopping elsewhere. One of the first such national programs was S&H Green Stamps, launched in 1896. Green Stamps and their imitators allowed customers to collect stamps and redeem them for free gifts.

HAVE A SMOKE... GET A FREE CARD TABLE! CPG companies got into the act, too. Notably – and perhaps notoriously – Brown and Williamson Tobacco sold Raleigh Cigarettes from the 1950s through the 70s, with a coupon on every pack, redeemable for household goods and other merchandise.

Disposable diapers in the 1980s carried manufacturers’ coupons for free or discounted toys from Tyco and other manufacturers.

Today there is a strong movement among CPG companies and others with indirect selling models to develop relationships with end consumers.

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THE HISTORY OF LOYALTY PROGRAMS FROM TRADING STAMPS TO OMNICHANNEL LOYALTY®

THE MODERN LOYALTY PROGRAM WAS NOT DESIGNED TO REWARD CUSTOMERS, BUT TO ACQUIRE DATA

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As the distance between marketers and consumers grew, companies no longer knew their customers. This was especially true in the airline industry, where travel agents owned 95% of the market and had the direct relationship with the traveler. Airlines introduced modern loyalty programs, but not to reward fliers per se. The miles, free trips and upgrades were there simply to motivate customers to share data.

The first modern program was American Airlines’ AAdvantage, launched in 1981 after more than a year of careful planning. But

what came to define the emerging loyalty environment was United Airlines’ near-instant match with the introduction of Mileage Plus, over the weekend after the AA launch.

Loyalty programs became a me-too proposition virtually overnight.

Marketers started to one-up each other, bidding up the stakes with double and triple miles and costly share-shift promotions. To quote one early loyalty pioneer, “You were only as smart as your dumbest competitor.”

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As memberships grew, marketers increasingly segmented their programs, adding status tiers to provide aspirational motivation for members to level up. Tiers were a badge of honor, and a way to provide increased benefits to more valuable customers.

Two movements in loyalty programs emerged during the late 1980s, both of which are still growing today.

• Earning based on spend, status based on frequency. Hotel and credit card programs allocated earnings in proportion to dollars spent, rather than shopping events or visits. Some more sophisticated programs, especially in the hotel industry, used both frequency and spend to reward multiple kinds of customers for specific behaviors. In many programs guests earn rewards based on their spending, but earn recognition based on how many times they visit.

• Focus on customer experience in addition to material rewards. A pioneer in this kind of program was Hertz, which introduced its Number #1 Club Gold in 1988. It was the first major program based entirely on the customer experience.

When research showed that what renters really wanted was the quickest possible way from their airplane to their car, Hertz created the first

program in the industry that allowed members to skip the counter.

In a legendary win-win, customers loved the program, and Hertz served them more cost-effectively, because stopping at the counter was not just a hassle for renters – it was also a cost for Hertz.

A final pioneering feature of Hertz #1 Club Gold was that there was a fee for the program – which was waived for the vast majority of renters, who were valuable frequent travelers. Charging a benchmark fee established an official value for the program and provided ancillary revenue to offset program costs.

From their beginnings in the late 19th Century, by 1990 loyalty programs had matured in what they offered to consumers and marketers, setting the scene for unprecedented growth and creativity in customer engagement strategies.

By the early 90s, loyalty programs had become routine in many business categories. The next generation would shake things up, with programs extending into new categories, becoming nearly ubiquitous, driving more revenue and profit, introducing more creative rewards and partnerships and finally, becoming experiential.

PROGRAMS GROW MORE SOPHISTICATED

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In the 1990s, supermarket chains including Kroger and Safeway in the U.S. and Tesco in the U.K. introduced club pricing, which became wildly successful – at least in terms of market penetration. By requiring members to use their card to get the lowest prices, stores signed up over 90% of shoppers. The chains now had a wealth of individual customer data; but much of the data was used in aggregate by stores and their CPG partners, often failing to target individuals with meaningful and relevant offers. An added bonus for retailers – discounts were usually funded by manufacturers.

In time these programs grew better at leveraging data, with Tesco establishing best practices. Today, customers receive highly targeted offers and messaging via mobile apps. Most programs today include partners; in the

U.S. most major supermarket chains partner with gas station chains, to deliver two of the most important needs of American families: food and fuel.

But program partnerships have grown way beyond the food and fuel model, becoming broad coalitions of marketers in many categories.

In Canada, the U.K. and Europe, coalition programs like Air Miles and Nectar, introduced in the 90s, have been very successful, largely because of the greater consolidation within categories like grocery, compared to the U.S. When Air Miles was introduced in America in 1994, it failed to gain traction. Today there are new efforts to launch coalition programs in the U.S.

Today banks and credit card issuers are integral partners in loyalty programs, with many brands offering credit products like private label or co-branded cards. In the airline industry, the first co-branded card was issued in 1986 by Continental Airlines and Marine Midland Bank. The entry of credit cards started the movement towards recognizing dollars spent instead of the frequency of purchase represented by miles, trips or stays.

If there is a single tipping point underlining the importance of loyalty programs, it may have been American Airlines’ report in 2006 that the airline earned more from selling AAdvantage miles to its partners, like Citibank, than it did selling airline tickets. Programs had grown from a “gimmick” to incent customers to share data, to a business selling loyalty currency that is larger than the airline itself.

CLUB CARDS AND COALITIONS

MILES AND MILESTONES

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Until the early 2000s, loyalty programs were limited to those industries where marketers have direct relationships with the end consumer, like banks, hotels and retailers. But as loyalty technology became more affordable and new media made communication almost free, manufacturers began to think about building direct relationships with end users. And they had to do it without disrupting the retailers who are their distribution partners.

It’s no surprise that the first CPG company to enter the loyalty field was one of the world’s great brands – Coca Cola. In 2006 they launched My Coke Rewards, giving consumers the opportunity to go online and enter codes from product packaging to earn points redeemable for merchandise and members-only experiences. The customer experience, which requires entering a lengthy code manually, could be much improved. The program is still in-market and current technology is gradually improving the experience. While nothing has been published definitively crediting the program with increasing revenue, the program clearly engages consumers, and opportunities with other CPG companies are exciting.

PACKAGING LOYALTY

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In 2007, Virgin America airlines changed the loyalty game. Their program, Elevate, was a dramatic departure from legacy frequent flyer programs – and it changed the way airlines, other marketers and consumers look at loyalty.

Over the years frequent flyer programs delivered less value to members, who complained loudly and publicly. “Free” flights cost more and more miles; blackout dates made award travel impossible at certain times; and capacity controls reduced the number of seats available for awards. The industry felt locked into a structure based on miles, because of customer familiarity and precedence. However, there were huge variations in profitability per mile flown. There were also huge variations in the value of a 25,000 mile reward which could be redeemed anywhere within the continental U.S. There was a fundamental mismatch between profitable behavior and reward payout.

Why did the airlines go with miles in the first place instead of dollars? Because miles were

the only data point that could be measured by individual flyer in the 1981 data systems. The reason for one 25,000 mile reward across the U.S. was the same – it was all the original systems could handle.

Virgin America blew it up with one simple insight: why not manage earnings and rewards using the same system we use to manage fares? By awarding points based on dollars spent, and dynamically pricing award seats, no blackouts or controls were needed. Any seat on any flight was available for award use, at the right price in points – earning and rewards now matched profitable behavior. The system is fair and transparent for flyers, and more profitable for the airline. Dollars for points were by now commonplace for credit cards and retail programs so the concept was easy to communicate and advances in real time digital technology made booking a dynamic reward intuitive. This approach was such an obvious win-win, it was adopted by Southwest and JetBlue.

ELEVATING LOYALTY FROM PROGRAM TO EXPERIENCE

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But it wasn’t just the financial game Virgin changed. Elevate was designed to be more than a transactional program; it is part of the overall brand experience. Membership enables access to enhanced services, like the onboard entertainment system that turns an airplane into the member’s personal playlist. Members can play games onboard, competing with other passengers and sometimes other planes. Back on the ground, Virgin personnel congratulate the winners.

The influence of the groundbreaking Elevate program can be seen in today’s best programs, like Starbucks’ integrated mobile app that combines and integrates real time loyalty, payment vehicle, games, offers and more. Loyalty programs would never be the same.

By 2015, customer loyalty had reached the milestone of 3 billion program memberships in the U.S., with the average American enrolled in 13.3 programs and active in 6.7 (Bond 2015 Loyalty Report). While some think this level of engagement is disappointing, the same report finds that 34% of U.S. consumers say they are loyal to a brand because of its loyalty program – and usually U.S. consumers don’t like to admit that they can be influenced by a marketing effort. What other single marketing strategy can claim 34% effectiveness?

Loyalty programs continue to evolve, reaching into new industries and categories, using technology to enable the customer experience and breaking new ground in unexpected ways.

34% OF U.S. CONSUMERS SAY THEY ARE LOYAL TO A BRAND BECAUSE OF ITS LOYALTY PROGRAM

Thirsty? Check the Starbucks app on your smartphone to find the nearest store. Does it have a drive-through? How late is it open? Place your order via the app. Walk into the store and scan your phone to pay. Then watch the stars you just earned in My Starbucks Rewards bounce into the cup on your screen. If you have enough stars, redeem them on the spot for a free snack.

THIS IS WHAT LOYALTY LOOKS LIKE NOW.

Technology has allowed the best marketers to integrate store locators, payment vehicles, loyalty programs, even games, in a single app that’s always at the consumer’s fingertips. Convenience, rewards, ease of use and a fun experience combine to build habit, loyalty, engagement and advocacy.

THESE ARE TODAY’S BEST PRACTICES.

Initially led by Millennials, all consumers have come to expect experiences, benefits, rewards, services, entertainment and information customized to their needs and wants, tailored to their current location, context and mission,

delivered in the channel of their choice, anywhere and anytime. Marketers who fail to deliver on those expectations will be left behind. And loyalty programs remain one of the best ways to gain a consumer’s explicit permission to track behavior, which will only increase in importance as more privacy laws take effect. Loyalty programs provide a visible mechanism to exchange data in return for value and relevant content that engages consumers and delivers a rewarding experience with the brand.

Mobile payment is a key part of the best-designed programs. As Apple and Google work to bring mobile pay to critical mass acceptance, one piece of the puzzle will be incorporating loyalty seamlessly into the experience, as Starbucks has done but with the limitation that the member has to purchase a stored value card and maintain a balance with Starbucks. So far, most payment apps require the customer to identify herself twice; once for the payment and once for the loyalty program. This is a less than optimal experience, and will have to be solved as the apps mature.

WHATEVER I WANT - WHENEVER, WHEREVER, HOWEVER I WANT IT

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In 2006, Coca Cola introduced My Coke Rewards, leading the way for CPG manufacturers and other marketers with indirect distribution to start building direct relationships with customers. Other packaged goods companies including Procter & Gamble, Kraft and Kellogg’s also began efforts to interact with consumers without disrupting their retail partners. Many of these initiatives are simply communications, like e-newsletters, but some are full-fledged rewards programs, like Kellogg’s Family Rewards. CPG programs still face a challenge in delivering an effortless customer experience – some programs require manual entry of package codes – but program penetration in the category is bound to increase in the near future as the ability to scan data from receipts and purchased products becomes a reality.

Entertainment content companies like Warner Bros., Disney, NBC, and Univision have also been trying out loyalty with some fascinating reward innovations. However, most did not sustain the effort to gain critical mass. For example, Warner Bros. launched Insider Rewards in 2008. It was

an innovative program rewarding purchases with points redeemable for discounts, and interactions such as reviews, likes, and tweets with recognition, status and game elements. That program morphed into the Warner Bros. A-List, primarily used as a research panel. Disney has been the most successful at the discipline of building actionable loyalty bases with targeted programs to reward different segments willing to buy directly. Disney Movie Rewards targets the direct purchaser of Blu-rays, DVDs and digital downloads with rewards in kind plus exclusive collectibles. The Disney Movie Club combines features of modern loyalty programs like Amazon Prime with the old-school appeal of the classic music and movie clubs. Club Penguin and Games apps provide age appropriate engagement opportunities for children – with full parental permission.

Whatever forms these engagement efforts take, the key is creating interaction with the end consumer, even in an environment where the transaction is owned by distributors like Apple, Amazon, Walmart or AMC Theatres.

DIRECT CONNECTIONS WITH INDIRECT CUSTOMERS

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Another sector entering the loyalty arena may seem unlikely: public agencies, and public/private enterprises. Perhaps the most noteworthy is the Merci program launched by the Societe de transport de Montreal. While a public transit agency is essentially a monopoly, such agencies obviously compete with private cars, taxis, Uber and other alternatives – and a good loyalty program can help agencies win and retain share while also monetizing their extensive rider base. STM partners with local businesses to offer discounts and rewards to Merci members, using behavioral data and geo-locating technology

to deliver immediately relevant, local offers and experiences to transit users. Merci also rewards “doing the right thing” with recognition for the rider’s contribution to the environment and quality of life.

Other public agencies, including power utilities, have also experimented with loyalty programs, achieving mixed results. Some, like Energy Plus, partner with existing programs (Marriott, Amtrak, Sears and major hotels and airlines) to deliver rewards to their ratepayers. And other enterprises, such as Recyclebank, partner with numerous “green” merchants to reward socially desirable behaviors.

MERCI, MERCI, MERCI

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Merci also rewards ‘Doing the right thing’ with recognition for the rider’s contribution to the environment and quality of life.

Coalitions like Air Miles and Nectar have long been successful in Europe, Canada and other markets. But success in the U.S. has eluded those loyalty marketers, like Air Miles, that have attempted to break into the American market. One primary cause of this disparity is that key industries, including supermarkets – a vital player in most coalitions – are much more fragmented and regionalized in the U.S., compared to the more compact and consolidated markets elsewhere where one player can drive membership of the majority of all consumers in a country. Another factor is the American consumer’s strong engagement with individual brands’ programs, especially the airlines that have enough partners to fulfill the function of multi-brand coalition. Finally, marketers fear that coalitions won’t provide them with the customer data they need, and may distract customers with a separately branded program.

PLENTI IS BETTING THAT’S ALL ABOUT TO CHANGE.

Launched in 2015, Plenti’s initial marketing partners include Macy’s, AT&T, Exxon Mobil and Rite Aid. Plenti’s marketing efforts are extensive and expensive, including national media and prominent POS promotion. The program certainly has a chance to become America’s first successful retail coalition, given the strong brands participating and the powerful promotional campaign. But the challenges to gaining traction are significant. The public will need to perceive that the program’s rewards are sufficiently valuable and relevant to bother playing. And marketers will need to see measurable return on investment along with improved access to a larger customer base. So the jury remains out on coalitions in the U.S.

IS AMERICA FINALLY READY FOR COALITION PROGRAMS?

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Many have predicted that loyalty programs would outlive their usefulness and disappear from the marketing landscape. But 34 years after the launch of modern programs by the airlines – and 119 years after S&H Green Stamps – it appears that the death of loyalty programs has been greatly exaggerated. In fact, Millennial customers display even higher rates of sign up, earning, and redemption than other age groups – almost 70% of 20 to 34 year olds said they would change where they shopped to get more loyalty rewards (Bond 2014 Loyalty Report).

Customer engagement strategies have continued to innovate, attracting new players,

new industries and new members every day. Programs have adopted new technologies, introduced new efficiencies, developed new ways to deliver the benefits customers want and the results marketers need. Programs have adapted to changing relationships between consumers and marketers; in fact, programs have been a key driver of today’s disintermediated, customer-driven environment.

It’s a pretty safe bet that loyalty programs will continue to be an integral part of the marketing mix for the foreseeable future – provided we never stop listening to customers and innovating to meet their needs.

WHAT DOES THE FUTURE HOLD?

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70% OF 20-34 YEAR OLDS SAID THEY WOULD CHANGE WHERE THEY SHOPPED TO GET MORE LOYALTY REWARDS

With over 25 years’ experience in customer loyalty, Howard Schneider, Senior Consultant at Kobie Marketing brings innovation and insight to the creation of effective solutions for each client’s unique situation. Prior to joining Kobie,

Howard was Managing Partner of Metzner Schneider Associates where he led the team developing customer engagement strategies for multiple global brands.

Kobie is a leader in loyalty marketing and customer experience solutions. We help brands track, measure, analyze, and respond to consumer behaviors in real-time across systems, channels and devices. Our technology and services enable and shape the entire customer experience so brands can better engage members and impact profitable growth.

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