About three years ago, I was flying from Barcelona to New York on United Airlines.

As we were descending into New York, five flight attendants approached my seat in the back of the plane and they said, “Are you Mr. Ehredt?”

I said, “well yes, I am”, and they said, “we wanted to congratulate you for reaching one million actual miles on United’s flight today.

And while I was surprised that they knew that information at that time, you should have seen how surprised were the other ten people sitting around me.

That type of simple recognition goes a great way in building loyalty with customers.

This presentation is about driving customer engagement, and how the loyalty industry is transforming in order to engage with the mid-tail and long-tail customer.

You can either click play below to watch the presentation in full, or you can scroll down to read it in full and scroll through the slides.

Loyalty programs must evolve to keep customers engaged

Every business needs a loyalty strategy, but not every business needs a loyalty points program. Points are just an excuse to start a dialog with customers, keep score, and enable an economy based on an incentives currency.

It doesn’t matter what type of business you have, you won’t survive without a significant portion of your customers remaining loyal.

However, it is not the customer who needs to demonstrate their loyalty to your brand, but rather you as, a business professional, who has to build loyalty with customers. You can do this by delivering good value and a consistently good experience.  Note that I did not say ‘great value’ or ‘great experience’.  It just has to be consistently good.

Loyalty comes from a combination of the characteristics of your product and/or service. And it does not matter if you are B2C, B2B, or B2B2C.

Today, I am not going to teach you the basics of loyalty marketing. This is not a beginner’s class.

Rather, I will explain why the industry is changing and why your company needs to collaborate with complementary brands in order to double or even triple engagement with customers.

I will also explain why the API economy will make this happen quickly, with the convergence of Artificial Intelligence (AI), continued mobile adoption, implications from the Covid-19 pandemic, and a few other factors.  The way brands engage with customers will change dramatically in the next 2-3 years.

Over the past 30 years, the average number of loyalty programs that people belong to has grown from about 3 to about 30, yet brands still tend to have less than 25% of total customers active in their loyalty program.  If this trend continued, customers would be participating in over 50 loyalty programs in just 10 years’ time – and that implies they are carrying a kilo of plastic cards in their pocket or they have the capacity to pay attention to 50 companies marketing to them on a weekly basis.

People can’t possibly have the attention span to keep up with 50 brands.  I do believe that the level of loyalty engagement will continue to grow.  It just won’t grow with stand-alone loyalty programs.  It will grow among brands that participate in large networks of partners, collaborating together so their customers can earn more value, and have greater freedom to use that loyalty value as they prefer.

Markets evolve because they are ecosystems.  The most effective and efficient ecosystem in the world is nature.  Plants and animals have co-existed in a degree of harmony for millions of years.  Where there has not been harmony, plants or animals evolved.

Some would call that survival of the fittest.  I would suggest it is evolution based on every participant trying to optimize the environment based on their own self interests.

People and businesses should do the same.

Mankind has an advantage on our planet because of our level of intelligence and ability to innovate fairly quickly.

Innovation in markets has been going on for centuries.  Money was invented to make trade and marketplaces more efficient.

Marketplaces have evolved from souks and bazaars, to supermarkets, shopping malls and now massive ecommerce marketplaces.

Supply chains and logistics have evolved from the Silk Road, thousands of years ago, to low-cost, last-mile delivery.

And guess what? Customer acquisition and retention tactics have also evolved tremendously, to now include merchant-funded offers and cashback, as well as real-time, geolocation-based targeting.

Technology is enabling this at scale. All of these areas of innovation are accelerating – which is precisely why there is so much opportunity in the world for you, as entrepreneurs, investors, merchants, or customers.

So, now let’s zero-in on loyalty marketing.

Loyalty is hard-earned in a competitive marketplace

Keep in mind that businesses have had loyalty strategies for hundreds of years.  The first loyalty programs as we think of them today were launched around 1930 as stamps programs – where you could collect stamps when spending at specific merchants.

You might know that prior to the 1980s, consumer demand for products typically exceeded supply. Therefore, companies could put almost anything on the shelves and it would sell.

What seems strange to me is that in the past 30 years, nearly every aspect of the “market” has evolved significantly, but most loyalty programs are still designed the same – basically to give points for purchases (very transactional).

Points are still relevant because they are an easy way to keep score.

But in an extremely competitive market, the customer’s attention is most precious.  People are bombarded every hour with many brands trying to obtain their attention.  Since people are time-starved, they turn to technology and rely on instinct to reduce the burden.

This will continue and people will increasingly rely on AI-based Intelligent Personal Assistants to work for their human masters.  Such assistants include Amazon Alexa, Google Assistant, Siri and others.

Any technology that saves people time will be valued.

Habits are the primary reason why customers stick with a known brand.  The customer may not be particularly loyal, but the reduced risk associated with a known supplier tends to create habits – which can be hard to break.

AI-powered assistants don’t care about habits because they are based on mathematics and will mostly make decisions based on calculated value.  That means that any brand offering that is not in digital format, and digitally visible in global ecosystems, won’t be analyzed by the digital assistant, or form part of the consideration set presented to their master.

With the Covid-19 situation, many human habits have been broken during the past 6 months. Plus, customers have had a bit more time to explore alternatives, or been forced to use alternative suppliers due to being stuck at home.

In reality, a loyalty program is really just a value exchange.

It creates the rational framework for a customer to justify in their own mind that giving up their data and receiving marketing messages via email or via apps, is justified in exchange for special offers, recognition, and the points.

The design of most loyalty programs have reached their limits to engaging with customers – kind of like a glass ceiling.

That means for brands, they may have 20-25% of total customers participating.

You have to ask yourself ‘why are the other 75% of customers not participating?’

That is the key question. And, it is the fundamental reason why loyalty marketing will transform.

Now it may be true that the 25% of customers who are participating make up 40-50% of total revenue – so that is significant. The reason these customers participate is because of their frequency and volume of spending.

Frequency is the key characteristic that determines the success of most loyalty programs. If your customers only shop with you every 3-6 months, your standalone loyalty program will struggle to sign up members. If your customers buy from you less frequently, it is even harder. In truth, most customers don’t need a new refrigerator very often, let alone new shoes, a car, or even a trip to Mallorca.

For brands that sell these types of products or services, a loyalty program can only be valuable to join if the points have value outside that business in a larger network of brands – because within your business alone, customers just won’t earn enough to make it worth their while.

On the other hand, if you have frequent engagement with your customers then you have the potential to let customers accumulate significant value from you, so their participation warrants the effort.

Collaborate with other brands to maximize cusotmer value

To put your loyalty program on steroids, you need to collaborate with other brands, so customers can collect more often and have greater choice in how they put that loyalty value to use to meet their goals.

Imagine if you could collect the loyalty points you really want at nearly every place you shop. You would then accelerate earning and the pace at which you earn rewards.

Most people in developed countries spend about $2,000 per month on discretionary items: groceries, pharmacy, gas, clothing, financial services, utilities, and housing. The slide below shows these spending categories arranged from the perspective of a supermarket loyalty program, but the same theory also applies to a loyalty program in the travel sector.

If you could earn the points you really want across all those service providers, the value would add up quickly. Of course, Tesco does not want you to earn points with them and then use those points at Carrefour, so some limits on freedom need to be in place.

Therefore, loyalty collaboration among travel companies, supermarkets, pharmacies, and clothing retailers could make daily engagement very realistic for billions of people.

For example, when a city allows people to use the same ticket across trains, busses, and the metro, ridership goes up for everybody.

infographic showing a loyalty coalition in the grocery sector

Businesses sharing insight about a customer’s spending habits could help each partner be more proactive in serving needs and creating customer value.

The days of hording data are coming to an end. Most customers are willing to share their data if it leads to better experience or greater value.

Brands should embrace the customer’s willingness to co-create value and collaborate more, as well as more openly share data when given permission.

Customers don’t buy products or services just for the sake of spending money. Customers buy food because they need to eat.

Customers buy cars because they need to get to places that are too far apart to walk.

To go to the cinema, they often need to pay for a taxi, fuel, parking and/or mass-transit to get there. They will often have dinner with their companions before or after the movie.

If a select set of providers of all the required services collaborated, they could generate incremental revenue and perhaps pass some of the value back to the customer in the form of a discount, loyalty points, or a discount voucher for the next time the customer consumed the same package of services.

Many of the people in the audience today sell technology solutions. Few of you solve your customer’s entire problem with your solution alone.

That’s a pretty good reason to collaborate with other companies that deliver complementary technology, knowledge, or operational support to solve your customer’s entire problem.

A marketing campaign technology provider should collaborate with an analytics company, as well as companies that can provide more sources of customer data to improve targeting.

Such coordination would simplify the work and reduce the risk of your customer, while creating efficiencies in delivery that can be replicated across more potential customers.

As in any healthy marketplace, each stakeholder should be optimizing the environment for their own self-interest. I would argue that this type of ecosystem collaboration would lead to more sales, a shorter sales cycle, reduced delivery cost and greater customer satisfaction. And, as you know, satisfied customers are the ones who become loyal.

In fact, solving a customer’s problem more comprehensively is the primary motivator for mergers and acquisitions.

Bigger companies often buy smaller ones precisely so they can solve more of their customer’s problems with their expanded portfolio of solutions.

A model for a winning loyalty program

So, let’s wrap up by envisioning a loyalty program that would dominate the market and shift consumer spending to the collaborating partners.

First, you would want a supermarket chain that has stores in most cities. Grocery is an important category because people spend between 10% and 20% of their monthly income on food – so the frequency and volumes are both high.

Next, you would want a financial services entity where customers can keep their money and facilitate payments. Historically, this would be a bank with offices in most towns, but today it could be N26, Revolut or another digital bank.

Banks in Europe had powerful loyalty programs before July 2017, but when the European Union slashed the interchange fee, banks no longer had an easy way to fund the value of points. What banks failed to realize was that their merchant network would happily fund the value of points if the bank promoted their brands to the bank’s large customer base.

I predict that some of the most successful loyalty programs in the coming years will have a bank as a central sponsor. Banks operate a large ecosystem of commerce already – which is under threat from fintech challengers. If the bank repurposed all the collaborations they see daily through consumer and business spending, they could easily lay a loyalty program on top – not only to create more value for their customers, but to build rich insight about customers based on their actual behavior and lifestyle preferences.

And then, in this program, we would add a fuel and convenience store chain with good coverage nationwide. The amount of spend and the items purchased at convenience stores tells a lot about peoples’ preferences.

A mobility operator should also participate – such as a taxi company, or even a mobility app that sits on top of many mobility alternatives, so customers can easily find and book the optimal method to get to their destinations.

I would then add in one or more pharmacy groups, and a few high street retailers for apparel, shoes, and household goods.

To provide a little excitement, I would add a cinema chain, some restaurant groups, and a hotel chain. It would be nice to add an airline, but in reality, most airlines prefer not to take part in others’ programs as they’d rather customers earned their own loyalty currency. But I still would ensure the points that the customers collect in this open network of partners could be spent on travel.

From this collection of brands, that provide the products or services on which customers spend an accumulative 1,000€-1,500€ per month, the customer can now earn 10-15€ by collecting only 1% of their spend with each brand in the form of points.

The value customers could earn per year would be in the 150€ to 300€ range.

That is enough to get people to change their habits, so rather than buy gas anywhere, members would now concentrate their spending at the fuel retailer participating in this loyalty program.

People who did not bank with the financial services entity participating might open new accounts in order to earn value in such a scheme. People with debit or credit cards from multiple banks would make the one from this ecosystem top-of-wallet to earn more points.

And, you can take this further and provide points for non-purchase activities that increase the lifetime of a customer. This might involve offering points for customer referrals, posting product reviews online, or participating in surveys.

Creating emotional loyalty, by incentivizing non-purchase activities and creating experiences or memories, is key in building long-term, mutually beneficial relationships.

The magic of loyalty points

So, now let me explain how such a loyalty solution can create real magic.

You may know that revenue management systems at hotels are now so good, they can predict one month in advance how many rooms will be vacant on any given night. Because of contracts with Booking.com or Expedia, the hotels cannot easily discount the price to stimulate additional demand.

But, the hotel operator also knows it only costs about 7€ to clean a room. Therefore, filling those vacant rooms for any amount above 7€ actually contributes to their profits.

Therefore, in an opaque marketplace like a loyalty program redemption catalog, they might be willing to sell a room that normally would cost 150€ for 40€. The hotel makes over 30€ in contribution margin, the customer may spend more money on parking and in the restaurant, and the hotel might even convince the customer to become loyal and return at full price in the future.

This type of redemption enables a huge step up in value for the points in circulation. Each point may still have a cost of one penny, but the customer perceives them as being worth 4 cents each in purchasing power.

This magic can be repeated with any high-margin, perishable product – such as meals at restaurants, training courses, tours and activities, spa treatments, logistics services, digital entertainment, etc.

This marketing insight can help each partner in the loyalty ecosystem dramatically improve engagement through personalization. In fact, participating brands could double or triple customer conversion and remain top-of-mind when a customer needs their type of product or service.

Importantly, the cumulative effect of this type of multi-brand collaboration could shift 5-10% of customer spending within the country to the brands participating in the loyalty coalition.

That 5-10% shift in spending might represent an ROI of 50-100% for the participating brands.

And, instead of brands having 20-25% of their most frequent customers active in the loyalty program, this multi-partner coalition could be relevant to 80-90% of the population – allowing the brands to communicate with 60% more customers and ensure that each communication was tailored to be relevant.

Finally, the cost of the technology to support such a program would be spread across all participating partners based on the economic benefit they realize – so instead of one company spending 50,000€ to 2M€ for a good loyalty program management system, they are spending only a percentage of incremental sales on the underlying technology.

I challenge you to think about:

  • what incentives could motivate your customers to behave in a more profitable manner
  • …and which other companies that serve your same customers, could be your partners in creating more value.

I can easily imagine that in 3-5 years’ time, you will be able to see a world where some proactive brands, banded together in such a commercial network, achieve deep and frequent engagement with customers.

Consider your wider ecosystem to ensure survival

This simple insight of thinking about what your company does, in the broader context of the ecosystem in which your customers exist and consume your product or service, will unlock many ideas about which other companies you should be collaborating with, in order to reduce the cost of customer acquisition and retention, and to maximize custommer lifetime value.

Nokia, Kodak, and Xerox saw the world that was coming and were the inventors of many things we use today. But, their leaders rejected innovation.

Leaders in most companies today continue to struggle with similar choices. Since the turn of this century, 52% of Fortune 500 companies have ceased to exist. Sticking your head in the sand will not help your company.

Yet companies without legacy constraints are dominating the world.

We often say that no person or company exists in a silo, but most companies continue to go to market as though they do live in a silo.

The future in loyalty marketing will be based on multi-brand collaboration because that makes them more relevant to many more customers. It allows the cost of technology and operations to be shared across more partners, and this is the only way you can get the mid-tail and longer-tail customer engaged.

Getting these less frequent customers engaged will lead to finding that some of them are actually big spenders in your category, and others are willing to be more frequent if they can earn the loyalty currency they really want to collect.

Having 25% loyalty program participation is no longer enough.

And that is why the loyalty industry will change, and more brands will collaborate in loyalty networks.

About Chuck Ehredt

Charles is a seasoned entrepreneur and problem solver who built a career aligning people with technologies to turn business challenges into opportunities. Now the CEO and co-founder of Currency Alliance, Chuck is dedicated to promoting the collaboration between brands so together they can affordably deliver more value to customers while capturing behavioral insights to enhance personalization and lifetime value. As a serial entrepreneur, Chuck has launched 12 companies across multiple sectors and helped fund 23 startups.

Find out more about Currency Alliance on our website, and discover how to collaborate with your customer’s favourite brands.

Alternatively, get in touch here.