I carry a tiny wallet. It can hold only my driver’s license, MetroCard, three credit cards, and about $100 in cash. My friends wonder how I get by with so little carrying capacity. Answer: I don’t participate in customer loyalty programs. No cards that earn me coupons from drug stores, no key fobs for discounts on groceries, not even a little piece of paper with stamps that entitle me to a free sandwich. Loyalty cards are usually a bad business strategy. They’re either a creepy way to monitor and exploit your habits or a desperate gambit by weak retailers to distract you from their own shortcomings. Most companies use loyalty programs as a crutch when they’re out of ideas, and, therefore, these schemes are ultimately bad for customers as well. If a cashier tries to shove a loyalty card into your hand, it’s a good indicator that you should be taking your business elsewhere.
A brief history of the customer loyalty program shows why. In 1981, American Airlines CEO Robert Crandall made three observations about his industry. First, a tiny proportion of customers were responsible for a huge percentage of revenue. At the time, more than half of American Airlines’ customers took just one flight per year, whereas the top 5 percent flew 20 or more times. Second, business travelers, who made up the bulk of that top 5 percent, cared very little about the price of any individual ticket. Finally, airlines are all basically the same.
As much as people tout the quality of a few airlines, Crandall’s assumption that his competitors offered the same levels of service, safety, and timeliness is beyond serious dispute. A 2010 study showed that a mere 5.5 percentage points separated America’s most on-time airline (Southwest) from its 10th best (JetBlue). Flight safety experts insist there is no way to statistically separate the safety records of major airlines, because accidents are so rare. As for service, I don’t need to hear curated house music while I put my bag in the overhead bin, nor do I fully appreciate the value of a warm towel.
Since Crandall couldn’t compete on quality and his biggest customers didn’t care about price, he made a novel offer: Choose American Airlines over our identical competitors, and we’ll toss in a free flight every now and then or bump you up to first class. It was called AAdvantage, and most management experts agree it is the father of the modern customer loyalty program.
Here’s the takeaway: Loyalty programs only make sense in industries in which a company can do nothing to differentiate itself from its competitors, and customers lack either the motivation or the price sensitivity to shop around. Those descriptors apply to very few businesses. In addition to airlines, the programs probably make sense for car rental companies, newsstands, and possibly a few others. In most industries, though, companies that think they can’t compete on service or quality are not trying hard enough.
Take a look at grocery stores. A few chains, including Whole Foods and Trader Joe’s, attract customers through superior quality or unique products. It’s no coincidence that these stores don’t have loyalty programs. They don’t need them, because they’ve given you a compelling reason to shop with them. Grocery outlets with harsh lighting, cheap flooring, and signs handwritten in marker—you know the ones I mean—almost always have some kind of club program, because they can’t think of any other reason for you to walk through their noisy, unresponsive sliding doors. (Wegmans is alone among premium-quality grocery chains in having a loyalty program, but it dates back to 1990, before the chain surged past its humdrum upstate New York competitors.)
Business management scholars have written piles of studies on customer loyalty programs, and virtually all of them reach the same conclusion: In most industries, they’re hopelessly mismanaged. It’s not that the programs don’t work; it’s that they work too well. Customers become so well trained to follow loyalty discounts that they won’t buy without them. According to a 2002 article in the Harvard Business Review, many retailers now offer such extensive rewards for loyalty that they’re no longer making money on their top customers—the very people the programs are supposed to entice. In addition, most customers engage in what researchers call “polygamous loyalty,” which is a creative way of saying disloyalty. The overwhelming majority of fliers, for example, belong to multiple rewards programs. It’s a race to the bottom, as companies are so afraid of losing customers to their competitors that they destroy their own profitability and forsake strategies to attract customers in novel ways.
Those rare loyalty programs that management researchers favor lock customers into uncomfortably personal relationships with a grocer, airline, or clothing store. Take, for example, the widely celebrated program launched by the British grocery chain Tesco. The more often a customer shopped at Tesco, and the more high-profit-margin products he purchased, the more coupons he received in the mail for more high-margin products. In other words, Tesco trained its customers to buy pasta with a larger markup, like dogs that salivated at the sound of a bell. In addition, Tesco monitored its customers’ buying habits closely. When a loyal shopper who visited the store weekly suddenly missed a couple of weeks, the chain feared that one of its sheep was straying from the herd and dispatched some coupons to shepherd him back. Maybe you’re comfortable with that relationship, but I don’t want a large grocery chain tracking my weekly movements, and I’m willing to forgo 40 cents off of Greek yogurt to avoid it.
A brief history of the customer loyalty program shows why. In 1981, American Airlines CEO Robert Crandall made three observations about his industry. First, a tiny proportion of customers were responsible for a huge percentage of revenue. At the time, more than half of American Airlines’ customers took just one flight per year, whereas the top 5 percent flew 20 or more times. Second, business travelers, who made up the bulk of that top 5 percent, cared very little about the price of any individual ticket. Finally, airlines are all basically the same.As much as people tout the quality of a few airlines, Crandall’s assumption that his competitors offered the same levels of service, safety, and timeliness is beyond serious dispute. A 2010 study showed that a mere 5.5 percentage points separated America’s most on-time airline (Southwest) from its 10th best (JetBlue). Flight safety experts insist there is no way to statistically separate the safety records of major airlines, because accidents are so rare. As for service, I don’t need to hear curated house music while I put my bag in the overhead bin, nor do I fully appreciate the value of a warm towel.
Since Crandall couldn’t compete on quality and his biggest customers didn’t care about price, he made a novel offer: Choose American Airlines over our identical competitors, and we’ll toss in a free flight every now and then or bump you up to first class. It was called AAdvantage, and most management experts agree it is the father of the modern customer loyalty program.
Here’s the takeaway: Loyalty programs only make sense in industries in which a company can do nothing to differentiate itself from its competitors, and customers lack either the motivation or the price sensitivity to shop around. Those descriptors apply to very few businesses. In addition to airlines, the programs probably make sense for car rental companies, newsstands, and possibly a few others. In most industries, though, companies that think they can’t compete on service or quality are not trying hard enough.
Take a look at grocery stores. A few chains, including Whole Foods and Trader Joe’s, attract customers through superior quality or unique products. It’s no coincidence that these stores don’t have loyalty programs. They don’t need them, because they’ve given you a compelling reason to shop with them. Grocery outlets with harsh lighting, cheap flooring, and signs handwritten in marker—you know the ones I mean—almost always have some kind of club program, because they can’t think of any other reason for you to walk through their noisy, unresponsive sliding doors. (Wegmans is alone among premium-quality grocery chains in having a loyalty program, but it dates back to 1990, before the chain surged past its humdrum upstate New York competitors.)
Business management scholars have written piles of studies on customer loyalty programs, and virtually all of them reach the same conclusion: In most industries, they’re hopelessly mismanaged. It’s not that the programs don’t work; it’s that they work too well. Customers become so well trained to follow loyalty discounts that they won’t buy without them. According to a 2002 article in the Harvard Business Review, many retailers now offer such extensive rewards for loyalty that they’re no longer making money on their top customers—the very people the programs are supposed to entice. In addition, most customers engage in what researchers call “polygamous loyalty,” which is a creative way of saying disloyalty. The overwhelming majority of fliers, for example, belong to multiple rewards programs. It’s a race to the bottom, as companies are so afraid of losing customers to their competitors that they destroy their own profitability and forsake strategies to attract customers in novel ways.
Those rare loyalty programs that management researchers favor lock customers into uncomfortably personal relationships with a grocer, airline, or clothing store. Take, for example, the widely celebrated program launched by the British grocery chain Tesco. The more often a customer shopped at Tesco, and the more high-profit-margin products he purchased, the more coupons he received in the mail for more high-margin products. In other words, Tesco trained its customers to buy pasta with a larger markup, like dogs that salivated at the sound of a bell. In addition, Tesco monitored its customers’ buying habits closely. When a loyal shopper who visited the store weekly suddenly missed a couple of weeks, the chain feared that one of its sheep was straying from the herd and dispatched some coupons to shepherd him back. Maybe you’re comfortable with that relationship, but I don’t want a large grocery chain tracking my weekly movements, and I’m willing to forgo 40 cents off of Greek yogurt to avoid it.
by Brian Palmer, Slate | Read more:
Image: Joe Logon/Flickr via Creative Commons
