Loyalty marketing: Stop copying the competition

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In studying customer reward programs, Michael McCall, a consumer psychologist at Ithaca College, has found that they are not always so rewarding — for the customer or the business.

McCall discussed with DMNews his June 2010 paper, “Building Customer Loyalty: Ten Principles for Designing an Effective Customer Reward Program,” which he co-wrote with Michigan State University professors Clay Voorhees and Roger Calantone.

DMNews: What does your paper say about customer rewards program?

Michael McCall: Our first paper that we wrote appeared in the Cornell Quarterly back in February. It was kind of a review that says, “OK, what do we know? What are people thinking about customer reward programs? And what are directions we can take this line of thought?” I'm an academic, so basically a lot of what I do is on the academic side. And then there are practitioners out there who are out in the streets. And the problem is the two of us don't always talk, which creates some obvious issues.

The first reward program was the S&H Green Stamps program. That was years and years ago. What was interesting about it is it gave users a choice of what they wanted as a reward. So they would buy products, they would earn these stamps, they would fill up their books, and at some point, they would decide to redeem them. That was a real good part of the program, giving the customer a choice. On the other hand, you didn't get a whole lot of what we now call analytics or data from your customers.

In 1981, American Airlines launched the Advantage program, and that's probably the prototype for most reward programs today. What reward programs are intended to do [are to] give the best customers the best rewards. The interesting piece in that is the airline programs don't do that. They reward miles flown but not necessarily to the most profitable customers. The thinking being that someone can take 10 discounted flights for $49, or whatever the deal may be, and be less profitable than the guy who takes one flight and goes to London first-class.

DMNews: You mention in your paper that tier-based programs don't always work well.

McCall: What we're thinking about here is, “OK, how do you design a program that actually engages the customer, that gets the customer to voluntarily market the firm — in other words, word-of-mouth conversation?” For instance, the Marriott program, you can earn the Silver status after 10 nights, but the next upgrade doesn't come until 50 nights. After I get my 10 nights, and I'm pretty sure I'm not going to make 50, am I going to stay with Marriott or am I going to shift over because I'm getting close on my Hilton points?

DMNews: What is a loyalty program that you think works well?

McCall: Casinos are kind of leading the way. They're ridiculously good at collecting data. And what has happened now, particularly with the technology, is that the casinos are almost leading this discussion because they have so many sophisticated ways of capturing that information, and almost view their rewards program as just an expense for gathering customer data. Those little rewards cards they give you when you go into a casino — they can tell what table you hit, they can tell you when you go to the spa, when you go to dinner, what your room preference is. Plus, they know all this other information about you — how frequently you come and what you like to do.

DMNews: Do you see a common mistake that companies might be making when designing their programs?

McCall: I think the most common mistake is they get involved in the loyalty program, by and large, copying what the competition is doing. We had this quote in another paper from a hotel manager who said, "I've got this program. I don't know what it does for me. It's expensive, but I feel like I've got to have one because everyone else does." So the most common pitfall in all of this is to design a program simply because your competition has one. In some cases, that might not be profitable.

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