Loyalty Programs — Instilling or Rewarding Loyalty?

Loyalty program has been into existence since the advent of modern day marketing. Almost all the industries, B2B, B2C and C2C, have some kind of loyalty or reward programs as customer engagement strategy. For an industry like airlines this has evolved into one of the core offering  — a source of competitive advantage. However, this article likes to do a quick check into what is the real objective behind offering a loyalty program — to bring loyalty (read repeat purchase) from the existing customers or to rewards loyalty for already existing customers.

Lets take two such cases where loyalty program was designed to meet either of the objectives.

Airline Loyalty Program

The idea of loyalty programs in airlines started with Texas International Airlines which evolved to became a prime service offering for almost all major airlines. The basic idea behind airlines programs is to provide customers in initial few purchases a reason to stick to a  service provider. From this sense, most of these loyalty programs are build to encourage repeat purchases from an existing customer and create an exit barrier against customer churn.

Amazon Loyalty Program

Amazon loyalty program is designed to give preferential and better services for select customers (who by the way have to pay a certain amount to enrol the program) .These customers are given better speed, better prices, better access to promotions and better return policies. However, the customers most likely to enroll for these programs are the ones who are more than certain that they are going to purchase from Amazon in near future. Hence, the overall program is designed to reward loyalty to the existing customers rather than build loyalty.

In both the above cases, the loyalty program is creating an exit barrier for the customers, improving retention and in some cases even improving the purchase value and purchase frequency. However, the customer segments on which these programs apply and underlying objective for offering such a program to customers are totally different. The naysayers, at this point, will point out that in both the cases the end result is same and it’s will be very hard to classify a particular loyalty program clearly into anyone of these buckets; and I do not totally disagree with this argument. However, even the most ardent followers of this belief will be convinced despite the same end objective for these programs is same, customers will perceive and enroll for these programs for entirely different reasons.

So why do different companies, industries or functions offers different value proposition to the customers. The answers lies deep into different customer expectations from different programs and lifecycle stage of the industry. Customer expectations from airlines and amazon retail is totally different especially in terms of availing differentiated service. This could be because of the industry player’s ability to provide differentiation with positive RoI or customer need for differentiated services from the service provider. In the cases mentioned, the ability to provide differentiated service at scale is not possible for many major players in airlines industry — leaving alone the luxury or class A airlines. Also, the customer expectation for differentiated addon service is also low for most of the customers. However, in case of product + services offering like that of Amazon, firm’s ability and demand of differentiated service both exist — leading to loyalty program is designed to cater to specific differentiated services to specific customers. The second major factor which leads to a specific industry falling to either of the buckets is its lifecycle stage. Airlines industry, especially in developed nations, is in mature stage — where the players focus is more on customer retention v/s their acquisition. Moreover, the ability to differentiate between airlines operating in a similar category has been diminished — hence loyalty programs comes in as an handy tool to retain customers. However, in case of ecommerce, 1) majority of the geographies industry is still in customer acquisition stage, 2) there are multiple experience components which can be moulded as per customer’s preferences — customized delivery speed, product range, promotions, prices, even channels. The loyalty programs in this scenario is designed to provide such match customer needs for these customization — helping in better retention and acquisition of the similar customer segments. These programs are designed for better retention through customized services for invested customers, hence the concept of rewarding loyalty

One Comment

  • Airline industry has actually very low profit margin because if high operating cost and price sensitive customers. Even for big OTA’s, it’s very difficult to include flight in the loyalty program. In lodging industry, since profit margin is so high, discount offers and member-only-deals are a norm since both supplier and OTA’s join hands in providing loyalty benefits.

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