25 Jan 2010

Why loyalty programs are failing and how to fix yours

7 Comments facebook marketing and advertising, finance and economics, game dynamics and points

An article in MediaPost today highlights why few companies are delivering upon their loyalty programs. In a nutshell, consumers want personalized rewards, whether it be through their grocery store cards, airline frequent flyer program, or other points-based system.  But marketing departments are not able to personalize because they are unable to collect the data needed to personalize offers and internal organizational hurdles prevent companies from unifying their data across multiple silos.

I was fortunate to spend a few years at American Airlines to perform analysis on the AAdvantage program– to learn firsthand how the granddaddy of loyalty programs operated. Some challenges and how we overcame them:

Incomplete customer data
The website, reservations deck and gate agents all had separate customer databases. If you were a smart customer, you could complain at all three locations and earn triple the points. So if a bag supposedly fell on your head from opening the overhead bin, you could get miles for the inconvenience and the agents at the airport, on the phone, and from the website wouldn’t know that you were already compensated. 

The solution– create a unified customer database. This is quite expensive, has political issues to solve, but is well worth the effort.  When you can create a single view of the customer’s activity, you can measure their overall profitability and create programs to incent the right kind of behavior.

Mass blasting (spamming) customers

Email marketing is so easy and inexpensive that SVPs of Marketing are tempted to spam customers.  After all, if sales increased from changing the newsletter frequency from monthly to twice a month, why not weekly? We’ve seen this approach taken at a number of large brands.  Not only is this a customer turn-off, but goes against the whole point of offering personalized offers that are most appealing to where a customer is in your lifecycle and their stated preferences.   Part of status is being remembered for your particular likes (mints on your pillow and extra towels, if you’re a hotel customer), not to get the same message delivered to everybody.

The data crypt

What used to be called a data warehouse, then later called a datamart, then called business intelligence, then enterprise analytics is really just the same thing with a new name each time. Even if you can embark on a $20 million project to consolidate customer data into one spot, the bigger issue is actually getting it out.  Most marketing managers believe they have to speak a special prayer to the high priests of IT to be granted access to the database. The inability to easily access the data– no matter what expensive analytics tool you might have bought– prevents marketing manager from being able to do the analysis necessary to create a tailored menu of rules. Without a menu of actions and corresponding points, and then being able to adjust payouts based on what’s working, a loyalty program bleeds.  And the more data you have in your scoring model, the complex it is to calculate status, as you’re dealing with an increasing number of empty fields for variables and bad data.  So perhaps you were able to get a data append from a third party– let’s say Acxiom– and now you have gender, income, and the type of car they drive.  How is that affecting the ways to earn and burn points in your loyalty program?

IT doing Marketing and Marketing doing IT

Managing a loyalty program is really an exercise in user psychology, but which requires some technical execution.  You’re really looking at video game design and trying to influence their behavior.  An average IT administrator is not going to understand this, nor is a traditional brand marketer that has done media buys for 20 years. If you have a loyalty program in-house, ask yourself who is running it?  

The answer is finding folks who are well-versed in data analysis (crunching SQL statements in the database) and also understand user psychology.  Writing SQL is for engineers, you say?  Look at Amazon, where they require marketing managers to know how to query a database.  It’s not that hard.  How are you going to structure and adjust rules for earning and burning points by customer segments if you’re not able to go in there and hands-on be able to run reports? 

Summary– the weakest link

Well there you have it– all it takes is one break in the chain and your loyalty program has a problem.  If you aren’t able to collect user data– transactions and preferences, you can’t create personalized offers. If your marketing people can’t properly access the data, that expensive database just sits there. If you have the wrong people trying to solve the problem, it’s a guy with a hammer who thinks everything looks like a nail.

I’d say that brands would be well-served to hire folks from Nintendo, Blizzard, and other companies in the gaming industry to help revamp their loyalty programs. This is nothing more than a video game.


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written by
Dennis Yu is the Chief Technology Officer of Portage. He is an internationally recognized lecturer in Facebook marketing, having been featured in The Wall Street Journal, New York Times, LA Times, National Public Radio, TechCrunch, Fox News, and CBS Evening News. He is also an author at InsideFacebook and AllFacebook. Dennis has held leadership positions at Yahoo! and American Airlines. He studied Finance and Economics from Southern Methodist University and London School of Economics. Besides being a Facebook data and ad geek, you can find him eating chicken wings or playing Ultimate Frisbee in a city near you. You can contact him at dennis@portage.co, his blog, or on Facebook.
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7 Responses to “Why loyalty programs are failing and how to fix yours”

  1. Reply uberVU - social comments says:

    Social comments and analytics for this post…

    This post was mentioned on Twitter by digireviews: Reading: Why loyalty programs are failing and how to fix yours http://bit.ly/5LQn07

  2. Reply Dan Wedin says:

    Are there 3rd party loyalty program aggregators? It seems the future customers would demand it.

    • Reply Dennis Yu says:

      Hi Dan,

      You would think, but that’s just not how loyalty programs work– it’s like trying to combine PacMan with Mario Brothers. In the airline industry you have alliances, so like programs can combine. But that’s as far as I know. What do you think?

  3. Reply Dan Wedin says:

    Thanks for responding Dennis. You’re right, loyalty programs are unique. But, what if the 3rd party company had something like FB connect only in the real world. You carry around 1 card that you swipe at participating locations/businesses that you’ve signed up for and it’s all administered from your account online?

    I own a couple of restaurants and we participate in a program called PACE(4pace.com). Customers sign up online and every time they use their designated credit card at participating locations, the location donates a small portion of the sale to a charity/school of the customers choice.

    My employees don’t even have to know the customer is using it. It’s seamless. Seems like it could be transfered to loyalty programs and ran through merchant processing.

  4. Reply Paul K says:

    Dan, that’s a really great program. I wish more restaurants in my area would participate in this!

    In regards to the article, I definitely feel that many businesses are turning their back on a huge opportunity when it comes to loyalty programs. They are so prevalent these days that every business owner wants to try them – but without personalization as you mentioned, they just end up looking all the same, and hence really don’t encourage any kind of loyalty whatsoever. For example, I have 5 different grocery store keytags, and 3 different pharmacy keytags. I just go to whatever store is closest.

  5. Reply rachel smith says:

    check out http://www.stiqrd.com – we will be launching beta next month, then rolling out from there. this isn’t spam – i’m a real person, and happy to talk to anyone about the program. we are addressing the problem you have mentioned

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