Every business needs loyal customers. Loyalty means customers choose to buy products from us rather than our competition. Promotions and discounts are universally followed to garner this loyalty – incentivizing customers to buy from us through cash value rather than creating any long term differentiation. Sometimes, and much more effective, these offers are a means to get customers to try out or test the long term differentiation claimed.
In “Free: the Future of Radical Price”, Chris Anderson provides several examples of how discounts have generated opportunities to better engage customers.
Is “Free” or discounted prices really the right way? What do customers want? Do discounts really generate loyalty or do they just train customers to expect more for less?
A promotional campaign strategy has great uses. Some of them are:
- Low hurdles to adoption – initially free with a paid upgrade (e.g. LinkedIn, PayPal, software Products, etc.)
- Providing a trial period for customers to experience the product or service (ISPs, fitness centers, etc)
- Spurring demand through promotions and often pre-empting competition (CPG)
- Cross sell subsidies or loss leader strategies (Google, Facebook, CPG etc.)
The real question
Our question is: How do we get customers to be loyal “despite” price premiums, and especially when it comes to a long term & profitable relationship? Years ago, working with some of the best in the loyalty field, I got introduced to these basic elements. Much has evolved since then of course and here are some foundational elements:
- Aspirational value: Can we set goals that our customers would aspire or journey towards as they engage with us? (e.g. the coveted platinum gold club membership, the trip to the Bahamas, status on the web community as “The Social Citizen” etc. – I made the last one up but I’m sure it’s coming)
- Experiential value: Do our customers feel differentiated and can they brag about it to their peers? (e.g. the free valet parking, the reserved corner table for dinner, early access to concert tickets, the red carpet to board the flight)
- Gratification value: This is the most commonly understood definition of loyalty programs many of us and refers to the two% universal cash back on my Citi card, the weekly grocery coupon, the Buy One Get One Free promotion etc.Gratification can help with regular redemptions to keep customers motivated towards a longer term goal as well.
As we can observe all around us, the current market trends for loyalty seem to be all about immediate cash discounts – gratification value – which is manifesting itself as the tendency of customers to perceive a lower price to value tradeoff.
There is little doubt that factors such as quality, being first to market, user adoption and customer perception are really important. Amazon, Google, Apple and Facebook are great examples of how these have allowed them to surge ahead. But competition comes from unexpected sources. MasterCard and Visa are threatened by mobile P2P payments and private label cards. The recent 2 hour shipping phenomenon is affecting major players like FedEx and UPS.
In times like these, it is natural for us to hunker down and adopt the push and sell model. This is vital no doubt, but advances in digital now almost mandate that we strategically think of what else we can do to generate stickiness with customers, and in turn generate “loyalty”. Digital disruption is a term not to be taken lightly, because we have seen – in the past several years alone – several established and well respected players fall from grace due to inertia and inaction.
Here are some imperative as we analyze the question of customer intimacy, differentiation and loyalty:
- Identify the weak links: What relates us to the customer? How are we connected to the customer today? Are we taking these links for granted? For example, banks relied on consumer pulling out their credit cards for payments. Now consumers pull out Apple Pay. Are banks invisible? Has their relationship taken a back seat? Dis-intermediation is the technical term for this broad phenomenon.
- Fill the white spaces: Is there a gap in how we meet our customer’s needs? Do we understand their identity? Customers always have to look to multiple players to meet the spectrum of their needs – through another product, service or channel. As a business we will never be able to fill every white space but can we ensure that we can build out a friendly chain of links with other industry players – in other words a partnership ecosystem. For example, when customers look to see if a product meets their needs, do they ask you or a third party? When customers walk into a retail store, what triggered that need?
- Evolve the loyalty concept: We must move towards aspirational or experiential rewards. They are much stickier. The Giant Eagle Fuel Perks programs in PA was a smashing success because people saved for their weekly fill-up, linked various types of purchases to this program and saw the savings climbing up at the gas pump. Apparently there’s something about indirect gratification, and people actually spread the word by linking status to it as well – “We get good fuel for less because we’re a member”. Same is true of airline miles programs – folks have been known to fly to earn points, even when not needed.
- Strive for early redemption: Redemptions are an expense and also a liability. But if they happen early and more frequently, they drive earnings which gets a great cycle going. Redemptions can also be rewards for pursuing a long term goal (aspirational).
None of the above steps are easy, especially for companies that have an inherently low Customer Interaction Index (the first principle outlined in the book: Dancing The Digital Tune: The 5 Principles of Competing in a Digital World), but to say that we not evaluate and prepare is like waiting for the dark horse to come galloping by and scoop up the prize. Similarly, creating an ecosystem of partners (or a chain of links) need not be about a joint venture, but simply to mutually help each other by placing ourselves at the right point along the customer needs spectrum. The chain of links provides multiple entry points into the customers needs spectrum.
The means to achieve loyalty and differentiation are easier and at the same time more complicated in today’s digital and connected world. We can reach customers quickly and universally. The question to ask is: are we starting this encounter with a discount offer or are we engaging with customers in a slow dance for a longer term ecosystem?