What marketers are getting wrong about loyalty

This article first appeared in Fast Company.

The biggest mistake brands make with loyalty programs is to model them on human loyalty. Human loyalty is an admirable, deeply emotional bond that unites us. It’s irrational, inexplicable and often counters our survival instinct. The marketing world, ever the imitator, often looks to these emotional bonds as its guide to creating loyalty.

This is a mistake. It’s time not to make loyalty more “human,” in the traditional way, but to treat it as a question of economics and behavior.

It’s an old obsession of marketing to make us care about products as much as we care about each other. Brand building is, in the words of Saatchi & Saatchi CEO Kevin Roberts, to “inspire loyalty beyond reason.” It’s all about turning brands into human bonds. But at the same time, most loyalty programs don’t take into account some (non-emotional) very human preferences and behaviors. Consider the typical loyalty program from an airline like Delta. The point-building process is painfully slow and there’s a single-year window for customers to keep their Medallion status. After that, the process starts over. Customers begin with an impossibly high minimum point requirement, making gratification too delayed. Those who don’t give up on the spot await laborious redemption (they can use their miles for certain destinations but not for others), often irrelevant partner benefits, and disinterested customer service.

Marketing is not where loyalty programs belong. Their place is within a company’s revenue structure and within users’ decision-making process. With loyalty programs, companies are dealing with customers’ clear expectations of tangible economic benefits. To their interactions with a company, customers bring a specific assessment of some form of economic gain with behavioral dynamics to match. The new model for building loyalty capitalizes on these dynamics. It is based on decision-making, business design, and experience design for tangible outcomes.

Decision-making

One thing to know about human decision-making is that we want to be happy. Andwe prefer many small repeated gains over anything else. We’d rather find two $50 bills in two different places than a single $100 dollar in one. Since money usually doesn’t just lay around, we use mental accounting to multiply this small-gains effect in everyday situations. Mental accounting is responsible for our perceptions of value, utility, costs and benefits of something. It decides whether we are going to redeem that Groupon deal, or if JetBlue’s offer is really a good one. It shapes all of our shopping, saving, and retirement decisions. It is a great starting point for any loyalty program. Knowing what mental accounts its customers are using and how they manage them helps a company maximize the impact of its offers.

Business Design

The first thing to know is how a loyalty program will make money. To come up with a revenue hypothesis, it’s a good idea to venture off the beaten path and look at emergent value. Business models sprouting up in the digital economy are creating value around social interactions. Expertise, time, connections, or used goods are forms of emergent value that we can find at the “edges” of any service industry (Airbnb, ZocDoc, or Square are examples). Emergent value shapes customer expectations of economic benefits and influences their decision-making: If customers get transparency and flexibility from Kayak, they expect the same from their airline brand. Points systems are a default in most loyalty programs, but making them more flexible and extending them to things that go beyond the company’s core offerings are still largely uncharted territory. Loyalty programs have the opportunity to drive companies’ growth strategy as they venture into new markets. To test a revenue hypothesis for a new gain management model, it’s always a good idea to simultaneously design and release a few versions of a loyalty program to see which one has the greatest negative churn rate and has the biggest positive impact on the company’s pricing, cost structure, competitive strategy, and growth strategy. Loyalty programs succeed when they simultaneously contribute to the bottom like and have a high negative churn rate.

Experience Design

The key question is what experience we want to make better for our users. At its simplest, experience design is about the quality of users’ experience with a product or service: ease of use, beauty, convenience, utility, simplicity. Gain management can use experience design to create a positive acquisition utility that makes users want to return: “It’s the quality of the product they’ve built that keeps me coming back.” From this starting point, gain management can improve experience further to make company’s existing offerings more valuable to its customers. Improvements can revolve around adding a “software layer” over a company’s core business (as Target does), combining digital and analog offerings (Tesco Price Check), creating product systems (Lufthansa “Anywake”), creating an information or community resource (Pepsi Refresh Project), or coming up with complimentary offerings (AmexOpen Forum).

Decision-making, business design, and experience design are three pillars of building new loyalty models more suitable to today’s customer and market dynamics. Instead of one-size-fits all, these new models are designed for diversity and customization. They replace a rigid points system with one that’s flexible and adaptive to current customer requirements and competitive market offerings. They are so simple that they don’t require a learning curve. They are built upon already existing customer behaviors. They account for consumers’ preference for many small gains, and offer them frequent incremental rewards instead of big infrequent ones. They complement a company’s existing products and services with digital experience. They turn the entire company experience into customer benefit.

Loyalty programs are great proof that we find it hard to deal with human irrationality when it occurs outside the domain of emotions. Too often, we are eager to rush toward the emotional core for making things “more human,” as if our own behavior isn’t human enough. Not only is behavior very human, it is the key to forming long-lasting bonds.