Thursday, October 25, 2012

What Marketers Are Getting Wrong About Loyalty

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.


One thing to know about human decision-making is that we want to be happy. And we 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