Why Loyalty?

I am passionate about loyalty for four reasons:

1. The economic impact of increasing customer loyalty is tremendous.

I was fortunate to be a Partner at Bain & Company in the late 80’s when several of us were working with Fred Reichheld on his groundbreaking analysis of the economic impact of increasing customer loyalty which led to the publication of his first book, The Loyalty Effect. While at Bain, I began to understand the tremendous impact small increases in customer retention and customer loyalty could have on a company’s bottom line.

In their first Harvard Business Review article about the economics of customer loyalty,   Zero Defections: Quality Comes to Services, Reichheld and co-author Earl Sasser, Jr. presented this graphic to illustrate the multiple sources of increased value from loyal customers:

A few years later in an article for Strategy Magazine, Marketers Should Study “Loyalty Math,” I used the example of a family’s annual grocery purchases to quantify the value of each source of value to a supermarket chain. The exercise showed how a loyalty customer could actually be over 600% more profitable thank an average customer to the store over a five year period.

2. I was one of the creators of the data-based coalition loyalty program model, which remains one of the most profitable and sustainable business models ever.

I left Bain to start what became The Loyalty Group, a company formed in Canada to develop, launch and manage the AIR MILES Reward Program.  The AIR MILES Program is a “coalition loyalty program,”  where over 100 companies are given the exclusive right within their consumer spending category and geography (e.g. retail grocers in Western Canada) to issue a common reward currency that can be pooled with points earned at other companies within the coalition and redeemed for over 800 different rewards.

The company now has over 70% of Canadian households as active collectors, sales of over $600MM CAN and employs over 1500 people.  Loyalty’s business model is one of the purest I have seen in my business and academic careers.  While all companies ultimately succeed or fail based on the relative value they provide to their sources of revenue (i.e. customers), the coalition loyalty model is crystal clear:

Coalition loyalty programs only make money if the target consumer believes there is sufficient value in the program to increase their shopping (i.e. loyalty) at program sponsors. If they do so and the incremental profits from the additional shopping are sufficient to provide an attractive ROI to the sponsors based on what they pay for points and program administration, they will increase their promotion of the program and recruit new program sponsors. Adding new sponsors to the program increases the value of the program to the consumer, which in-turn motivates them to buy even more at the other sponsors which turbo-charges the profitability cycle.  If a program with sufficient value for all parties is launched with a breakthrough campaign, then everyone’s goals and value creation are aligned: consumers want to earn points as fast as possible, so they shop at sponsors, respond to offers and buy bonus point products;  Sponsors offer base and bonus points to encourage consumers to spend as much as possible at their businesses and to refer friends and decrease their cost of service; and the program operators profitability is driven by the points earned per member – the more members spend at Sponsors, the greater the Sponsor ROI and the higher the profit per member and ROI to program operators and investors.

Coalition loyalty programs are also great businesses because of the opportunity to use the database by-product of the points system and the opportunity to take advantage of practically every new marketing technology innovation that enters the market.

3. As a consumer and a father, I see daily examples of how behavior follows rewards.

One of  my favorite businesses is an after-school learning program called “Score! Educational Centers.”  Through an innovative systems utilizing dedicated tutors and interactive evaluative and teaching technology, Score helps students advance in both language arts and mathematics.  One of their tag lines is “When learning is fun, kids want to learn.”  Both of my kids loved going to Score and one of the things they loved was collecting “Score Points.”  Students earned points for completing assignments and also for shooting baskets at the end of each session.  The points can be redeemed for rewards ranging from balloons to Bionicals.   Although I know part of their attraction to Score was driven by my kids inherent competitiveness and desire to learn, I also know that the “Scorecards” were hugely motivating as well.  Behavior follows rewards.  Same goes for the points earned on Club Penguin and Webkins.  Even John Della Volpe, the Founder of Social Sphere Strategies – and not a “points person” – admits that one of the reasons he uses Dining In to make reservations is the points he earns for doing so!

4. Far too few businesses get these simple facts.

As you will see in the posts and “White Pages” of Collaboration Evangelist, far too few businesses appear to understand the value of customer loyalty and retention, or the opportunity to join other leading companies to form a coalition to maximize the collective value of a  target audience.