The making and breaking of customer loyalty should be one of the dominant considerations for all business owners.
When we set out a deliberate plan to build loyalty through some sort of program, we need to think through the costs of closing or winding down such schemes in a way that honours the trust and the agreement that had been built between the parties.
Two companies have given us demonstrations of how to make and how to break customer loyalty, namely, Menulog and On The Run.
The cost and benefits of customer loyalty
It is business and marketing planning 101 to consider the value of building customer loyalty.
While that goes without saying, the automatic decision to use a loyalty program to build loyalty is RARELY a productive choice.
Vendors of loyalty programs will shout loudly about how it is common sense to look after loyal customers because they are cheaper to service, pay better prices over time, and promote your business.
Intriguingly, a Harvard Business Review article, The Mismanagement of Customer Loyalty, points to research that shows the opposite is often true.
For example, the researchers found no link between long-standing customers and the cost of servicing them, other than quite the opposite; in some sectors, long-standing customers take more time to service.
Also, the research found that high volume loyal customers typically know they are putting through a high volume of sales activity and often negotiate better pricing, undermining the claim about more profits from loyal customers.
Nuance is added by a Journal of Retailing paper, The effects of loyalty programs on customer lifetime duration and share of wallet, in which the researchers found that while loyalty programs CAN have a positive effect on the length of customer lifetimes and share of expenditure, where consumers have numerous loyalty programs with geographically-close retailers, lifetime duration is reduced.
As a further point to consider on this topic, a European Journal of Marketing paper, The effects of introducing and terminating loyalty programs, Valentyna Melnyk, Tammo Bijmolt, (2015), delivers depressing news to companies “stuck” with loyalty programs they want to terminate:
Prospect theory (Kahneman and Tversky, 1979) suggests that losses loom larger than gains. Terminating an LP or removing benefits that consumers enjoyed represents a loss from a consumer’s point of view, leading to decreased loyalty toward the firm. Consistently, Lewis (2004) concluded that terminating an LP for an online grocery and drugstore merchant would result in a drop of about $13 in revenue per customer per week. Similarly, research on customer status demotion suggests that when a firm changes the terms of an LP, the negative impact of status decreases is stronger than the positive influence of status increases (Drèze and Nunes, 2009; Wagner et al., 2009).
This serves as important context for two recent consumer experiences.
What Menulog giveth, Menulog also taketh away
Last week, I had an experience that fits exactly into the findings of the Melnyk and Bigmolt article cited above, when I logged into Menulog to claim the free meal that I had earned through 10 previous orders with my favourite local restaurant, Taste Of Nepal.
To my dismay, my credits had disappeared, or so I thought. As it turns out, there had been an email sent on August 19 to explain that the program would be closing but I am not sure how many people trawl through their spam folders for emails from mobile food ordering sites to keep abreast of potential changes in policy? I would love to have seen large banners or pop up notes during Menulog usage from August 19 onwards, alerting users and asking them to acknowledge that this change was coming.
Unaware of this, I spoke to the online chat person and trawled through old emails, to discover that Menulog had decided to end its loyalty program and replace my $75 of credit with a series of $10 and $5 codes could only be used in single transactions.
Now, I am the first to admit this is a first world problem but I have not been able to shake my perception of this move being a cynical one because it honours only the letter of the law (making the credit available), rather than the spirit of it (forcing me to have eight separate transactions to claim what I was entitled to in one).
My mantra, as a marketer and as a human, is to be true to the spirit of whatever has been promised in a transaction because that is how trust is built and maintained and trust is what sees us through challenges.
The Menulog email about changes to programs waxes lyrically about how there will be new discounts and enticements but for my relationship with Menulog, the damage has been done.
My experience as a consumer has mirrored that forecast by the article above, “removing benefits that consumers enjoyed represents a loss from a consumer’s point of view, leading to decreased loyalty toward the firm”.
Honouring customers On The Run
By contrast, the On The Run group has gone above and beyond the letter of the law, in honouring its carwash loyalty program.
The company has moved to a new, digital loyalty program but many consumers still have the old stamp cards in their possession.
One of my colleages said that on the weekend, when going to get a carwash, the attendant explained how the system had changed BUT they would take the card and honour it and then set up the new loyalty system from that point forward.
There will be a slight cost incurred by On The Run as it transitions customers to the new system but along the way they will be building trust with their customers, which will pay a dividend in manifold ways.
Do you want to be making or breaking customer loyalty?
Obviously, we all want to be doing the former and one of the surest ways is to set our moral and ethical compasses to point towards honour.
The research shows that customers will use loyalty systems while they are in their interest, which might or might not lead to profitability for your businesses.
However, the most certain finding is that you should think long and hard before you pull the loyalty welcome mat out from under their feet and replace it with a Use Other Door notice because they just might use another company’s door.