Is Loyalty at Risk?

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Marketing
Marketing
Marketers' traditional approach to loyalty is training customers to tune out.

In this era of always-on marketing, customers are showing signs of fatigue. The multitasking digital lifestyle, constant media distraction in the home and workplace, and the hypercompetitive marketer's pursuit for customers' time and attention have driven valuable customers to tune out. Terms like cognitive overload, email attention deficit disorder, and data smog have filled the press lately. Marketing effectiveness is diminishing as a result.
But that's not the worst of it. This tempest is shaking loyalty from its foundations. As a customer strategy, loyalty programs run the risk of losing effectiveness because companies can't get their messages through the marketing storm. When they do, customers often don't pay attention to them. Consequently, the approach to customer loyalty has to change. Here's how.

The Psychology of Next

"The human brain is an 'anticipation machine,' and 'making future,' is the most important thing it does. Wonderful things are especially wonderful the first time they happen, but their wonderfulness wanes with repetition."

That quote is from Harvard professor Daniel Gilbert's award-winning book Stumbling on Happiness. This quirk of human nature has ramifications for customer loyalty. The "anticipation machine" that runs our brain has become overfueled by the deluge of marketing messages, a proliferation of product choices, and ever-expanding channels to buy them from. Our society has become efficient at pushing "the psychology of next" and even better at downgrading the "next big thing."

Consider the iPhone. Within 30 hours of its release many of the more than 270,000 people who purchased it had switched from their current, working mobile handset and cancelled current service contracts (likely at a cost), all to get their hands on "next." Despite its innovations and media frenzy, the iPhone was doomed to quickly drop from "next" to "new." The New York Times noted: "Even before a single iPhone was sold it felt like we'd lived through an entire product lifecycle." And Marian Salzman, CMO at ad agency JWT, was quoted as saying "About 45 minutes after it debuted people were waiting for the 2.0 version."

If consumers are continually focused on "next," marketers may in turn suffer from a dearth of attention to their communications on "now," which could lead to a lack of customer knowledge and therefore a loosening grip on what makes customers happy.

Also contributing to customers' distraction is the culture of multitasking, which discourages attention. Sixty-five percent of respondents to a study from the University of California at Irvine consistently talk on their cell phones while they drive. Kids talk on cell phones while they IM, and do all this while they watch TV with 90 percent of the screen, a crawler at the bottom, and promotional messages flashing in the corners.

"Attention," says Umair Haque, a strategy consultant with Bubblegeneration, "is becoming the scarcest-and so most strategically vital-resource in the value chain. Attention scarcity is fundamentally reshaping the economics of most industries."

I Think, Therefore I Buy

Some marketers are getting desperate about capturing customers' attention at such NextGen touchpoints as email, online banners, and mobile messaging-key entry and tracking points for many loyalty programs. A June Wall Street Journal report addressed "banner blindness," showing how major agencies are trying to dress up the Internet's most basic advertising building block with video, new sizes, and new placements, all in the interest of trying to get and keep customers' attention.

The issue has reached the point where 54 percent of all consumer packaged goods companies recently surveyed by McKinsey had "significantly increased" their non-traditional marketing spending, including hiring "cool hunters" and using word-of-mouth marketing tactics. According to a July report in Harvard Business Review, 70 percent of all CPG marketing managers cited declining loyalty as their primary concern.

And no wonder. The practice of using technology to analyze customer value, purchase intent, and even predictive behavior has increased dramatically, but most companies have not made appreciable progress in solidifying customer loyalty. DoubleClick's June research study on online loyalty showed that 71 percent of the customers surveyed browse multiple stores before they make a purchase and 42 percent consult a shopping comparison site or review site. Although 70 percent said they belong to at least one loyalty program, participation in it wasn't a big driver of purchase behavior. Price and free shipping were the most powerful factors in getting customers to return to an e-commerce site. Despite aggressive efforts to the contrary, customers are still driven more by price than by loyalty to a product.

"Loyalty is a looser proposition than it used to be," says Stuart Frankel, president of the Performics division of DoubleClick, which conducted the survey. "Customers have more choices and when they're constantly being messaged about these things, and their appetite is constantly whetted for new things, you have to do more."

It is no surprise, then, that many recent studies have quantified a surprising lack of customer loyalty. Conceptually, loyalty is less, well, loyal than many companies and analysts once thought. For example, one study by U.K.-based Focalyst finds that Baby Boomers are loyal only to financial services and healthcare firms. Those "most likely to return" to brands in that demographic were high for insurance (72 percent), but low for frequently purchased items like apparel (26 percent).

A new report from mobile solutions provider SmartReply says turning up the marketing volume may not work. It claims that 60 percent of all consumers avoid advertising whether by using DVRs or ignoring Internet ads and 54 percent avoid products from companies that "overwhelm" them with marketing messages.

The generation that will control the purse strings of the future is being raised to expect even more from companies while hearing less from them. What the Pew Internet project calls Generation Next (ages 18-26) doesn't seem to be loyal even to some of the Web sites whose success it has been most responsible for. More than 40 percent of customers who have a profile on MySpace have profiles on Friendster, Facebook, and other sites.

According to Terry Dry, cofounder of teen-focused online promotional firm Fanscape, loyalty is an
allegiance to the next big thing and the next cool brand. "Kids don't feel like they owe you anything," he says. "They want what they want and they want something for their loyalty even if it's temporary. Keep delivering value and you have a shot."

New Loyalty Touchpoints

While there is every reason for companies to be concerned about the long-term consequences of marketing overload, there is also every reason to believe that loyalty programs can still be effective. The economics of "next" requires the next approach to loyalty and new thinking on loyalty program execution. The June 2007 study "Getting It Right at Retail," in the "Relationship Builder" series from Carlson Marketing, shows the impact of relationship strength.

Relationship strength is driven by emotional elements such as "trust" as well as economic advantages. The study found that when relationship strength is high, the customer is 49 percent more likely to remain a customer. In addition, a customer in a strong relationship is 1.82 times as likely to recommend the retailer to friends and family. These factors also lead to growth in same-store sales, a critical success measurement within the retail industry.
As author Gilbert said, "Wonderfulness wanes with repetition."

Psychologists call that habituation. One way to beat habituation is to increase the variety of the experience. Therein may lay the best customer therapy for the psychology of next. In fact, variety in loyalty programs may be the economic Prozac for Generation Next.
The loyalty of next has two main elements. One is the concept of emotional touchpoints. The second is the dynamically served loyalty program. So far only a few companies have designed and implemented loyalty programs with dynamic content and rewards. But the thinking behind them directly addresses the need for constant change. "As people get used to getting what they want, when they want it, loyalty programs need to offer more than a toaster for the right customer behavior," says Mark Sage, director of loyalty for Carlson Marketing's EMEA division. "A company has to move as close as possible to on-demand loyalty rewards. If not, the amount of available choices that has made loyalty so loose a concept could tempt any customer."

Sage's thinking combines concerns about the loose concepts of loyalty with another theory that has received a lot of play over the past year: the Long Tail. Based on the book by Chris Anderson, the Long Tail quantifies the effect of the Internet on commerce. According to Anderson, the Long Tail has driven business opportunities into smaller niches. The Internet has lowered the cost of entry into product development, marketing, and even retailing. Businesses need to be ready to deliver the tremendous amount of choice that this generates.

Sage believes loyalty programs can expand into a dynamically served customer portal that reflects purchases, interests, and lifestyles. That way, the content and offers in the loyalty program look different every time a customer checks in. The choices are exponentially greater, but the ones served to the customer are more relevant. The new entity would be a combination of a social network, e-commerce portal, and loyalty program.

Several companies are using the portal concept effectively. Among them is Lifespring Health, which is giving its customers the ability to accrue points toward co-pays and deductibles through a "wellness portal" that includes retail and travel partners whose offerings encourage personal health. And J.P. Morgan Chase is six months into a dynamically served loyalty program for its Chase Freedom credit card. Developed by Mall Networks, the loyalty reward menu changes every time a customer makes a purchase. Brian Gantert, first vice president of marketing at Chase Card Services, says Chase developed the program to try to keep pace with the personalization, relevance, and speed that customers demand from a credit card and a loyalty program. "We wanted to change the foundation of our relevancy," he says. "Static loyalty programs will not drive loyalty."

Static won't, but dynamic will. Gantert believes that speed and flexibility will lead customers to use Chase Freedom more often and more exclusively. Here's how it works: Every time a Chase Freedom cardholder makes a purchase (or a group of purchases) an email is automatically generated. It updates the cardholder about points earned, merchandise available, points needed to redeem more expensive merchandise, and points needed to obtain other rewards such as partner discounts. Every interaction is a trigger; every trigger makes Chase Freedom look a little different to each customer.

Does it work? Gantert is not divulging any results, but did say the program is being accelerated to add more rewards, more partners, and more customers. "To me loyalty programs represent a whole new sales and marketing channel," says Mall Networks CMO Ben Kaplan. "The brand becomes a loyalty portal; the portal adds to the brand. It all adds up to a new series of customer touchpoints."

The Softer Side of Loyalty

The new series of touchpoints Kaplan refers to have emotional and economic components. A new research report from New York-based branding agency Fletcher Knight, for example, shows that beauty brands based on an emotional connection have increased purchase intent and higher purchase frequency. They even have better metrics around employee engagement. The report calls out Avon (equality), Dove (self-esteem), and Body Shop (humanity) not for their economic connection to loyalty, but for their emotional connection.

As social media develops and peer-to-peer networks continue to take new forms, many companies are still developing ways to make the emotional pull of community translate into loyalty. For example, Intuit has maintained an "Inner Circle" customer advisory board for two years. Its Web site not only highlights the feedback it gets from its professional tax advisor users, it also touts the product enhancements made based on suggestions from the Inner Circle.

BlackBerry has a similar program. Both have seen significant loyalty increases from the community compared to non-engaged customers.
According to Satmetrix CEO Laura Brooks, Ph.D., community can be an effective loyalty program. "Don't try to confuse buying someone's loyalty with growing it organically," she says. "A community can create what I call a referral spiral. It can change dynamically and become a good differentiator. And it makes people feel emotionally involved with the product or the company. Brand advocacy creates loyalty."

Dan Hill, author of Emotionomics, says loyalty to some extent will come down to "owning" abstract concepts. Disney, for example, aims to own "family fun." McDonald's aims to own "happiness." GM aims to own "patriotism."

Psychological profiling is also addressed in the new thinking on loyalty in this age of distraction. For instance, Nielsen suggests placing grocery shoppers into four psychological mind-sets: autopilot, seeking variety, susceptible to buzz, and bargain hunting. Nielsen's analysis even suggests that each customer can be in a different and predictable mood such as impatient, anxious, or curious.

Jungian Loyalty

Maybe the psychologist who had the best handle on the possibility and peril of customer loyalty was Carl Jung. Toward the end of his career he wrote: "A man can find satisfaction and fulfillment only in what he does not possess."

Commerce and arguably the whole capitalist system are based on this endless chase. People want what they can't or don't have and companies try to convince them that they need what they don't need and that they can have what they never thought they could own. Once customers are sold on this, companies then want customers to have more of what they make and to buy it more often.

"In the short term we've done a great job of creating anxiety," says Forrester analyst Lisa Bradner. "Lasting loyalty is emotive, social, dynamic, and creates a win-win for companies and customers. The long-term challenge is in forming stronger ties and being more authentic. Brands will need to address...customer needs if they want to be successful long term."

Companies can achieve customer loyalty regardless of the marketing environment and psychosocial mind-set. Some of the basics are still the most important, such as addressing customer value and designing brilliant customer experiences. But the customer loyalty program and customer loyalty concept is changing. It needs to blend the economic and the emotional. It needs to accept the conditions created by the ever-changing Internet landscape.

"I think this can all fit together brilliantly," says Colin Shearer, SPSS vice president, analytics. "Loyalty programs can still get the customer the next great thing or give them enough information to figure out what the next great thing is. I think we're developing a customer profile of 'next.' Now we need to treat them accordingly."

EXPERT OPINION
EXPERT OPINION