How to build a strong loyalty program?

How many times have you heard from your marketing manager that this is the time to think about a new loyalty program? Working on a broad portfolio of brands and channels I’ve discussed this question already for many times….

However, this time before bringing consumer insights to my team I’ve decided to revisit a book written by B. Sharp “How brands grow: what marketers don’t know” as well as some related academic papers.

Let’s have a look at the key marketing rules & ideas discussed in the book from a perspective of building a new loyalty program.

Purchase duplication law says that “everybody switches” and that “defection rates don’t vary significantly between competing brands” (Sharp, 2010). The key metric that varies is a penetration – in line with a market share.

That can lead us to the first conclusion that eventually the key objective of the loyalty program should be a growth of its market share (Sharp, Wright and Goodhardt, 2002; Dawes, 2008).

Double Jeopardy law underlines that brands with a small market share “suffer twice – fewer people buy them, and those who buy them do so less often” (Sharp et al, 2012).

Research shows that loyalty programs is a classic example of a strategy skewed towards heavier buyers of a brand and as a result “loyalty programs generate small or no shifts in market share” (Sharp, 2010).

Heavier buyers of a brand are much more prone to join loyalty programs due to two reasons: 1) significantly higher physical and mental availability of a loyalty program for them; 2) sufficiently stronger economic value that heavy buyers receive from a participation in a loyalty program (Sharp, 2010).

However, light buyers do matter for a brand success. This is linked with the fact that all brands have a long tail of light buyers.

As research results show, loyalty programs don’t attract a disproportionate number of new heavier buyers for a brand, they have a potential to attract some light buyers (Sharp, 2010). For instance, loyalty programs that include several brands where bigger brands can attract some light buyers to make a trial / buy more frequently smaller brands presented in the program (Sharp and Sharp, 1997).

So, the second conclusion – as loyalty programs won’t attract disproportionate number of heavy buyers, it is worth to focus on attracting more light buyers.

Dirichlet model highlights that “consumers don’t randomly allocate their purchasing among all brands in a category but do so in a biased fashion…. All buyers have their own particular loyalties… consumers are polygamous loyal to a number of brands in most categories” (Sharp et al, 2012).

Hence, positive short-term results of a loyalty program can be driven by a temporary shift in buyers purchase frequency and/or spend per purchase; however, it won’t be represented in a long-term increase in buyers’ loyalty and will lead only to decrease in company’s profitability (Sharp and Sharp, 1997; Sharp et al, 2012).

Hence, the third conclusion is that since buyers behavior changes very little over the time, loyalty programs actually drive consumers switching within the repertoire of brands that in long-term won’t lead to a substantial impact on a brand share (Sharp et al, 2012).

Taking into account these three conclusions, the following recommendations on development of the loyalty programs can be provided to marketing managers:

1. Shift the focus of the loyalty programs from a decline in a brand retention rate to gaining more brand switchers.

2. Target buyers of diverse brands rather than a particular brand as it will allow to increase a base of the light buyers.

3. Include smaller brands in the loyalty programs to drive cross-selling and trial from the side of the light buyers of big brands.

4. Analyze loyalty program results in a long-term basis and consider market share as a key success metric.

5. Consider alternatives to loyalty programs to build consumers loyalty – e.g. moving from repertoire market to subscription market can increase buyers loyalty without additional loyalty programs (Sharp, Wright and Goodhardt, 2002).

6. Benefit from information received in the frames of the loyalty program – e.g. to build a database of consumers, empower communication channels and monitor purchase behavior.

Loyalty_insights_bestinsightsphere

Source: https:// securityintelligence. com/ cybercriminals-phish-their-way-into-customer-loyalty-programs/

Sources: 1. Sharp, B. (2010) How brands grow: what marketers don’t know, Australia: Oxford University Press; 2. Sharp, B., Sharp, A. (1997). Loyalty Programs And Their Impact On Repeat-purchase Loyalty Patterns. International Journal of Research in Marketing, 14, pp. 473-486; 3. Sharp,B., Wright,M., Dawes,J., Driesener,C., Meyer-Waarden,L., Stocchi,L., Stern,P.(2012). It’s a Dirichlet World. Modelling Individuals’ Loyalties Reveals How Brands Compete, Grow, and Decline. Journal of Advertising Research, 52(2), pp. 203-213; 4. Sharp, B., Wright,M., Goodhardt,G. (2002). Purchase Loyalty is Polarised Into Either Repertoire or Subscription Patterns. Australian Marketing Journal, 10(3), pp. 7-20

Consumer Behavior and Loyalty

Thinking about Consumer Behavior classes I quite often remember heavy books and lots of abstract models. However, once I was lucky to have a very interesting Consumer Behavior course which was much more about critical thinking and how consumer models could be applied to solve important business issues.

Working in FMCG companies I always face the same type of question – how to drive consumers loyalty to our brands and products? So, I’ve decided to look at the basic consumer behavior approaches from this perspective.

The first one is called “behaviorist approach“. It states that many consumers’ purchase decisions are highly repetitive that leads to low consumers engagement. ATRN model introduced by Ehrenberg (1997) and that is shown below represents the key idea of the behaviorist approach.

ATRN Model

Overall, this model states that consumers making their repetitive purchases are not prone to do a lot for switching and in case of positive Second Moment of Truth continue shopping of their usual brands or products.

Speaking about the Second Moment of Truth it’s always nice to keep in mind the words of Charles Darwin about the survival not of the fittest, but of the fit enough. That means that consumers who have ‘fit enough’ product experience in many cases continue to stay in their ‘reinforcement’ stage.

However, at some point of time consumers move to the phase of ‘nudging’ and start looking for new products and brands. But when consumers are searching for something new is it only about their loyalty? Quite often it’s just about the required diversity and possibility to make a choice.

Therefore, in many product categories, especially in food we have so many tastes and flavors. It allows to keep consumers within our base of customers in case of nudging and search for variety.

Another scientific approach to consumer behavior is called “habit approach“. It highlights the importance of preestablished in consumer behavior.

This is linked with the importance to win in the Point of Market Entrance, when consumers just joining a category. Being the first, brands establish the habit and pattern in consumer behavior and set up a particular level of product expectations. As a result it enables brands to win their customers loyalty.

To sum up, in order to keep consumers loyal and minimize the level of switching companies should keep a constant high level of Second Moment of Truth and target to win in the Point of Market Entrance. However, thinking about many upcoming product innovations companies should be very conscious about their targets, as consumers who are in the ‘reinforcement’ stage have very low probability to mention the innovation.

Communication of some product innovations is worth to be highly focused on the increase in the brand variety and opportunity to have a selection.

Source: Ehrenberg, A. (1997). Justifying our advertising budgets. Marketing & Research Today, 25(1)