Ninety percent of companies have loyalty programs — does yours?
I just bought my third vacuum in three years. But this time I bought a well-engineered, pricey model from Germany as opposed to another one of those plastic ones that are found stacked up on department store aisles.
The one I bought is about twice the cost of the others, and I got it at a local vacuum repair store. The owner, a repairman, toured me through the various models; and just dealing with an expert was a refreshing service experience.
When I reached for my wallet to pay, I started to think of what payment method would be the most advantageous. Were there coupons I could use, or any other way I could get a lower price? Or what about earning some value points for use later on?
But without coupons or sales, the decision came down to whether to use a reward gift card that was like free money, or my credit card that rewards me two airline miles for every dollar spent. These are just a few of the types of loyalty programs that exist to influence and motivate customers to buy and stay loyal.
I reference this quite ordinary experience to point out that payment experiences have become more than simple transactions. They are integral to the entire service experience.
As a service designer, I have to admit that until recently I had taken the entire register–checkout experience for granted
Service designers are responsible for developing new services and improving existing ones. The field of service design is matriculated at the graduate level and is generally practiced around the world, including North and South America, Africa, China, Southeast Asia, India, Oceania, Russia, and Eastern and Western Europe. You can find service designers integrated into financial services, hospitality, healthcare, IT, education, retail, social services, and just about any other consumer-centered service. Service designers work for corporations, small and mid-sized companies, governments, and as consultants in boutique firms and global management consulting firms.
The field of service design is marked by user-centricity, meaning all the design activities are centered around the user, from the user perspective. Thus, services are considered successful when they meet users’ needs and deliver on users’ expectations.
Loyalty programs are intended to draw in new customers or users, and convert users into loyalists Thereby, they create short-term value on the enrollment side, and long-term value from maintaining connections between a user and provider.
An example is Marriott hotel’s rewards program, called Bonvoy. The Marriott hotel chain’s program offers immediate discounts for signing up, such as discounts and upgrades, and then rewards loyalty with an accumulated points system that can be applied for free night stays. The program also entitles Marriott to keep in touch with its members through frequent communications with information on benefits.
When it Comes to Loyalty Programs, the Airline Industry Leads the Way
U.S. airlines have evolved their loyalty programs in ways that offer examples to others.
Their programs have evolved due to changes in deregulation and swings in economic cycles in an industry that is highly competitive. It’s either “boom or bust,” which begins an introduction of a Federal Aviation Administration report forecasting the industry from 2018 to 2039.
In 1978, the U.S. government deregulated domestic carriers, allowing them to set their own fares. Prior to then, the competition was over who had the best in-flight meals, the most attractive stewardesses, and a generous free onboard cocktail menu.
After deregulation, the airlines went nose to nose over low fares in hopes of luring passengers. But lower fares only exacerbated the unending squeeze on profits. In yet another route to attract passengers, one airline after another launched member mileage programs. These programs looked to sign up travelers and keep track of their traveled miles. After accumulating a set number of miles, travelers could redeem them for a free trip anywhere on the airline routes.
The airlines had not anticipated the powerful influence of a free flight on its customers, some of whom figured out how to game the system, some banding together in groups for the common purpose. The most popular destination for all the domestic programs was Hawaii, 2,500 miles off the California coast. It was so popular that the term free flights became interchangeable with a trip to Hawaii. Appearing in the New York Times on January 5, 2021, a story titled The Man Who Turned Credit Card Points Into An Empire, included this: “As one oft-cited, almost-certainly imaginary airline executive titled once put it, ‘People are willing to pay anything for a free ticket.’ Travel rewards pose a compelling incentive — a shortcut to the playgrounds of the globalized elite.”
Due to the demand, the airlines added restrictions for redeeming miles. They introduced blackout dates and expired travelers’ unused miles. These restrictions, however, became all too common for travelers when they called to cash in their miles. The result was a free fall in the value of earning miles, leaving little incentive for members to enroll or to prefer one air carrier over another.
Adding More Value to Member Programs
A solution by the airlines was to shift the objective of their programs, to create loyalists, travelers who would prefer their airline rather than quantifying the numbers of enrollees. The answer involved converting miles into points and allowing them to be redeemed for international travel along with upgrades and amenities. The move also required partnership with others willing to accept an airline’s points.
When I traveled frequently for business, I came to learn that many of my colleagues, and presumably most others traveling in business class, rarely paid full fare. Instead, they used their points.
The change in objectives for airlines by offering long-term value through their frequent flyer program reverted back to satisfying customers whose interest was earning free flights. The drive was sufficiently strong that credit card companies, issuing banks, looked to capitalize on their marketing potential. They bought large blocks of points from the airline’s mileage programs and offered them to customers who signed up for cards. CapitalOne bank among them, also awarded airline points for purchases.
The move had several advantages for airlines, such as an incentive for traveler loyalty, a greater awareness of some of the carriers’ programs, and perhaps most of all, a tradeable commodity that airlines can control and earn revenue. Nowadays, a traveler can buy an airline ticket using a credit card and earn points for the flight and from the credit card purchase.. No wonder customers are pausing at the register to figure out which way to pay.
While the point reward systems may have been invented by the airlines, they are no longer exclusive to the airlines. Our local supermarket, Giant Food, awards customers points based on how much they spend on groceries. The points are redeemable at Shell Oil gas stations in our area, which can shave 50 cents off a gallon of gasoline. This is just one example of many others that exist.
The takeaway is, if consumers value the reward and earning it seems within grasp, there is a good chance a loyalty program will succeed. Additionally, reward programs will have a greater value from partnerships with those who can redeem the points for other rewards. Meanwhile, businesses rely on their programs to engage customers, adding to their mix of communications including advertising and other paid media.
The Demand for Loyalty Programs
On the heels of success, there are growing numbers of companies offering loyalty programs. A recent report by the consulting firm Accenture estimated more than 90 percent of companies have some sort of loyalty program. Perhaps because they are so ubiquitous, customers now anticipate a loyalty program when they make a purchase. A study by the Michigan-based Invesp found that 69 percent of consumers base their buying decisions on a provider’s loyalty program.
What’s more, 69 percent of Millennials and Generation Zs, an emerging block of highly prized consumers, told researchers they will not commit to a brand that does not offer loyalty benefits “Modern consumers know that they have plenty of options when it comes to shopping and are more likely to expect rewards or loyalty programs in exchange for their business,” Ashely Autry says, a writer from Access, a site that publishes customer engagement and loyalty statistics.
Loyalty programs come in all kinds, there are purchase-based, cashback programs, points-based, referral-based, tiered, and paid. Plus there is a range of options for tallying users of a service — with punch cards, swipe cards, and online print or show coupons.
A reward or loyalty program requires an objective in order to succeed. An objective that a provider needs to decide, should be simple and well understood. With the airline's example, their loyalty programs began as a differentiator and evolved for creating loyalists.
Each industry, mostly defied by a competitive business subgroup, will include segments or a population of customers’ desires, needs or interests. For loyalty programs, companies need that understanding as part of forming an objective
Six Common Loyalty Program Objectives
Designing Loyalty Programs as a Service Experience
It’s often difficult to know where to begin a design. At the International Service Design Institute, we recommend starting the design of loyalty programs with what customers will earn from purchases, how they will earn them, and how they will redeem them.
The next step is to list all the other functions that must occur, say, the logistics of awarding purchases, tallying the value accumulated, and communicating the awards. As an example, Starbucks requires members to enroll, who then earn points from purchases, for which those points are visible to the customer on the Starbucks proprietary app or through in-store communications. From that point, a customer must request using their points toward a purchase. Obviously, there are backend, mostly technology-related logistics for automating the process.
With a list of functions for the loyalty program, the next step involves arranging each function in sequence. These functions can drive user behavior and include options. But they can also follow a natural or likely user behavior, say, having to complete a payment with a credit card.
There are wonderful service designs to help with the design. A journey map can be used to help visualize a sequence, but even better, a service blueprint will help uncover any gaps in the user experience.
This is an over-simplification of a design process, but ultimately it draws upon knowing the design process, one made easier with the use of service design tools.
There are counter arguments to developing a loyalty program. I would use the caveats to inform my design rather than abandon the idea altogether.
As indicated, there are a number of off-the-shelf loyalty programs, familiar to many, with templates that exist or could be acquired through vendors.
Common Types of Programs
1: Points-Based Rewards Program
2: Benefits & Perks Loyalty Program
3: Tiered Loyalty Program
4: VIP/ Interest-Based Program
5: Subscription Loyalty Program
6: Surprise & Delight Loyalty Program
7: Gamified Loyalty Program
8: Customer Referral Program
9: Cashback Loyalty Program
10: Community Loyalty Program
Target Market Approach
1: B2B Loyalty Program
2: B2C Loyalty Program
3: B2E Loyalty Programs
Sales Channel Approach
3. Types Based on Main Sales Channel
1: Loyalty Card Program (POS/Offline)
2: Online Only/eCommerce Loyalty Program
3: Omnichannel Loyalty Programs
4: Payment Card Linked Loyalty Programs
5: Coalition & Multiparter Loyalty Program
Loyalty programs can play an outsized role as part of a provider’s service because they add to a service experience and ultimately can drive value that can convert to revenue. Nowadays, companies will choose consumer loyalty over many other sources for added revenue. Loyalists provide companies with long-term value, and it’s more economical to upsell loyalists than to seek out new customers. For this reason, loyalty programs need to be well-designed, and who better to create or improve one than a service designer.
Addition sources used for this article:
- The Evolution of Frequent Flyer Programs, Eric Rosen, The Points Guy, August 17, 2019.
- Can Frequent Flyer Programs Save Airlines?, Nick Fouriezos, OZY, May 13, 2020.
- Giant, Shell Team for Savings at the Pump, Convenience Store News, 05/12/2010.
- Loyalty Trends in APAC by Epsilon’s Ashish Sinha. Wise Marketer Staff. The Wise Marketer. 02/11/2011.
- How Airlines Make Billions From Monetizing Frequent Flyer Programs, JT Genter, Forbes Advisor, July 25, 2020.
