Companies are investing billions of euro into customer reward programs in an attempt to build customer loyalty and defend their top line results. This article describes how loyalty programs short-term can boost revenue and win over customers, but long-term they are likely to become cost centres, which consequently lead to a disturbance of market equilibrium in the shape of an overall higher price level. According to a 2011 research report based on an analysis of about 96% of all loyalty programs in the US the number of programs per household is now 18, an increase of 50% since 2006. In 2010 the overall estimated total value of loyalty currency in the US represented 48 billion USD. The all important question is, to what extend can a monetary based program substitute customer satisfaction and build loyalty? Numerous researches have demonstrated that customer loyalty is based on customer satisfaction, which is directly linked to the performance of the employees.

1. Customer reward programs:
Creating phantom loyalty
By Jens Gregersen: Aligning the marketing and sales departments with customer expectations is more than my
expertise, it is my passion. I develop long‐term competitive advantages based on consumer and experience
orientated profit strategies. Stay connected LinkedIn
Despite a lack of evidence are companies investing billions into customer
reward programs in an attempt to build customer loyalty and defend
their top line result. This article describes how loyalty programs
short‐term can boost revenue and win over customers, but long‐
term they are likely to become cost centres, which consequently
lead to a disturbance of market equilibrium in the shape of an
overall higher price level.
According to a 2011 research report based on an analysis of
about 96% of all loyalty programs in the US the number of
programs per household is now 18, an increase of 50% since
2006. In 2010 the overall estimated total value of loyalty cur‐
rency in the US represented 48 billion USD.
The all important question is, to what extend can a monetary
based program substitute customer satisfaction and build
loyalty? Numerous researches have demonstrated that cus‐
tomer loyalty is based on customer satisfaction, which is di‐
rectly linked to the performance of the employees.
Service as profit strategy
Mass production and globalisation have not just erased any ma‐
jor product differences in terms of features, functionality and price, it has also made it easy for
companies to practise the simplest, most familiar, and effective marketing strategy of all, to copy and market
proven ideas. This change in production also have a significant influence on companies position strategies as its
products no longer is the primary source of customer value – the value received compared to the total cost.
This reality is seen in a new communication trend has gained popularity among major producers of consumer
goods (FMCG) in Spain; via TV‐ads they communicate that they do not produce for white labels. This is rather
interesting because if you think about it they are actually saying; Dear customer, you can’t really tell the differ‐
ence by taste, feel or look, but if you want our “exceptional” product, you need to buy our brand!
As honest as the message might be it is a significant shift away from the communication strategy of for example
Coca‐Cola, which seemingly always has based its marketing communication strategy on the uniqueness of its
products – the secret formula locking away in a vault with a rusty lock. True, Coca‐Cola’s actual strategy is based
on an airtight distribution network making its products available in even the most remote areas of the world.
According to Fader (1993) the most effective growth strategy is one based on distribution or product availabil‐
ity. An example of this is found on Villiers Street, a short footpath in London, connecting Embankment tube sta‐
tion to Strand. On these 250 meters a total of three Starbucks coffee shops are ready to serve the cafe latte
segment. Though three Starbucks shops on just 250 meters is significant they are by far not the only ones serv‐
ing lattes – and hands on heart, the latte served at Starbucks is not that different from other great lattes. Hence,
distribution is a no brainer; it is basic prerequisite that customers have easy access to our products, especially
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2. when tempting alternatives or substitutes are within arms length.
Service production gap
Since the 1970’s (Hakansson 1982), and more so in the 80’s and 90’s (Reichheld et al. 1996) companies have
been encouraged to drive profitability and growth via customer loyalty initiatives in the shape of service. Com‐
panies are not blind to the value of providing good service; many have invested significant resources into defin‐
ing their service standards; but a company can carve its service standards in stone on top of Mount Sinai for
that matter without making any qualified contribution the service level experienced by its customers. This is
seen in the fact that the service industry battles the same issue of low productivity, a key driver of customer
satisfaction, today as has been the case throughout the 70’s, 80’s, 90’s and 00’s due to a lack of skilled manag‐
ers and training (Gregersen 2011) but also because of the replacement frequency of service employees (Heskett
1994).
Productivity in the service sector is directly linked to customer loyalty, as productivity creates value which is the
driver of customer satisfaction, and without satisfaction there can be no loyalty (Heskett 1994). On the other
hand, productivity depends on employee satisfaction, which is primarily generated by “[...] the ability and au‐
thority ... to achieve results for customers.” (ibid). In other words, customer loyalty begins and ends with the
employees.
The problem with service is that it can be defined but not stored. In other words, service is created and con‐
sumed simultaneously and is therefore in the hands of the performers of service, the employees. Somewhere
along the line of defining and per‐
forming service something goes Letter of indulgence
wrong. Despite companies have
had 34 years to practise their ser‐ Dear valued customer:
vice skills since the service indus‐
try became the single biggest basic The past 30 years of mass production and globalization have given little
sector of the developed econo‐ room to differentiate our products and prices so we gave up on this long
mies (Fuch 1968), an astonishing ago. In order to battle this we have defined a range of service standards and
60% of customers still experience communicated these to our employees – sadly it has proven almost
poor service. So, what to do when impossible to motivate our employees by directives, consequently leading
products are generic, competitors to a service level below what you rightfully can expect when paying in the
can copy your distribution net‐ area of 6 – 8 times the cost of goods in a market with endless substitutes.
work, and service fails more often
than not? One way is by convinc‐ But do not despair, we have come up with a solution.
ing customers to be loyal to you. Claim your indulgence card now! Well, we have chosen to name it Customer
Loyalty Card but it’s basically the same. When you have purchased from us
Artificial customer loyalty nine times and experience mediocre service we will buy our way to your
This is where customer loyalty forgiveness by offering you a similar product for free!
programs come in – or reward
cards as they are typically called in But be warned, if you do not make nine purchases within three months,
the US. The wonderful thing about your indulgence card will expire as we can no longer count on your loyalty
loyalty programs, at least from a and commitment.
corporate perspective, is that they
are easy to manage and measure Best regards,
– hard values on “soft” measures. Your customer service team
Could this really be the silver bul‐ P.S. This email was sent from no‐reply@company.com.
let in building customer loyalty?
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3. Blimey, back to service.
Well, it really depends on ones definition of loyalty.
As described in the introduction to this article customers have an average of 18 loyalty cards. Though the 2011
Colloquy report do not specify this, it is fair to assume that people have more than one loyalty card per business
type. That raises the question of to what extend customers are loyal to the actual program more than the prod‐
uct, service or brand?
The American terminology, reward cards, is probably is a more accurate term, as these cards do little less than
rewarding customers for their repeat purchases. This might seem like an insignificant linguistic difference but
how the loyalty program is perceived and articulated by the issuing company has a major influence on, first, the
design and, second, the actual operation of the program. For example, should the loyalty program offer imme‐
diate rewards such as price promotions, or should the reward be delayed as in the case of air miles? Should the
loyalty program support the product’s value proposition or other indirect types of rewards? Customers actually
prefer instant rewards in the shape of discounts, directly product related or not. Companies on the other hand
prefer product related rewards, provided immediately or delayed (Dowling & Uncles, 1997). Thus, a reward card
is little more than a discount card – in other words, loyalty programs are basically compensated monetary
friendships – comparable to, well, mercenaries, who will also stay loyal until someone else with a bigger wallet
comes along.
Polygamous loyalty
In 2010 serial entrepreneur Bill Carney demonstrated this to an ex‐ Eight different airlines have
ecutive MBA class by explaining that a total of “eight different airlines my undivided loyalty.
have my undivided loyalty.” This behaviour is known as polygamous Bill Carney (2010)
loyalty – probably not the type of loyalty hoped for by the issuing
companies. Ignoring exceptional cases, polygamous loyalty clearly dem‐
onstrates a loyalty program failure as the whole idea is that customers choose one place over others. Add to
this that research has revealed that just 10% of high frequency customers are 100% loyal, and that 100% of
these loyal customers are light buyers (Dowling & Uncles, 1997). Thus, launching a loyalty program could result
in significant resources being allocated to loyal but light buyers (ibid). Further, loyalty programs are easily replic‐
able, thus, a successful program will have a limited period of exclusivity before being challenged by competing
programs, which often provide customers with a better deal in order to lower the switching cost for the custom‐
ers – occasionally this leads to a bidding war for customers leading to higher cost for the issuing companies,
which finally is reflected in the prices paid by the customers (ibid).
As most loyalty programs are monetary based companies are at best buying (or bribing) their way to a higher
level of customer tolerance to mediocre service. Hereby not said that loyalty programs should be excluded alto‐
gether; they are an important source of information to understand customer behaviour and preferences, with
this information companies can customised offers. One example of this is the ClubCard issued by UK retailer
giant Tesco, who send out their ClubCard newsletter in 1.7 million customised versions to their 15 million mem‐
bers in the UK, Ireland and Poland – and it works! 20% of the recipients make a purchase compared to just 0.5%
for the sector overall. But this should not necessarily be confused with loyalty; these customers might merely be
bargain hunters.
ASDA, the UK arm of the world’s biggest retailer, has chosen another strategy; they have chosen not to have a
loyalty program and they have made this decision an integrated part of their marketing strategy under the
brand Every Day Low Price (EDLP): “At ASDA we reward all of our customers for their loyalty by charging low
prices every day of the week, all year round.” One problem with the EDLP strategy is that it is hard to prove, es‐
pecially when regular prices are mixed with promotional offers. Also, new customers might be convinced by the
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4. marketing promise but later the challenge is to keep this fresh in mind. The EDLP strategy is similar to Tesco’s
ClubCard in the sense that it is based on a monetary logic – thus, is unlikely to build lasting loyalty, or loyalty at
all for that matter.
Passing ‘Go’ in Monopoly without collecting from the bank
Based on the above description
of the complexity, polygamous On the brink to the 00’s the experience economy theory was articulated – it
loyalty behaviour and purchase argues that companies need to provide experiences by appealing to the
frequency among loyalty card senses and involvement of the customers in order to gain a competitive
holders it can be concluded that advantage – of examples given are Hard Rock Café and Planet Hollywood.
loyalty programs are not the
service silver bullet hoped for by One could almost hear the sigh of relief throughout the corporate world,
many companies. At best loyalty finally something concrete to create customer loyalty instead of the “soft”
programs can disrupt market and intangible service concept. Thus, more and more theme based busi‐
equilibrium and attract new nesses popped up in the shape of Irish Pubs and rose coloured Himalayan
customers but the real battle for salt flakes. But businesses apparently overlooked a fundamental detail – the
customer loyalty takes place in fact that customers take products and services for granted! In other words,
the interaction between the basing a business on a product related theme, storytelling or even a fantas‐
service employee and customer. tic packing is not sufficient if the service fails. Blimey, back to service.
Food for thought
“Satisfied employees generate demonstrably superior customer satisfaction and that, in turn, satisfied custom‐
ers are more profitable ones.” Herb Kelleher, founder of Southwest Airlines
“Based on 30 years of research it can be concluded that enthusiastic employees consistently outproduce and
outperform their less satisfied counterparts.” Jack Welch, former CEO of General Electric
“Companies with a highly evolved sense of the employee‐to‐customer‐to‐profitability chain constantly measure
everything: customer satisfaction, employee satisfaction, process efficiencies ... everything. Marketing Innova‐
tors International
“A 5% increase in customer loyalty can produce profit increases from 25% to 85%.” Reichheld & Sasser
“The average monthly cost of replacing a sales representative who had five to eight years of experience with an
employee who had less than one year of experience was as much as $43,000 in sales.” Abt Associates
We would rather take an eager, hungry, customer‐orientated
mind and mold it to what works well at Southwest, than try to
change the habits of someone who’s come up through an
organisation that views life differently .
Sherry Phelps, Director of Corporate Employment, Southwest A.
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