Under the Influence

Persuasive Perks: The World of Loyalty Programs

This week, we explore the world of loyalty programs. In this day and age, marketers do everything possible to encourage loyal customers, and loyalty programs are one of the most effective ways to retain them. We’ll go back in time to see how the first loyalty programs started, and we’ll analyze the marketing strategies behind today’s programs to see how they really work. Loyalty cards may give shoppers points, miles and merchandise, but what they give marketers is fascinating.
Air Miles claims new members saw rewards they couldn't afford as a way to motivate them to collect more miles. (Air Miles)
This Week's Must-Listen Moment: Persuasive Perks: The World of Loyalty Programs

This week, we explore the world of loyalty programs. In this day and age, marketers do everything possible to encourage loyal customers, and loyalty programs are one of the most effective ways to retain them. We'll go back in time to see how the first loyalty programs started, and we'll analyze the marketing strategies behind today's programs to see how they really work. Loyalty cards may give shoppers points, miles and merchandise, but what they give marketers is fascinating.

According to music streaming service Spotify, there are over 1,300 music genres in the world.

30 million Spotify users split 1,300 different musical genres. (image source: spotify.com)

So, when you stop to think about the genres you love and listen to, it's just a drop in the musical ocean.

Some of the genres are surprising.

Like Norwegian Hip Hop, Swedish Reggae and Spanish Punk. Then there's Black Sludge, Math Rock, Vaporwave and No Wave.

But Spotify's research revealed something else.

Specifically, how loyal listeners were to particular genres.

When you look at the world as a whole, which genre do you think inspires the most loyalty?

Here's a hint: It is the runaway success on the Spotify chart. It can't even see the #2 genre in its rearview mirror.

The loyalty this genre inspires is worldwide, devout, steadfast and completely unwavering.

The answer: Metal.

The masters of metal. (image source: billboard.com)

Metal listeners are more loyal to their favourite musicians than any other fan base. Bar none. Pop was a distant second, and you need a telescope to see the third place folk genre.

The genres that came in last with the least loyal listeners – Classical and Blues.

The master of madal. (image source: biography.com)

But metal fans are a tribe unto themselves.

And you may be surprised to know they don't fit the genre's stereotype.

The world seems to view metal fans as dangerous and destructive, but a research study by the Heriot-Watt University in Scotland found metal fans to be "quite delicate things."

When metal fans listened to their favourite bands, they became as "tranquil as tattooed Buddhas," said the University.

Namaste. (image source: tumblr.com)

Several personality studies show that metal listeners have far greater emotional stability than pop fans. They tend to be more curious, enjoy taking risks and are physically active and open-minded.

While this group tends to have lower self-esteem than other groups and are highly sceptical of authority, metal fanatics are thinkers that like to analyze the patterns they see in the world. They have a high desire for uniqueness.

And if all that surprises you about metalheads, listen to this:

According to a survey from the European dating site Victoria Milan, a site for people looking for discreet affairs - think Ashley Madison with an accent – metal fans were the least likely to cheat.

Metal heads practice loyalty in all aspects of their lives. (image source: sincemybabyleftme.com)

While not the most scientific of studies, the insight was interesting. Metal listeners are not only the most loyal music fans, they're quite possibly the most loyal to their partners.

Who knew? Which proves loyalty is a many splendoured thing.

In the world of marketing, loyalty is the Holy Grail.

In this competitive age, brands have to do everything they can to keep shoppers loyal.

Which has led to the phenomenon of Reward Cards and Loyalty Programs.

(image source: rootinc)

The exchange of information for reward is an intriguing swap. Shoppers get points, miles and merchandise, while marketers get a skeleton key to the inner thoughts, behaviours and habits of their best customers.

And what they do with that key is fascinating.

You may think Loyalty Programs are a recent marketing phenomenon, but they've actually been around for over 200 years.

Back in 1793, a merchant in Sudbury, New Hampshire, began handing out copper tokens to his customers when they made a purchase. Those tokens could be redeemed for a discount on the next purchase.

One hundred years later, in 1891, a Milwaukee-based retailer called Ed. Schuster & Company created a loyalty program that used stamps instead of costly coins. They resembled perforated postage stamps, and customers could exchange them for jewellery, toys, or household items on future shopping trips.

Loyalty programs started small. (image source: inherited-values.com)

But the first big breakthrough in loyalty programs would happen five years later.

Thomas Sperry was a silverware salesman.

One day, he saw the success of trading stamps at Schuster's in Milwaukee, and wondered if a loyalty program could succeed if it wasn't tied to just one store.

He shared his idea with businessman Shelly Hutchinson, and the two of them started the Sperry & Hutchinson Company in Jackson, Michigan, in 1896.

(image source: wikimedia)

The concept was to approach multiple retailers with the idea of issuing Sperry & Hutchinson (or S&H) green trading stamps to their customers.

(image source: wikimedia)

Shoppers would get one stamp for every 10 cents spent and paste the stamps into booklets.

The famous Quick Saver Book housed 1200 stamps. (image source: Pinterest)

Then shoppers could redeem those booklets for premium household and kitchen products. S&H created catalogues that listed the merchandise shoppers could work towards, and began opening 800 redemption centres around the country.

(image source: ebay.com)

S&H also advertised Green Stamps nationally, attracting shoppers into the participating merchant's stores.

The program was an instant success. The stamps helped families through the First World War Years, and especially during the Depression era.

How S&H made its money was simple and ingenious – they would sell reels of stamps to merchants. S&H would use that revenue to buy household merchandise wholesale, then sell those items in exchange for the stamps at retail prices. The spread was their profit, and the fact 30% of all stamps would go unredeemed was the cherry on top.

Trading stamps soared in popularity in the 1950s.

The war was over, optimism was high, people were back to work, and the public was eager to consume after years of sacrifice.

The trading stamp industry grew from $30 million in 1950 to over $190 million in 1955. 80% of American households were collecting trading stamps. S&H was printing three times as many stamps as the post office, and was redeeming over one billion per week.

(image source: wikimedia)

That huge success inspired other programs, including what is probably Canada's oldest loyalty program - Canadian Tire Money – launched in 1958.

Canada's second currency since 1958. (image source: thestar)

And Quebec's Steinberg supermarkets began handing out Pinky stamps in 1959.

Conservez les timbres Pinky pour des cadeaux. (image source: ebay.com)

But trading stamp loyalty programs began to decline in the 70s, due to a deep recession and the emergence of big-box low-price retailers like Wal-Mart.

It would take a high-flying idea to resurrect loyalty programs.

The first full-scale loyalty program of the modern era was created by American Airlines.

(image source: American Airlines)

And as with most revolutions, it was created under stress.

When the airline industry was deregulated in 1978, it opened the skies to increased competition. It meant more regional airlines, more routes, cheaper fares and the number of passengers jumped 300% – as air travel was suddenly no longer just for the wealthy.

During that scramble for passengers in 1981, American Airlines created a new thing called a frequent flyer program. The plan offered frequent travellers a "Loyalty Fare," then expanded to offer points that could be redeemed for free first-class upgrades and discounted economy fares.

The response to the program was so overwhelming and the hunger to collect miles so consuming, all other airlines rushed to create their own loyalty programs.

But there was a big difference between green stamps and frequent flyer programs – because American Airlines could track its passenger's spending activity.

That ability would change everything.

In 1987, American Airlines approached American Express to create a co-branded credit card that would allow people to earn reward miles while making everyday purchases. Amex turned the offer down, much to its everlasting regret. So American Airlines teamed up with Citibank to create one of the most profitable relationships in business history.

(image source: aa.com)

That pairing also inspired other loyalty programs.

In England, a man named Keith Mills launched a very successful rewards-based loyalty program called Air Miles, in 1988. Unlike most loyalty programs, it wasn't tied to one company, but rather was a coalition of retail companies that pooled marketing resources and allowed customers to earn miles while shopping across an expansive list of stores – while using only one card.

Loyalty cardholders can earn Air Miles at over 120 different retailers. (image source: airmiles)

That concept was brought to Canada in 1991.

In just six months, Air Miles had attracted over two million Canadian members. And since, it has grown to become the largest loyalty program in the country with over 200 participating retailers.

Two-thirds of all Canadian households collect Air Miles. (airmiles.ca)

A reward is redeemed every 4.8 seconds, and 1,000 Air Miles cards are swiped every minute of every day.

11 million Canadians love the benefits of Air Miles.

But when you analyze the benefits it gives to companies, it's even more fascinating…

The way loyalty programs make money is interesting.

Airlines, for example, sell reward miles to loyalty companies.

For the largest airlines, selling reward miles is a billion dollar-per year revenue generator. Plus, a sizeable portion of those rewards are distressed inventory, meaning empty unsold seats. So the cost to the airline is minimal.

Take Aeroplan. It isn't owned by Air Canada anymore, and is a standalone third party company representing a coalition of 70 retailers.

(image source: aeroplan)

Aeroplan sells reward miles to those 70 companies. And you earn those miles by being loyal to those companies.

When you want to redeem those reward miles through Aeroplan, it uses the revenue it has generated from selling the air miles to retailers to buy seats from Air Canada at a reduced, preferential rate.

It makes money on the spread between what it sells its miles for, and what it costs to buy the discounted seats from Air Canada - echoing the old green stamps business model.

One other little tidbit: You don't own your air miles or your reward points. Read the fine print – they are the property of the issuing company.

So when loyalty firms make sweeping changes or alter the redemption rules, there's not much you can do about it.

That's why loyalty programs have to be very careful about how they treat their customers, because it can easily become all take and no give.

At the retailer level, a loyalty program card is a "customer identification tool."

It allows merchants to recognize individual shoppers, track their purchases and analyze their behaviour.

While only 15% of shoppers are loyal to a single retailer, research reveals that this group generates up to 75% of a company's revenues. That's roughly in line with the Pareto Principle – which is the business rule that states 20% of a company's customers generate 80% of the sales.

But for retailers, loyalty programs don't merely secure faithful customers, they are an intricate strategy to influence shoppers on many different levels.

First, it's a plan to acquire new customers. Companies try to make their loyalty programs so appealing that it will pull customers away from competitors.

Second, it's a strategy to increase your spending.

Because retailers track your shopping habits via your loyalty card, they will try to influence additional spending by offering bonus points on your favourite products. Or they will offer bonus points to try new products. They will also target shoppers whose spending has declined over the past three months with special deals and extra loyalty points.

Sephora's loyalty program offers customers travel-sized versions of new products to test. (image source: sephora)

Third, a loyalty program is about retention.

50% of the customers at most companies change every five years. It's 6 to 7 times more expensive to acquire a new customer than it is to retain an existing one. The probability of a sale from a new customer is 5%-20%. The probability from an existing customer - 60%-70%.

Loyalty cards can also shift your spending to higher margin products.

For example, a grocery store notices you buy one kind of kid's cereal, so it offers you a coupon and the incentive of extra loyalty points if you buy a higher-priced brand. So now you are either buying two cereals, or you've switched to the pricier one. Either way, the store benefits. Loyalty programs also incentivize you to cross-shop in other higher margin areas of the store.

The information contained in loyalty cards also helps retailers make tactical decisions. For example, LoyaltyOne & Air Miles CEO Bryan Pearson tells this story in his book, The Loyalty Leap:

(image source: loyalty.com)

At one point, Shell had too many gas stations in Canada and was inefficient. It wanted to close 20% of its locations, going from 2,500 to 2,000.

15L of fuel grants you one Air Mile. (image source: uwaterloo)

When Air Miles analyzed Shell's loyalty card data, it discovered that half of each location's revenues came from Air Miles members – and 50% of that group accounted for 86% of those sales.

So Shell posted notices on locations that were closing, directing customers to the next closest station, and offered Air Miles customers double the points on their next purchases. The result – a 300% increase in the volume at the other stations. Customers were retained. And Shell moved from being the least-efficient fuel retailer per location to being the most efficient in the country.

(image source: blogspot)

All due to the influence it could exert through loyalty cards.

The best loyalty programs try to create an emotional bond between the store and the customer.

There are many ways to do this. First, there is a difference between a "rewards" program and a "loyalty" program. Rewards are rational straight-ahead points-for-merchandise plans. But loyalty programs are about creating a deeper, long-term customer relationship.

Smart retailers know a one-size-fits-all loyalty plan isn't effective. So they get to know their shopper's preferences by analyzing loyalty card data, and use that information to create more interesting, personalized offers. Some offer VIP services, like Amex's "Front of The Line" benefit, and MasterCard's "Priceless Experiences" program. Some even surprise their best customers with birthday gifts.

(image source: rewardscanada)

According to Air Miles, personalized offers have response rates 5 to 10 times higher than standard offerings.

And smart marketers know not to lump their high-value customers in with their low-earning ones.

Loyal customers want to feel special.

That's why the psychology at work here is very interesting…

Shoppers know they are surrendering private information when they sign up for a loyalty program.

But they expect something in return.

Psychologist William James says the deepest principle in human nature is the craving to be appreciated.

(image source: wikimedia)

"Craving" is a powerful word.

Shoppers want to be appreciated by the companies they choose to spend money with.

At the core of loyalty programs is the idea of recognition. Many programs have tiers – like Gold, Silver and Bronze. Or the 25, 50, 75 and 100K status levels at Air Canada.

Sephora's coveted reward program offers three tiers: Beauty Insider, Very Important Beauty Insider (VIB) and VIB Rouge. (image source: sephora)

People strive for that acknowledgment. Like George Clooney in the movie, Up In The Air:

At a profound level, achieving high status not only says, "I am appreciated - but - I am important."

As Pearson notes, many shoppers will buy items just to maintain their Gold status. Many frequent flyers will even book obscure routes near the end of the year to make sure they re-qualify for top tier status.

It's not just about merchandise. 43% of Canadians say they get a rush just from accumulating loyalty points.

Then there is the fear of loss. Losing something is more profound than gaining something in the human psyche. So shoppers are reluctant to leave points behind by switching their allegiance to another retailer.

That is the stickiness in the honey pot of loyalty programs.

And the stickier it gets, the more information merchants can collect.

Which has led to some odd moments.

Loyalty cards have already been used in some surprising ways in legal cases.

In one instance, a man's loyalty purchase of a very expensive wine was used as evidence in a divorce case to prove he could afford to pay more alimony.

In another court case, a supermarket asked to use loyalty card alcohol receipts to prove that a man who sued after tripping over a yogurt spill in its store had a drinking problem.

And after the 9/11 attacks, federal agents reviewed the shopper loyalty cards of the men involved to create a profile of "ethnic" tastes and supermarket shopping patterns associated with terrorism.

But while loyalty plans can sometimes work against some people, other enterprising individuals have figured out ingenious ways to make loyalty work for them big-time…

One smart collector figured out a way to accumulate points through the U.S. Mint.

For a year and a half, it was possible to buy U.S. one-dollar coins using a points-collecting credit card. So this one collector bought $70,000 worth of coins from the mint, then deposited the $70,000 of coins right into the bank to pay off the bill.

That zeroed his credit card balance again.

The bank wasn't thrilled with having to process 70,000 one-dollar coins.

But here's the thing: The collector received 70,000 Air Miles because of the purchase, and flew to Europe in business class.

For free.

Then there's the story of a man named David Phillips in California.

David Phillips, a civil engineer at the University of California. (image source: podes)

He noticed Healthy Choice chocolate pudding was having a promotion. For every 10 barcodes sent in, the buyer would get 500 Air Miles. On top of that, there was an early-bird offer – anyone redeeming barcodes in the first month got double the Air Miles. Therefore, every 10 barcodes got him 1,000 Air Miles.

Phillips scoured his town and discovered a discount grocery chain selling Healthy Choice chocolate pudding for only 25 cents each. Meaning - for $2.50, he would get 1,000 Air Miles. So he cross-crossed town and bought up all the chocolate pudding he could find.

Then came the tough part – peeling the barcodes off hundreds of pudding cups.

He and his family started developing blisters – until Phillips had another idea.

He approached the Salvation Army and asked for volunteers to peel the barcodes. In return, he would donate all the chocolate pudding to them. The Sally Ann said sure. That little move also got Phillips an $800 charitable tax deduction.

In the end, Phillips spent $3,000 on the pudding.

"The Pudding Guy" in all his glory. (image source: Karin Higgins)

But get a load of this: In return, he got 1.2 million Air Miles. That gave the Phillips family lifetime access to the American Airlines Advantage Gold Club, and he's now earning miles five times faster than he can spend them even though he's travelling extensively.

He'll never have to pay for another flight again in his life.

And all for spending $3,000 to gain Air Miles.

Minus the $800 tax deduction.

For a grand total of $2,200.

So, are there benefits to loyalty programs?

Well, the proof is in the pudding…

Loyalty programs are a fascinating aspect of marketing.

They are a way to say thank-you to customers, and at the same time, provide a treasure trove of lucrative information to companies.

Merchants use that information to turn good customers into better customers, and better customers into their best customers.

While some retailers manage their own internal loyalty program, coalition programs raise an interesting question: When merchants hire loyalty firms to handle their rewards programs, can that merchant ever be truly sensitive to its customers when there is a third party mediating the relationship?

And who pays when that third party makes a profit?

25% of Canadians don't participate in any Loyalty Programs because they don't want to share their private information with corporations.

The other 75% are willing to exchange that information for rewards.

Yet only a small percentage of those shoppers feel that companies are going the extra mile for them.

It's a golden opportunity for smart businesses to step up and honour that exchange with thoughtful perks and more personalized offers.

Because loyalty is worth something in this day and age.

Whether it's to an airline, a drugstore or even Metallica…

…when you're under the influence.