Loyalty cards seem to be everywhere! It all started innocently enough. It seemed like no big deal when airlines and hotels embraced the ‘frequent’ traveller rewards programmes. We consumers loved the idea of earning rewards for our travel. Soon, as we added banks, hotels and retail cards, the number of loyalty cards that we held crept into the double digits.

US companies spend almost $50 billion a year on loyalty programmes and some top ones, such as Marriot Rewards, have over 30 million customers. Loyalty marketing research firm Colloquy estimates the total number of loyalty programme members in India to be over 35 million.

Loyalty measurement metrics are also very fuzzy. Some retailers with mature loyalty programmes claim nearly 65-70 per cent of their total sales come from their loyal consumer base. But it is incorrect to look at this metric. What should be tracked are the sales accruing from customers who have come more than once. New loyalty customers should not be counted!

Two-way street More importantly, how do companies view loyalty? Should companies build strategies to be loyal to customers or do they really only expect customers to be loyal to them? When you look at the benefits that the loyalty programmes profess, there is a large vacuum. You get minuscule points for your purchases, hardly a reason for you to come back. And companies hesitate to give you “real” benefits wondering whether they can actually differentiate among customers at the storefront or in the bank.

Loyalty programmes which have been launched as yet another tick mark in a marketing arsenal are bound to fail. The programme needs a wider commitment within most companies for it to give “real” benefits back to customers.

Beyond hard cash After all what is the point of a loyalty programme which does not give me a separate checkout line in a retailer or give me a preview sale with relevant offers?

Loyalty programmes are meant to break down barriers between customers and your business and yet charging a fee is not a bad idea. In some circumstances, a one-time (or annual) fee that lets customers bypass common purchase barriers is actually quite beneficial for business and customer alike. By identifying the factors that may cause customers to leave, you can customise a fee-based loyalty programme to address those specific barriers.

Not enough thought is being given by marketers to the softer benefits that loyalty programmes can incorporate. Patagonia, an eco-friendly outdoor apparel company, realised that its customer needed more than just points and discounts from a loyalty programme. So the company implemented its Common Threads Initiative in which it partnered with eBay to help customers to resell their highly-durable Patagonia clothing online through the company website. While consumers love discounts, you can get them passionate about incentives for living a healthier lifestyle, for sharing on social media and for participating in social responsibility programmes. I have yet to see substantial innovation around this for loyalty programmes in India. There is so much talk about coalition loyalty nowadays. Almost every large global company in the loyalty space is here and batting hard! Does coalition loyalty work in India? Will marketers cooperate and align or will multiple programme partner interests be too complex to manage. Or will the Indian ‘crab syndrome’ come in the way?

India is seeing a plethora of coalition loyalty companies. Can they improve the quality of programmes that exist? Payback has been the early coalition entrant. Some reported figures place the transaction throughput via Payback to be around $350 million (₹1,500 crore to ₹1,600 crore) every month.

Research suggests that in India, around 35-40 per cent of the loyalty points that are given by Payback to its members is redeemed, while in Germany, about 95 per cent of the points given by Payback are redeemed.

Breakage is simply the amount of points or credits that expire or never get redeemed.

Along with gift and cash cards, it is widely associated with loyalty and rewards programmes. The biggest question is: ‘How much breakage is optimal? If the breakage is low, does it mean that the programme is a success, and if it is high, is it because members do not care about it? This is not always easy to answer, as a certain percentage of points do naturally break and form a part of expected revenues.

Studies have indicated that breakage in the retail loyalty programmes hover around 25-30 per cent. Some large airlines indicate a breakage between 13 per cent and 25 per cent.

It would be interesting to analyse customers who redeem regularly and get some insight into what customers find valuable in a loyalty programme. Programme design has a huge impact on breakage. It is a myth that high breakage leads to a good loyalty programme; it’s exactly the reverse! Marketers should go back to the basics of building a credible loyalty programme and not get misled into shortcuts through only the coalition loyalty route.

Where’s the value? But are people forgetting a few fundamentals? Loyalty programmes, if they are to engage customers, should allow them to see ‘value’. Loyalty is no longer about points, discounts, miles or rewards. Rather, loyalty points as a method of building loyalty is myopic and in fact a lazy marketer’s dream. Give them points and they will come back is an absolute myth today.

Discounts don’t have memory and so most programmes come out with points. But according to the 2011 Colloquy Customer Loyalty Census, of the $48 billion worth of perceived value in reward points and miles distributed by American businesses annually, one-third goes unredeemed by consumers.

Companies lose money on time and effort, and customers get no more value from the businesses to which they are supposedly loyal.

(Ajay Kelkar is Co-Promoter & Chief Operating Officer of Hansa Cequity)

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