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Most people understand what incentives are and how best to use them, but they don’t understand why the entire industry came about.
During the 1970s in most developed countries, the availability of goods and services exceeded demand for the first time. This meant that companies could no longer just put anything on the shelves and expect it to sell.
Therefore, all types of marketing and sales disciplines started to evolve to incentivize and influence customer choice in order to drive more revenue. The incentives industry was born out of this marketplace transformation – where scarcity basically disappeared.
So, with competition across nearly every category, all companies now need a loyalty strategy. Not every company needs a loyalty program with points, gift cards, or other incentives, but very few businesses can survive without a base of loyal customers that makes up 30-50% of recurring total sales.
The question, now, is how we organize and optimize our marketing efforts to deliver consistency in the brand message, build a loyal base of customers, and increase share of wallet.
The next wave of challenges for brands will be related to embracing the marketplaces where customers now spend most of their time. Brands must adopt marketing and sales practices which are effective in digital ecosystems where they no longer control most of the factors that can influence customer choice.
Incentives must be tailored to the customer’s context
Incentives are used to influence customer behavior. There are financial incentives (like points, gift cards, or profit sharing), emotional incentives (like recognition), subsidies, negative incentives, etc.
Incentive schemes like loyalty programs are effectively a value exchange. The customer agrees to share their data, and to receive marketing in exchange for better experiences and value.
Of course the nature of value evolves over time – as customers set higher expectations and brands become more sophisticated. In many ways, the best experience we receive from any brand becomes our expectation of every brand.
This ecosystem of value exchange, therefore, also naturally evolves. Industry incumbents are replaced by those who innovate more effectively – much like in nature.
Equally, ongoing changes in human nature alter our perception of value.
Our brains have been wired for thousands of years to behave in similar ways – but, as our safety in the world has improved, our behaviors are evolving much more rapidly. So, while human nature is general, the individual still responds in particular ways depending on the context of any situation. Incentives play on human nature – so they need to be equally responsive to their human context.
Every action from a business – down to and including total inaction – will solicit a reaction from the customer.
The reaction can be a small or big change in trust, confidence, satisfaction, or perceived value. However, the reaction often depends on the context – which is constantly changing. In fact, customers have different personas depending on mood, work, family, etc. Therefore applying one ‘best practice’ will often be the wrong action for most customers in any particular situation.
The next evolution in CX will be based on operating off better loyalty data to adapt to the context.
An entire martech & incentives industry has spawned around the need to optimize marketing performance. Providing incentives solutions or providing consulting services, to help clients improve performance, is a noble profession. As leaders in these categories, it is our job to understand the psychology of consumers, but also the operational capabilities of our clients to maximize results from measured efforts.
What I want to emphasize today is how companies, that don’t coordinate the incentives they offer, confuse customers and leave a great deal of money on the table.
Customers have a single view of a brand
A company is a legal and social entity that organizes resources to achieve objectives that often cannot be achieved by an individual.
In many cases, the complexity of operating a company means that not all participants have the same objectives. In fact, most individuals within an organization have their own objectives – which, if defined and motivated well, lead the entire organization to achieve desired results.
Unfortunately, many departments end up with their own goals and can drift from the overall business strategy. This creates internal conflict as well as confusion among customers about what the company stands for. It also explains why many marketing tools end up being used randomly across departments with little enterprise coordination.
Imagine how many departments in these companies do something that influences the end-customer experience. There are probably hundreds of teams across dozens of departments that have to coordinate activities.
On the other hand, customers have a more singular view of each brand, its value, and the experience of doing business with that company.
If a company’s incentives for their own employees are not aligned, the messages delivered to customers can create conflicting views. This is precisely why activity within teams must be aligned with the business strategy.
With so much change taking place within our companies, in the lives of our customers, and the ways in which they shop, buy, or interact with brands, the need for CX and loyalty professionals to collaborate has never been greater. What is coming next will make or break most companies.
Evolution of businesses’ CX functions
The discipline of CX gained a great deal of popularity during the past decade – and for good reason. As digital sales, marketing, and service channels proliferated, companies were often on the bleeding edge of how best to deliver value.
Customer journey mapping and various other ‘best practices’ emerged to help companies innovate around their digital channels. But in most cases, the CX team operated far from the loyalty team and rarely was involved in optimizing the experience of the product or service actually delivered.
What brands did well with CX experts was improve the way in which customers interacted on websites and mobile devices. But those significant advances now have diminishing returns, so companies need to be considering the customer experience across all touchpoints; not just digital.
What needs to happen next is for CX to infiltrate every customer-facing part of the company to help customers save time, and obtain better overall experiences from every touchpoint.
The obstacle, of course, is that customer data remains spread throughout the organization – making it very difficult for anyone to have a 360-degree view of the customer, let alone anticipate their needs.
It is probably the loyalty team that should take ownership of the customer data, and the data model. They should build the richest profiles and orchestrate with CX professionals the methods by which they engage customers. CX and loyalty teams also need to figure out how to be top-of-mind in digital ecosystems or marketplaces like Amazon, home assistants, and social media platforms.
But this evolution does not mean that every customer experience will become exceptional. I believe it is a major flaw for most professionals to pursue a great customer experience. Rather, the experience should be aligned with the overall business strategy.
The brands shown in the video below are famous for their customer experience – good or bad. Of course, there are thousands of brands in the middle and I would argue that many of the incentives professionals among them are striving to surprise and delight customers. This may be reducing ROI for the company at large – or, possibly worse: delivering great experiences periodically, which sets the bar higher, and disappoints customers when the experience is merely ‘good’.
In most companies, the loyalty program operates as a fairly separate business with little coordination among other departments that coordinate customer touchpoints. You may be aware that the loyalty programs for Delta, American Airlines, United and others often contribute much more profit to the business than the airline itself (and that this was the case even before COVID-19).
Nearly every function of a business should have some responsibility for building loyalty among customers. The data from the loyalty program should fuel the CX at every touchpoint – as it can enable companies to cease providing one ‘best practice’ and deliver an appropriate interaction based on the customer’s stage in the sales cycle, propensity to respond to an offer, emotional nature, etc.
In the wave in CX, companies will be co-creating value with complementary brands and customers – to create more convenience that saves customers time. This will lead to much more participation in marketplaces by brands.
Brands must learn to coexist and thrive in marketplaces
he massive growth of loyalty programs over the past 10-15 years has produced a degree of fragmentation that makes it very difficult for the average customer to benefit.
I believe normal market pressures will lead to further proliferation of loyalty programs, but a significant consolidation of loyalty currencies. The most popular loyalty currencies today and a few new ones will survive (and possibly flourish), but thousands of loyalty currencies will disappear from the market over the coming 2-5 years.
Loyalty coalitions could, if run well, be a partial answer to the problem of fragmentation. But the coalition model for loyalty has been around for about 20 years, and in some cases, it has taken on negative connotations.
I personally believe multi-brand collaboration in an open loyalty network of complementary brands is the winning model. It cannot be coordinated by one intermediary running the program, extracting too much of the ecosystem value to cover their operating costs and profit. There needs to be a thin layer of technology that enables collaboration at low cost – so customers get most of the value.
This means that brands need to learn how to orchestrate the delivery of better customer experiences across multiple brands that are all selling stuff to the same customer.
This has already happened – in the historical evolution of offline marketplaces – and it’s worth understanding why this happened, so that you can succeed as the same trend plays out today.
The evolution of marketplaces
A long time ago, someone with excess grain or meat exchanged that excess with a neighbor to obtain something else they wanted. When this became routine, merchants emerged and began dedicating their efforts to buying and selling. Soon, merchants of various products/services realized they could get more business efficiency by co-locating, and by maintaining some regular frequency in offering their goods.
Outdoor markets emerged. Eventually the markets became permanent fixtures – often in dedicated buildings – known as souks, bazaars, mercados, etc. Over the course of 5,000 years these markets evolved into market squares, market halls, food halls, and eventually became shopping centers.
I’m not going to lecture you on monopolies versus oligopolies versus pure competition, but let’s focus on the characteristics of marketplaces.
Marketplaces became more efficient when they were anchored to one area (often zoned)
They became more trustworthy when weights and measures were introduced
Marketplaces even led to the creation of money – to further improve efficiency and represent value (without having to carry around 4 buffalos or 5 sacks of potatoes)
Of course, marketplaces also attract speculators, thieves, and pressure on margins
Marketplaces are often well organized and ‘choice’ is prevalent.
Why is this important?
It’s important because customers will migrate to the most efficient ‘place’ to achieve their goals – and marketplaces are evolving rapidly to suit their needs.
This should also increase trade for businesses.
3-4,000 years ago, most sellers of similar goods clustered together because they found it improved trade. When I was growing up, car dealerships were on opposite sides of towns. But today, they are grouped together once again – because a degree of collaboration and delivering efficiency for customers lifts the tide for everyone.
Technology is now driving the evolution of marketplaces online, bringing the convenience of goods delivered to your door, but also causing issues with the trust of people and merchants you don’t know. And, with supply far exceeding demand there is a constant downward pressure on margins.
We’ve seen this play out in travel – which explains why travel was the leading sector in the evolution of the loyalty industry.
There have been travel brokers for hundreds of years. More recently we have seen travel agents and online travel agencies. The reason it is so hard for airlines to earn direct sales is because customers like to shop around in an OTA’s marketplace.
I might argue that this is so natural, that airlines are spiting themselves by not showing (and selling) competitors’ flights. Most airlines do sell hotel stays, but since that is not their core business, it is often outsourced to someone else. Some of customers will buy flights from an airline directly, but most believe the airline doesn’t offer the best deals, so they go to other marketplaces for their travel requirements.
These trends will only accelerate.
We need to recognize that the future (12 months or 5 years) will not be the same as today. Nearly every building or ship that has ever been built was built for the requirements (or based on technical limitations) of that moment in time. Even websites from 5 years ago looked very different than those today.
The challenge for brands, and for loyalty professionals, is to evolve as quickly as the marketplaces where customers are now spending their time. That implies a change of tact: from passively rewarding customers for repeat business, to motivating customers to allocate share of wallet to your brand, in a marketplace where every other participant is trying to do the same.
How CX functions can motivate customers in a competitive marketplace
Customers are constantly striving for simplicity, and this dictates how likely they are to engage with your incentives initiatives.
As professionals in the incentives industry, it is our job to maximize motivation. The formula for motivation is…
the customer’s estimate of the likelihood of achieving what they want
multiplied by the perceived value of the reward
multiplied by 1 minus the effort.
If the effort is high or the likelihood or perceived value is low, the result is low motivation. So, we need to offer attractive things that require modest effort to obtain.
As your business tries to optimize the way it incentivizes customer behavior, we need to balance these factors in order to maximize the results.
1. HOW TO INCREASE THE PERCEIVED LIKELHOOD OF REACHING REWARDS
This is where liquidity comes in.
You don’t normally hear marketing people talk about marketplace liquidity. But if you work in financial services – or any industry with a complicated supply chain, you tend to focus on improving marketplace liquidity all the time, because the more liquidity that exists in the market, the bigger that market becomes for everyone.
In loyalty marketing, you can increase liquidity by:
reducing complicated rules
adding relevant partners so your customers can earn more frequently, and so that you can get better data about the customer
delivering a smoother customer journey
reducing cycle times – so customers can get to interesting rewards faster
adding better global coverage to appeal to a wider audience
treating points more like money, and giving customers more freedom to spend that value however they want.
The need for greater liquidity is the reason gift cards have become much more prevalent, in the last 5-8 years. They represent outstanding choice for the customer, because now, the customer can exchange points into an almost an infinite number of gift cards – whichever is most relevant to them.
Of course, providing perfect liquidity would actually defeat the purpose of most loyalty programs. For example Sainsbury’s wouldn’t want its customers to have the freedom spend its points at Tesco.
But brands do need to increase the degree of freedom and choice they give customers, in order to increase the perceived likelihood of achieving a reward. This gets more customers to join.
2. HOW TO INCREASE PERCEIVED VALUE
Brands can no longer fly solo.
Kodak, Nokia and Xerox were excellent at delivering their core products, but they didn’t collaborate in marketplaces. The leading brands today are marketplaces, and there will be new marketplaces that evolve over the next 3-5 years.
It’s difficult predict who those will be; the point is, customers are spending their time in marketplaces. That’s creating enterprise value for other marketplace operators, but also for the companies that are effectively selling in those marketplaces. The biggest trend we’ll see over the coming years will be many more brands collaborating with complementary partners, so that together, they can deliver more value to customers, and they can share insight which any individual brand by itself would not be able to obtain.
3. HOW TO DECREASE EFFORT FOR CUSTOMERS
As we engage more customers, those relationships will spin off a lot more data.
Customer data must be used to create more personalized and relevant offers, which ultimately save the customer time in meeting practical needs or achieving lifestyle goals.
But not all data is equal.
Knowing how many times a customer bought deodorant from a grocery store is much less valuable than knowing if they put premium gas in their car at least once per month.
For instance, you may be a grocery store or a hotel chain. If one of your partners is a gas chain, and you know which customers put premium gas in their cars at least once a month, then those customers will be much more responsive to an upgrade offer than customers that only ever buy the cheapest gas.
Or, if you partner with a coffee chain, and you find out that the customer is earning points on coffee 2,000 miles from home, but they didn’t fly on your airline, or they’re not staying in your hotel, then you know you’re not getting 100% share of wallet.
So – the data that can be revealed from these partnerships can be really very powerful. Marketers need to be thinking about which data is really worth collecting, and how they’ll make that data actionable, in order to drive desired results.
Organise your CX functions around the customer’s need
As you consider how to be more effective as these marketplaces evolve, keep in mind that optimizing the environment for customers, to meet their own needs quickly, is going to be the main differentiator. This is because it drives meaningful engagement and unlocks really insightful data.
Marketers must remain focused on the network effects of collaborating with other brands. They need to make sure that departments in their companies, that interact with customers, are operating in a consistent way, and that their actions are tied back to the overall business strategy.
At the end of the day, customers will migrate to the environment or the brand that saves them time, and where they can obtain greatest value. That does not mean the lowest price; it means the appropriate degree of value from the customer’s perspective, which likely means having optimal choice and the freedom to make their own decisions.
The loyalty & CX functions are really the disciplines that brings a brand to life.
As professionals, it’s our job to do that in the most effective and efficient way. Incentives are the tools that drive this desired customer behaviour, but they need to be tailored to the context of the customer any point in time.
This article was first published by Currency Alliance. Permission to use has been granted by the publisher.
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