The Changing Face of Reward Programs (#33)
History of reward programs, evolving customer preferences, and loyalty 2.0
Welcome to the 33rd issue of the Unit Economics. The article today talks about the evolution of the reward programs, and the changes in customer preferences for rewards in the fully-digital world - with thoughts on how reward programs can adjust better. Dive in!
Reward programs have a longer history than most would imagine. In an illuminating New York Times article written fifty years ago, James J. Nagle dates the rewards back to 1793, when a merchant in Massachusetts would issue copper tokens that could be redeemed for merchandise goods. Seventy years later, in 1863, he mentions, Robinson and Ballou Grocers – in the midst of Civil War - offered brass tokens that said, “Redeemed at our store”.
The coins were likely the first form of reward programs. But a few years ago, in the 1850s, B.T. Babbitt, Inc. had come up with a rewards program that would become more revolutionary. The customers then were invited to cut out ‘trade marks’ from the packaging of the company’s soap and soap powder products, and the trade marks, if one were to mail them to the company, could be exchanged for coloured lithographs.
As B.T. Babbitt, Inc. added more diverse products to its store, the rewards range was similarly expanded to what the company referred to as a ‘Mailing List of Premiums’. The offering allowed customers to redeem from a wide variety of daily needs and luxury products, including household articles, toys, gold rings, and chains, among others. This was, as you would guess, more in line with the contemporary reward programs.
In decades to come, companies experimented with new forms of collectibles that could be redeemed for their products.
In the 1860s, Great Atlantic and Pacific Tea Co. rewarded customers with a ‘check’ at the time of the transaction, and the check detailed the terms for redemption across 200+ stores spread over multiple countries.
In 1872, the Grand Union Tea Company offered ‘tickets’ that could be exchanged for a catalogue of products. By 1903, the company’s catalogue had expanded to 17 pages worth of products.
In 1890, Hunsicker & Warmkessell Photographers came up with ‘People’s Trading Coupon’, which – above a certain spend threshold – awarded customers with photographs worth $4. In the same vein, the United Cigars Store Co. began a ‘certificates and coupons’ rewards program that, through a coalition with major retail stores, offered redemption for all kinds of products.
The 1890s, and the following few decades, changed the rewards industry in a couple of ways, however. While the rewards remained intricately tied to transactions and spend,
They turned more standardized, and
Perhaps resultantly, the reward programs shifted to a coalition structure
Let me elaborate. In 1891, Schuster’s Department Store introduced stamps, with one stamp awarded for every $10c spent. At the time, a book with a collection of 500 stamps was redeemed for $1 worth of goods, giving customers rewards of 2% on their spending. With the success, the program was turned into a coalition by the WWII, with the same stamps offered by and redeemed in multiple food markets.
The shift from a standalone rewards program, wherein rewards could be redeemed at a particular merchant or a select few merchants, to a coalition rewards program, wherein rewards could be redeemed at multiple merchants, was significant. The coalition rewards program structure afforded greater flexibility for redemption to the customers, attracting an even larger pool of customers to the program.
In 1896, following Schuster’s, The Sperry & Hutchinson (S&H) Company started offering the loyalty program as a service (LaaS, if you will), building their business on the back of the coalition structure. Tying up with thousands of stores, S&H distributed Green Stamps, books, and catalogues through retailers to hundreds of thousands of customers and allowed redemption of the books directly with S&H.
The company standardized stamps as the symbol for rewards and popularized the coalition rewards program. At one point, in fact, it was claimed that S&H distributed three times as many Green Stamps as the US Postal Service distributed postal stamps. Competitors emerged but hardly reached the same popularity.
Stamps reached an even more enormous scale post-war. According to the National Commission on Food Marketing, in 1963, sales of $754Mn worth of industry stamps were recorded, accounting for 16% of total retail trade in the US. Moreover, according to Benson and Benson Consumer Studies, ~83% of all families in the US were saving stamps at the time!
The idea of stamps got hard to ignore, and this brings us to the fundamental question.
Why does any of this matter?
Metal coins, trade marks, checks, tickets, coupons & certificates, stamps, and box tops were different forms of a singular approach towards rewards. That is, one of a punch-card model, wherein all such rewards had three parallels:
They were transaction & spend based,
Little to no customer data was collected, and
The focus remained on repeat customers
By the early 20th century, rewards programs had been adopted in multiple countries, and the three dimensions stayed common. These elements changed gradually, but the reward programs today continue to serve the same purpose they did earlier – they improve brand loyalty for companies by increasing repeat usage. And loyalty is desirable because it offers an opportunity to, both, improve sales and cut down costs.
Harvard Business Review estimates, for reference, that acquiring a new customer is 5-to-25 times more expensive – depending on the industry you are in – than retaining an existing customer. Not only that, an average existing customer spends almost 1.67 times than an average new customer.
Moreover, a well-functioning rewards program helps a company in more ways than one:
Differentiates businesses from their competition – avoiding the need for lose-lose competitions on price for such customers
Increases customer lifetime value (CLV) by extracting higher value per customer through repeat buying
Connects customers emotionally to your brand and makes them your on-the-ground advocates. Capgemini’s survey, for example, found that 81% of emotionally connected customers through loyalty programs not only spend more but also spread the word for the brand. And 92% of the customers, as even we might attest, trust word-of-mouth recommendations more than any other form of marketing.
The benefits outline why some of the most noticeable brands – Amazon (142 Mn), Costco (94 Mn) Sephora (17 Mn users), Starbucks (22 Mn) - have incredible rewards programs today. The customer needs are changing, however, and rewards programs of tomorrow are likely to look much different from those of the earlier centuries.
The Modern Reward Programs and the Changing Needs
The Information Age of the 20th century bought with it systems and technology that changed how organizations stored and processed large amounts of data. By the 1980s, this meant that companies could introduce big-scale loyalty programs, while also building personal affinity for their users.
In 1981, American Airlines introduced the first frequent flyer program – AAdvantage, which continues to this day – and was soon followed by the competing airlines. AAdvantage was the first true large-scale loyalty program of the data economy. Over the next decade, though, there was a boom in the points and miles-based loyalty programs from hotel chains (Hilton, Hyatt, Holiday Inn, etc.), Airlines (Pan Am, Southwest, British Airways, etc.), card networks (Diners Club), banks, among others.
With the boom, the rewards shifted away from physical stamps to recorded points and miles, often tied to different payment form factors (most popularly to cards). Moreover, increased competition and ease of access to technology led coalition programs, similar to that of S&H Green Stamps, to become ubiquitous by the 2000s. Mobile and web further expanded the pool of customers and allowed brands to tie rewards not only to spend – but to other types of interactions: referrals, sharing posts, among others.
The reward stores for the coalition programs, continuing on the same momentum, today aggregate thousands of products and brands (Amex, Mastercard, Visa, wine clubs, Tesco, Walmart, etc.). Additionally, in this shift towards coalition programs, rewards got increasingly tied to the payments and the providers, as much as they did to merchants and their products.
These modern reward programs, especially the provider-to-customer ones that are largely coalition-based, have relied on three features as the Mastercard report indicates:
Contained costs: redemption equations that attach expiration dates and multiple terms and conditions to limit the program costs
Dedicated interactions: rewards are awarded and redeemed separately from the usual purchase experience
Broad offerings: multiple forms of rewards – vouchers, points, cashbacks – across thousands of merchants and categories
These elements have served hundreds of loyalty programs well over the years, likely contributing to billions of dollars worth of additional sales. The customer behavior demands different today, however.
The appeal for transactional rewards programs that offer points, miles, vouchers is falling. The ubiquitous nature of rewards and the lack of clarity on what the rewards earn users has lowered the value of such programs.
Customers do not want rewards to be hosted separate from their buying experiences. Instead, they want to get an integrated view of how their rewards will benefit them. Put another way, rewards should not be an afterthought but a tool that constantly informs buying choices.
Customers do not want their rewards to suddenly expire someday, and neither do they want to only redeem them against a curated set of products or merchants that appeal little to their needs or wants. They want redemption to be as easy as earning the rewards.
In short, many feel confused and irritated with the complexities of the reward programs, especially when convenience is the focus in the digital world.
How can rewards adjust to the changing needs?
Keep It Simple
Customers today want to feel engaged all the time, and unless the provider can easily explain how the loyalty rewards are earned and redeemed – the program is unlikely to be successful. This involves cutting down on unnecessary tiering for conversion from one form of reward to another (no points to voucher codes conversion), doing away with needless expiration of rewards earned, and communicating the points earned and how they can be redeemed at all stages of the lifecycle.
Relevant Rewards
The data-rich systems today do not only store the customer database but also map purchasing, demographic, and other behavioral data points to build sophisticated customer profiles. This should allow businesses to not rely on umbrella campaigns that treat a big subset of the customers the same but to personalize rewards for each. With time, the rewards program and their realization should increasingly appear different for different customers, even though they might be enrolled in the same program. An early example of this is the Chase Freedom Flex card that offers higher cashback on bonus categories that users transact more with.
Serve Evolving Needs
Customer preferences are changing faster than ever with a greater shift towards e-commerce. Not only are people transacting online for purchases traditionally made offline, but they are availing services such as wellness, and making increasing donations to social causes. All these trends highlight how quickly the behavior can change, and why the rewards must also keep pace with the change in preferences for goods and experiences. The communication, again, has to be exact and simple to ensure that this strategy can power customer satisfaction and program growth. A relevant example here is the Gemini credit card that offers rewards in cryptocurrencies – appealing to the millions drawn towards the crypto space lately.
Integrated Interactions
Customers have come to expect almost seamless buying experiences on mobile devices. The reward programs, however, have simply not kept up with the pace. Convenience, today, can be a differentiator for reward programs and all they have to do is allow access to information on rewards and redemption inside a mobile application, suggest relevant offers and rewards in-app based on past behavior, and make it easy for customers to get answers to their queries at a single place. Taking a slice from the book of the merchant-to-customer reward programs (Starbucks, Tesco) would be a good start.
The Bottomline
Providers and merchants today realize that simply offering a loyalty program may not be sufficient. Instead, they need to build a program that is customer-first and fully digital. As clichéd as it may sound, core to this discussion is the need to develop a data strategy that constantly improves the behavioral assessment of customers through demographic and transaction data - much in the same way that Ads have progressed on the web. With better profiling, the task of allotting more relevant rewards and of understanding newer needs would also be easier.
Moreover, breaking down behaviors into smaller sub-groups will allow a higher extraction of the consumer surplus, i.e., of the possible benefit from the overall consumer base. And lastly, with access to capital easier than ever and more and more companies luring customers with rewards – a multi-channel, personalized, and consumer-first approach that is derived from data should allow one to build a more sustainable rewards program and to adapt better to Loyalty 2.0.
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