Category Archives: loyalty

The 7 levels of loyalty programs (why emotion trumps logic)


One of the great ironies of marketing is that while organizations worry continually about customer loyalty, economists provide scant help in thinking through the levers of a loyalty program. The presumption of economic theory is that people conduct transactions rationally to maximum perceived value (profit) and minimize perceived pain (loss). So most marketers try to build loyalty by giving what they think is economic value (say, coupons or points programs) or using subscription agreements that maximize the pain of leaving.

But people aren’t purely rational. “Loyalty” goes far, far beyond the silly points programs or contractual switching costs that most marketers deploy. To understand the real levers, first consider that loyalty has two fundamental psychological levers: rationality and perceived fairness.

When faced with a decision, human beings logically seek to gain value and avoid pain; however, we are also emotional creatures worrying about fairness, attachment, and obligation. As behavioral economist Richard Thaler has noted, if pure economic incentives were all that mattered, no one would ever leave a good tip for a waiter or return a lost wallet found on the street. At many levels, we see fairness as a currency overlay, flowing outward to make others feel good if we think they deserve it and flowing in because, well, we demand it.

Fairness influences corporate behavior as well. Grocery chains, for example, often face surges in demand when bad winter storms approach and could easily charge $100 for the last roll of toilet paper or bottled water on the shelves; but they don’t, because such gouging just doesn’t seem fair. Businesspeople also react emotionally to perceptions of unfairness; a vendor proposal that could make you money might still be rejected if you thought the deal wasn’t “fair,” when in reality, the ROI on the potential investment is what really matters.

The root of fairness is a concept called “ethical altruism,” a dynamic in which humans are guided by their impact on others and not just themselves. But altruism isn’t all, either; you don’t have to be Ayn Rand to recognize that not everyone returns the wallet … especially if we saw the person dropping it was the same one who flipped us off in traffic 10 minutes before. Economic rationality and emotional fairness sit on either side of a loyalty scale.

So let us propose a simple hierarchy of loyalty program concepts that balance both logic and emotion, starting from least to most effective:

Level 7: Discounting. This includes coupons, savings, price framing, and price obscurity. This is the lowest form of loyalty inducement because (a) discounts are easily replicated and (b) by nature they erode the other perceived values of your service. In 2011 we predicted in Digiday that Groupon, a hyped social business that focuses on coupon marketing, would falter because aggressive discounting is not a sustainable model … and today its stock price, once $26, is languishing at $8 a share.

Level 6: Accrual of value-oriented benefits: This includes common points programs, such as airlines or hotel points, that are built up over time in exchange for repeat transactions. This is the second-lowest form of loyalty program because in reality, it’s just another method of price competition. Give away 10,000 hotel points and your customer at first may feel loyal; but your competitor can match those points, and it all becomes a pricing game. If your lover only stays because you buy her expensive jewelry every week, at some point, you might wonder what happens when another guy goes to a jewelry store too.

Level 5: Accrual of psychologically oriented benefits: This approach is similar to value accrual, but plays to the human ego with points or status measures that are purely mental. Today this is most common in social media. Twitter follower counts, Likes on Facebook, Klout influence scores, Boy Scout and military merit badges, certificates of diploma are all psychologically staged levels of perceived accomplishment that have no real value other than the fiction of stature they put in your head. This is why the Facebook layout has a little red button at top telling you how many friends recently commented about you — ping, your brain just got a mental high score, and in two hours, you’ll come back to check again.

Level 4: Entanglement for negative switching costs: Here, someone leaving has to incur a cost. If you break a cell phone contract, you pay money. If you fire your ad agency, you pay a kill fee. If you leave your spouse, you end up sleeping in a cheap motel. Making the switch costs you some pain. These switching costs are usually quietly established in the early stage of a customer relationship, and are triggered only when the customer decides to leave.

Level 3: Entanglement for positive switching costs: This, the positive twist on negative switching costs,  was the focus on Don Peppers’ 1990s “1to1 marketing” methodology, in which leaving means you give up something good that you can not find easily somewhere else. Peppers suggested that “personalization” of services to anticipate customers’ needs could create a new barrier to exit, since a consumer who spent time training a company to meet his or her expectations would not find the same value elsewhere. Examples include Netflix movie personalization that makes it easier to find a good film; teaching Pandora music channels that anticipate your preferences; and a personal accountant who recalls exactly how to expedite your taxes based on your prior years’ history.

Level 2: Complacency. Yet a higher form of loyalty inducement is to encourage customers to stop thinking about you altogether, since change requires a mental action. This doesn’t mean ambivalence, but rather, assurance so sound you don’t even come to mind. Complacency is the sleepy self-satisfaction that customers feel when they (rarely) think about your service, because they know they’ve made the right choice. Utilities, insurance providers and cable companies often focus on “unfocusing” their customers, since if a customer goes to sleep he or she will never switch to a competitor. While powerful, this is challenging to manage because it requires  (a) removing any disruption points in customer interactions with your organization, (b) having a surrounding competitive environment where no triggers for disloyalty emerge, and (c) deliberately walking away from a strong brand position in the customer’s mind. The risk is the ecosystem can change, and new competitors may enter to wake up your sleeping loyalists.

Level 1: Advocacy. Emotion almost always trumps logic in human decisions, and emotional feelings of unfairness about a product (“that bill was too high”) or lust toward a competitor’s product (“that new holographic iPhone looks so sexy”) can unravel any of the loyalty programs above. The solution is to remove the psychological space for unfairness or lust by filling the customer with a desire to be part of your brand. For example, a regional hospital in Connecticut has engaged hundreds of local cyclists to raise funds in an annual 100-mile “century ride” to support its cancer research; there is little chance any of those athletes or their friends will go to a competing hospital if they need cancer treatment, because they have become engaged as part of the brand mission. Building such advocacy requires brands to move beyond their core product or service to what consultant Scott Henderson calls “adjacency marketing,” or marketing to a popular, emotionally compelling issue adjacent to your brand proposition. This issue pulls customers forward, and your service by association becomes uncontested.

All of these levels of loyalty programs face challenges. Service disruptions, market entrants, new product designs, changes in consumer life stages, social persuasion, and the human desire to partake in novelty are all triggers that can make a loyalty program fall apart. But if you can combine emotional attachment and feelings of obligation with the perceived switching costs in your loyalty program, all adding more economic value than cost, then we might consider sticking around.

Breeding ground for customer contempt

Who is talking about your brand? Are you listening?

Andy up in Vancouver knows a guy who is a little upset with the local railroad for damming up a salmon-spawning stream. A few years back, this gentleman might have written letters to CP Rail management to complain. Now he’s posting 20/20-style documentaries on YouTube about a tiny little culvert that blocks the poor fish from their betrothed.

Many organizations focus loyalty programs on their most valuable customers; airlines and hotels chase business people who spend big bucks with points programs, because the math is obvious. Get your biggest customers to spend more. But in today’s age of social media, not watching the little guys on the other end of the spectrum could be costly.

Death, taxes and customer subscriptions

So we just finished paying our taxes, and sort of like the two guys in this 1923 photo testing bullet-proof vests on each other, we wondered — why the hell do we Americans inflict such dangerous pain upon ourselves?

To clarify: If someone pitched you a business model where millions of people voluntarily participated in half-day math sessions each year on complex forms to send you a big check in exchange for services they don’t see or understand, would you think anyone would participate?

The IRS lesson for marketers is compliance: You can increase sales and profits from customers if you move them from one-off transactions to an ongoing purchasing relationship. And that requires customers to comply.

Let us explain. Part of deriving value from consumers goes beyond “acquiring” them — the focus of so much advertising — to engaging them in some meaningful way to extend the profit and relationship. Subscription models are a classic example, in which a company or publication signs a customer up, and then works to extend the relationship for as long as possible. In the best case, subscription models increase the value exchange for both suppliers and consumers. The marketing organization increases sales at minimal incremental cost. Customers can fall asleep and still receive service. Brilliant.

So what is compliance? Customers have to agree to continue to give you their attention, or their wallets, or their annual tax returns. The intriguing thing is consumers, over time, become creatures of habit and will continue relationships they may not like, or may not find beneficial. Many, many businesses thrive by acquiring customers at artificially low “starter prices” and then ratcheting up rates over time. People, like spouses in soured relationships, tend to build up inertia. The perceived switching cost is just too much work, so you let hidden banking fees ding your account each month without taking action.

Yet … it doesn’t have to be this way. Eventually, consumers realize they’ve been had, and they will move on if you abuse them. The smart business anticipates that consumers will someday wake up, and thus increases profits over time while adding additional value.

So. How do you achieve nirvana — ongoing customer relationships and ever rising profits? The answer is to simply begin marketing to your existing account base. You certainly have a marketing plan to acquire customers, and you probably have loyalty programs in place to address those most at risk of defection. But what about the customers in the middle?

Customers will never subscribe to your service unless you give them an explicit on-ramp. If you never ask, you will never receive. Do you promote subscription models? Do you reward repeat purchases or long tenure?

Here’s a thought grenade for your team meeting next week: Ask, “Hey, guys, what is our marketing plan for our existing customers?” As you look around the table at the blank stares, explain, “Hmm, our competitors have a plan to steal them. Shouldn’t we have a plan to keep them?”

(Photo courtesy Shorpy.)

Loyalty’s allure, or why you always park in the same spot

Look, we shouldn’t be seduced by brands, because after all we work in advertising and understand that brands are just designer coloring put on commodity products. But last night we were checking out reviews of digital cameras … and realized we were drawn to the Samsung, which looked a bit like the Samsung Blackjack smart phone on our desk, which had a similar red hue as the Samsung washing machine in our laundry room …

And we realized. Branding by Samsung got us.

How does this happen? Psychologists suggest there are three aspects of loyalty: affective (emotional attachment), continuance (the perceived cost of switching), and normative (the feeling of obligation). Marketing gurus such as Don Peppers explain there is a hierarchy of loyalty drivers: quality, then loyalty purchasing (the points you earn on your credit card), and ultimately personalization (which competitors find difficult to match). Marriage is the ultimate bond of loyalty, where psychological emotion (love) and sheer marketing convenience (she knows how you like coffee) make staying the rational choice.

But we think there is something more basic in loyal consumption, the same impulse that makes schoolkids take the same seat in class each day, or drives you to select the same parking spot. Humans are comfortable in ritual. In the transaction utility of a purchase (the juice you get by making a selection), picking something new yet familiar is reassuring. Apple is the brand that combines this best — you love the new iGadget, but you’re comforted by the past performance. Probably our ancestors who found safe shelter, such as a cave without snakes, and stayed loyal to it survived … while the brand promiscuous got eaten by a bear.

We can’t explain why our new phone matches the washing machine. Imagine that Samsung planning meeting — “Team, we’ll make washers that people buy every 11 years look just like our hot cell phones!” But dammit. With no emotional attachment, no switching costs, no obligation, no marriage vows, no points program … somehow brand loyalty just felt right.

Are ratings up because of plot twists or tank tops?

If you follow long-form television, you get a prize. We can’t keep House and Heroes straight, can’t recall who’s married to whom on Desperate Housewives, and wonder why Battlestar Galactica has female robots. So look at the image above, email us what is really happening, and we’ll give you a free Mini Cooper S*. (*Matchbox size. Maybe. Restrictions apply.)

These long, convoluted plot lines are obvious loyalty devices, building up consumer switching costs like those fictitious cell phone rollover minutes. Don’t leave, or you’ll miss something special! Sometimes it backfires: John from Cincinnati is a dog. Sometimes, ratings go up: Sci Fi channel’s audience shot up back in 2004 as several long plot formats began. Sci Fi complexity works especially well, since the audience is highly attuned and plot nuances can carry over to web and video games for huge cross-sales.

If you need help, check out’s scifipedia. You’ll learn Battlestar Galactica’s Cylons are now attractive humanoid women in tight translucent tank tops who claim God can talk to them.

But you knew that already, didn’t you?