Why do companies wipe the loyalty slate clean at the end of the year?
How long does it take to prove loyalty to a company, and how often must it be reproven? For most companies, the answers are a year and annually. Loyalty, however, is not an annual idea. Today, we'll look at how several industries shoot themselves in the foot by forcing users to prove their loyalty on the company's fiscal schedule rather than on the user's own schedule and long-term behavior.
The idea for this column has been kicking around since I wrote a seven-part series on the science behind loyalty programs. It examined how various reward schedules affect human behavior on a per-transaction level.
Most loyalty programs offer a tiered membership. United Airlines, for instance, offers Premier, Premier Executive, and 1K Elite membership (in addition to "plain" membership). Hotel chains are similar. Marriott Rewards offers Silver, Gold, and Platinum membership. Each membership level has certain entrance criteria. Airlines require you to fly a certain amount of miles (or legs) with them in a year to qualify for various membership levels. Hotels require a certain number of nights at their hotel during the year.
The problem is every year, these companies wipe the slate clean and ask me to prove my loyalty again, with no regard to my previous history. It makes a little sense from the company's viewpoint: provide incentive for people to transact with it a certain number of times a year to maintain their membership level.
It doesn't make sense from a customer's point of view, however. After being an Elite member of United for years, I've dropped to regular status this year. Why? Our recent clients are located in parts of the country not served directly by United, making flying with it stupid (unless doubling or tripling travel time is a priority). Is that my fault? No. I'm a loyal United customer, and whenever I have the choice to fly it I do. But I don't have a choice right now, as it doesn't offer direct flights to my destinations. That doesn't make me any less loyal.
Since the New Year, my Marriott membership status has also dropped to "regular." What does this do to my loyalty? As long as I was getting the perks of a Platinum membership (free upgrades to better hotel rooms), I was more inclined to choose the hotel. Now that I'm a regular member, I'm less inclined to show favoritism because Marriott's otherwise undifferentiated from the competition. My loyalty has been wiped clean by these companies. Now my preferential treatment toward them has, as well. (See "Loyalty Doesn't Come From a Program" for more on how a differentiated brand doesn't require a program to instill loyalty.)
I propose a more long-term view of loyalty. Membership to the platinum tiers of the programs should take into account past behavior. For instance, every year I'm a platinum member of a program, I should "bank" an extra three-month window for my membership. So if I've been a platinum member for three years, I "earn" the right to lapse a little longer than someone who's only been a member for one year. After all, if I fly enough (or stay at hotels enough) to be a platinum member for three years running (or eight), shouldn't you want to keep my loyalty rather than disregard me if I don't travel for a year? I may travel heavily a year from now but not give you my business because I feel like you disregarded my past loyalty.
Not Just Airlines and Hotels
I became a T-Mobile customer about five years ago. I had a year-long contract. I've stayed with T-Mobile without a contract for the rest of the time. Last month, however, I upgraded to the T-Mobile MDA and signed a two-year contract. That was no problem, as I had no intention of leaving the company.
The MDA, however, has relatively poor signal reception. It turns out the signal strength in my apartment is really low. I didn't notice it before as my old phone had good reception. Now, I'm out of service whenever I'm home. When I used the phone to search manually for service, Cingular always showed up, but T-Mobile rarely did. I did some research and learned because Cingular operates on a lower frequency, its signal stretches farther than T-Mobile's (it's the same principle that lets you hear the bass from your neighbor's stereo but not the higher-pitched part of the song).
So I switched to Cingular and haven't had a problem since. Of course, I had just signed a two-year contract with T-Mobile and had to pay an exorbitant cancellation fee. This makes no sense to me. I've been a loyal customer (without incentives or contracts) for five years. I'd been under a new contract for a month, only because I wanted to use this new phone. The new phone, however, showed the flaws in the network reception, which prompted me to leave the company. When I cancelled, I asked if the last five years meant nothing to it. It didn't.
Much like my recommendation for a "rolling window" for membership requirements in the travel industry, other industries should alter their business rules based on loyalty. T-Mobile has a 15-day grace period if you want to return or cancel service before the contract takes effect. But if I've been a loyal user for five years, haven't I earned at least a little longer grace period?
Interactive Marketers Are Getting on Board
Why is this important to interactive marketers? Every day, online companies (both pure-play and multichannel) come to us for advice on how best to create a loyalty program. Some are interested in a generic program (in which every dollar is a point). Others are interested in tiered membership programs. We can learn from the mistakes of our offline brethren when creating this latter category of offerings. A quick survey of online loyalty programs (1-800-Flowers.com, J&R Electronics, RedEnvelope) shows most online players have opted for simple loyalty programs. To more effectively compete in a market that's super-saturated with these basic programs, they'll need to add some spice to their membership by offering tiered advantages. When they do, they must think about loyalty over a longer term than the offline businesses mentioned here.
Membership Should Have Its Long-Term Privileges
Two issues are at stake. First, loyalty should be rewarded with things other than hard or soft goods. It should be rewarded by changing business rules. I've touched on this briefly with the T-Mobile example. Airlines do this: platinum members get more miles per flight than standard members (this helps make it easier to stay at a certain level). Likewise, T-Mobile should offer longer grace periods to more loyal customers. I'm sure there is a parallel in your industry as well.
Second (and the real point), loyalty isn't an annual idea. My slate isn't wiped clean every year, and I shouldn't have to jump through the same hoops year after year to prove to you that I like your company. It currently takes 75 stays at a Marriott within a year to become a Platinum member. That's fine. But it should take fewer nights next year to maintain that membership (or it should credit you more per night when you're a Platinum member, like airlines do). Total length of membership should factor into the next year's requirements. If I've stayed over 75 nights a year at a Marriott for the last eight years, is it really going to forget about that if I stop traveling for a year, then make me prove myself worthy again? That would seem a bad business decision.
Ironically, all these companies talk about lifetime customer value. Yet their customers aren't valued based on their lifetime of loyalty. Just this past year.
Thoughts, comments? Let me know.
Until next time,
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