The Cost of Discounting

Many loyalty programs are at risk of becoming commoditized, says Colloquy

CINCINNATI -- Markdowns and cash rebates, a strategy many brands and retailers use today, may actually be eroding brand loyalty. When asked if it pays to be loyal to a favorite brand, only 12% of U.S. consumers strongly agree and only 17% say loyalty programs are a "very influential" factor in determining a purchase, according to a new Colloquy report.

In a white paper titled "The Rules of Engagement: Loyalty in the U.S. & Canada," Colloquy says loyalty programs have fallen into a trap of copying one another with discount and cash-back rewards that increasingly look alike to consumers. Its conclusion: Something new is needed, otherwise brand owners must incur not only the margin losses, but also the cost to re-engage their customers.

"Emotional engagement has come under pressure as companies look for quick wins," said Kelly Hlavinka, managing partner of Colloquy, a leading provider of loyalty marketing research, publishing and education. "The culprit is a general over-focus on hard-dollar economic rewards, discounts, and cash rebates--to the detriment of recognition and rewards that engage hearts and minds and reinforce a specific branded difference. Many loyalty programs are at risk of becoming commoditized discount programs because they are meeting only some, but not all, of consumers' needs."

The Colloquy data shows that while consumer participation in loyalty programs is up, the type of engagement that forges long-term brand commitment is down, a victim of the rapidly disappearing unique customer experience. The number of Americans participating in at least one loyalty program grew from 68% in 2009 to 74% in 2011. For Seniors (60 and over), the jump was from 61% to 81% for the same period.

According to the findings, in the past two years critical interactions that lead to deepening the bonds of emotional loyalty are trending downward:

  • Learning program information via websites was down to 33% in 2011 versus 44% in 2009.
  • Swapping program information via social networking sites was down to 9% in 2011 versus 18% in 2009.
  • Reading special offers via cell phone was down to 8% in 2011 versus 18% in 2009.

Hlavinka said he sees an opportunity stemming from the commoditization trend. "Marketers who shore up the relevance of their offerings and communications have the potential to differentiate themselves and outgun the competition," she said.

He offered three tactical initiatives to help marketers engage consumers so they'll stick with brands for better or worse and brag about them to friends:

1. "Give'em what they want." Just 31% of U.S. consumers find reward program communications extremely relevant. Leverage data from programs to determine what high-value customers buy and what drives their redemption. Put customers fully in control. Opt-ins and opt-outs must be easy and be offered by category and channel.

2. VIP mentality. Engender a sense of insider status for customers. Invite customers to design how rewards are tailored to their needs--this is the new horizon. Consumer-to-consumer dialogue and company-to-consumer-to-consumer trialogue present new opportunities.

3. Keep it simple. Achieve organizational transformation from being product or channel focused to being truly customer centric. Ease of engagement is the key. Approximately 64% of U.S. consumers told Colloquy the main reason they joined a loyalty program was because the program made it easy to redeem for a reward.

Cincinnati-based Colloquy is owned by LoyaltyOne, a Toronto-based global provider of loyalty strategy and programs, customer analytics and relationship marketing services. Its roster of clients includes leading businesses and brands in multiple sectors such as retail, banking, manufacturing, government, natural resources and utilities.