The Evolution of Loyalty Paradigm

Loyal customers are the main focus for any business as they directly impact financial performance. Customer loyalty allows businesses to reduce customer acquisition cost and boost the Customer Life Time Value (CLTV) by delighting them with Customer Experience.

Here we try to understand the evolution of Loyalty Paradigm and the associated benefits of each stage for the customers and the businesses alike

Loyalty 1.0
Loyalty programs have been prevalent since the late 18th century when customers were given copper coins which could be redeemed on future purchases. The infeasibility of coins led to the shift towards stamps in the late 19th century. In the late 20th century, loyalty programs, like American Airline’s AAdvantage started to collect data from customers to enrich customer experience
As businesses started to scale and became corporatized, the first formal modern loyalty systems were implemented using loyalty card-based programs. Loyalty points earned on these cards were considered as an alternative inexpensive currency by businesses to reduce their cost of discounting which in turn led to repeat transactions.
As companies realised the potential of “spend and get” based loyalty, many of them launched their own loyalty cards. This led to saturation of loyalty cards among customers and they were no longer interested in going out of their way to earn loyalty points, as it didn’t offer them much value.
Many customers shared loyalty cards among family members to accumulate points and most of the loyalty programs were undifferentiated which led to businesses not knowing their customers and having inaccurate prediction of Customer Life Time Value (CLTV).
Customers felt that they are only as important as their last purchase and must prove their loyalty to brands to receive rewards.

Loyalty 2.0

Loyalty 2.0 reflected the emergence of strategic partnerships and coalitions between brands and use of social media in loyalty programs. These partnerships were mainly focused on transactions, letting customers to earn & burn points across brands rather than focusing on improving the relationship with the customer.
This model also showed a shift from loyalty cards to contact number-based systems to collect and redeem points. This enabled direct channel marketing/promotion through text messages or even email. This shift was widely adopted across the loyalty programs as this saved the hassle of carrying many cards by the user and lowered the operational cost of running a card-based loyalty program.
These mass marketing activities led to spamming the users with irrelevant messages and emails. This led to the increasing disinterest among the members of the program.
Loyalty programs that use social media platforms to offer points are still transactional in nature rather than experiential.
Customer anonymity issues still persisted in this model as businesses were unable to distinguish between the household members sharing mobile numbers to which the loyalty program was registered. This led to businesses having unreliable customer insights and hence, unable to provide personalized experiences.

Loyalty 3.0

Loyalty 3.0 adopts the approach where brands demonstrate the loyalty of customers as opposed to customers providing their loyalty to the brand. It is also experiential in nature as opposed to the transactional nature of the previous versions. This model leverages technologies to improve loyalty marketing by collecting customer data to generate insights, outcomes and actions. This enables brands to know their customers better and engage in clienteling and proximity marketing.
Millennials and Gen Z seek instant gratification, and are more interested in experiential, emotional rewards beyond just financial benefits such as discounts. Millennials are open to sharing personal information in exchange for more personalised rewards and engagements. Companies are using gamification to have better engagement with customers.
Personalization of loyalty programs can tackle the growing dissatisfaction of customers. With Millennials and Gen Z being self-sufficient, hence use of digital platforms and multi-channel communication can increase customer reach for businesses. One such channel is Mobile phones which have increased the expectation of instant gratification. Customers expect relevant notifications.
Digital platforms enable an easy and seamless points accrual and redemption process. The programs also focus on reminding users about their loyalty points so that they redeem it before expiry.
Subscription commerce models adopted in Loyalty 3.0 are driven mostly by customer loyalty. Millennials and Gen Z have inspired subscription programs and are showing a positive experience. They are also introducing subscription models to the older generation. The subscription models started to look at more personalised products that were delivered, be it content or products that were chosen, such as Netflix content which is personalised using the users viewing pattern.
Customer loyalty is also fostered through mutual relationships between brand and customer. Brand communities are one such relationship, they help in understanding the customer’s perception of the brand. Examples of brand communities would be the Royal Enfield community.
Voice of Customers (VoC) could be used to build new products, improve their products, customer service and help in reducing costs.

Although customer behaviour and their motivation drivers have remained the same through time, customer expectations and the approach to meet them have changed radically. Successful businesses in the future will be the ones which are able to build a strong loyal customer base through communities, focusing on personalised customer experience in the phygital space.