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I came across this blog post the other day on retailcustomerexperience.com, and, especially as we prepare to release our pricing report tomorrow, I felt obligated to offer my own opinion. The topic was loyalty vs. loyalty programs, and the author, Dale Furtwengler, makes the argument that loyalty programs lead retailers to give discounts to people who would have bought from you anyway, creating a vicious cycle that leads to less service, higher prices, and more discounts to overcome the higher prices.I agree that when a loyalty program becomes a straight pay-for-data transaction ( “Hey, Ms. Consumer, I will give you discounts if you promise to let me collect your purchase history over time “), then you have not accomplished anything that might be termed loyalty and may in fact be hurting your business. Mr. Furtwengler ends his post with an exhortation to retailers to avoid loyalty programs: “Don’t risk your brand reputation. If you’ve established a loyal customer base, keep doing what you’re doing. You and your customers will both be better off. “Now we come to where I differ in opinion. I think loyalty programs are critical to understanding customer behavior, particularly as it shifts across channels, and I think that while there is a large universe of loyalty programs done badly, the bad apples should not be allowed to spoil the whole barrel, as the saying goes.What do I mean? Well, my definition of a loyal customer is a little bit different from Mr. Furtwengler’s. Rather than focus on what a customer is willing to pay (because I think all customers have grown more price sensitive to some degree and the premium you can charge a loyal customer is shrinking), I believe that a loyal customer is a delighted customer. When you delight a customer, you create the first step on a virtuous cycle, where the delighted shopper returns to be delighted again, thus building loyalty over time. You can fail to delight every once in awhile, and you don’t even have to try to delight her every time she comes, but if your focus is on delight and not discounts, then not only will your loyalty program be wildly successful, it might even be profitable and lead to more repeat visits and higher customer satisfaction.The problem, and the reason why there are so many loyalty programs out there that lead to Mr. Furtwengler’s predicted brand demise, is that delight is much harder to achieve than discounts. Delight implies that you understand something about what makes a customer happy. And even that can be misleading Ñ while everyone is happy to receive a discount, such offers don’t always go that extra step of delighting the customer. Delight implies recognition, a surprise, and most important, it implies relevancy. It implies that the retailer knows something about the shopper’s context Ñ what they are trying to achieve, not just what they usually buy.Not all loyalty programs are bad Ñ not many are good either Ñ but the problem isn’t with the program, it is with the offers coming out of the program. I once recommended to some grocers three things that they could do to their loyalty programs to help create delight in their customers. Before you kill your loyalty program, take a look: how many of these things are you doing?

1. The basics: Rank your customers to figure out who your best and worst shoppers are. Whether you choose to use something like Net Promoter score or Recency-Frequency-Monetary value calculation, or something as simple as average order value, at least go through the exercise of looking at your population of shoppers and figuring out who are top shoppers and who are not. And maybe even discovering why some people are best shoppers Ñ and why some are not.
2. The middle ground: Set loyalty tiers. In the airline vernacular (yes, I live in Denver and must fly United a lot), this is the difference between being a Premiere and a Premiere Executive. But the tiers have to mean something, and what it takes to reach the next tier should be easy to find and easy to understand. This is about recognition Ñ who are your best shoppers Ñ and about aspirations, setting goals for shoppers that are close to the next tier and incenting them to achieve that next tier of recognition. One of the (many) problems with the airlines these days is that there’s no real middle tier. Almost any regular business traveler can make Premiere, but you have to be a road warrior to hit Premiere Exec. So when it comes time to board the plane, the Premiere benefit no longer feels like a benefit at all, and the Exec benefit is so out of reach there is no point in trying.
3. Advanced: Provide differentiated service to your top customer tier. In grocery, there have long been arguments over whether retailers should offer a dedicated lane to high-value customers. The recognition is great and the implied value of dedicated service is there. The problem is that high-value customers tend to have larger baskets, and a dedicated lane might turn out to be slower for everyone involved than if they just went to whatever register had the shortest line. Differentiated service doesn’t have to be that complicated though. What about an invitation to a customer appreciation night? Or special access to free samples, or previews of new items. Again, recognition – and exclusivity – are the key attributes, not necessarily service.

Loyalty programs are hard to do well Ñ I won’t deny that. But before you throw the baby out with the bath water, I would recommend that you take a long hard look at what you’re trying to accomplish, and why. Because retailers who do manage to implement a strong loyalty program are going to have a clear advantage over those that don’t, especially if they ever hope to understand Ñ and take advantage of Ñ cross-channel behavior.