Rethinking loyalty: Why brands are starting to reward the right type of behaviour over spend

As brands overhaul the established model of discount-based loyalty schemes, is rewarding longevity now the answer to incentivising profitable customer relationships?

Dogs have been known to stay by their owners’ sides even after they have died. Give them food, shelter and treats when they’re good and it’s almost guaranteed they’ll be loyal for life. Unfortunately for marketers, people aren’t like dogs.

The success of Tesco Clubcard in the 1990s and 2000s quickly created an established model for discount-based brand loyalty in the UK, but increased competition has since made it more difficult for loyalty schemes to cut through, while macro-economic pressures have introduced the perennial dilemma of balancing customer incentives with the cost to the business.

Many businesses have been forced to scale back their rewards by reducing their value or increasing the spend required to earn each loyalty point, earning ire from consumers in the process.

Judging by the upheaval in the UK loyalty market in recent months, it has now reached a critical inflection point. Sainsbury’s and Tesco have both indicated there could be radical changes to the Nectar and Clubcard schemes, respectively, confirming a wider trend of encouraging long-term usage and deeper engagement, rather than short-term sales and deal-hunting. 

Yet consumers still show a propensity to favour simple money-off rewards, rather than complex mechanisms for ‘unlocking’ different levels of incentive, with Marks & Spencer’s huge investment in its Sparks scheme, which opts for the latter approach, so far failing to arrest the slide in clothing or food sales.

Marketers, it appears, have a challenge on their hands to change perceptions of what loyalty schemes are for. This is especially evident in the retail space, where competition is fierce and consumers are tightening their purse strings as they hunt for the best deals.

Earlier this year Sainsbury’s shelled out £60m to take full ownership of the Nectar reward scheme. Shortly after, it announced it would be undergoing a complete overhaul to “genuinely reward loyalty” and is currently testing a new model that will see customers receive points based not just on how much they spend, but also how frequently they shop and how long they have been a customer. In a nutshell, the more loyal someone is to Sainsbury’s in the long-run, the more they will be rewarded.

People can also choose their own offers online or via the app from a curated list based on the products they buy the most. Waitrose had been offering something similar via its myWaitrose scheme with ‘Pick Your Own Offers’ but it was scrapped earlier this year after customers complained it was too confusing – further proof people don’t want to have to work too hard for discounts and freebies. Thankfully for Waitrose, free coffee, newspapers and vouchers now seem to be working out just fine.

One thing is clear, consumers do want to be rewarded for their loyalty. According to a recent study by Mando-Connect and YouGov, more than three-quarters (77%) of Brits are subscribed to at least one loyalty programme, while 59% believe all brands should offer one.

Unsurprisingly, the main reason people sign up is to benefit from in-store/online discounts and offers (87%), followed by getting discounts and rewards from other retailers or brands (55%) and free products, services and experiences (52%). Less than a quarter of people show an interest in either exclusive access or premium service rewards.

Tenure-based rewards

The questions around loyalty don’t just dog the retail sector. Like Sainsbury’s, Sky is looking to reward customers based on how long they have been with the brand rather than how much they spend. It launched the Sky VIP loyalty programme last year, in an effort to reduce churn amid growing competition from the likes of BT and Netflix, and appease miffed long-standing customers who felt new customers were getting better deals.

Since it launched 10 months ago, 1.8 million people have signed up to Sky VIP, 70% of which have received a reward of some kind – be it a free film, queue jump or experience. Sky is expecting subscriber numbers to reach 4.5 million within the next 12 months.

Sky’s head of loyalty, Rob Chandler, says what started as a programme to reward customer loyalty is now more about Sky being loyal to its customers.

“It’s about us looking after them, not demanding their loyalty. The tenure framework really gives us permission to do that because it’s all about how long we’ve been together,” he explains.

“We made a very deliberate decision not to use the loyalty programme to entice people to change their behaviour. Right now we don’t need those mechanics where [you’ve got to earn points to claim rewards]; we don’t need any of that bribery action of traditional loyalty programmes.

“For us, it’s recognising the value of customers, their importance to us and making customers feel more valued – that emotional connection.”

In such a competitive market, we want our customers to feel like they’re part of something more personal and really interact with the brand.

Ann Steer, Simply Be

By rewarding people based on tenure, brands do risk losing some incredibly valuable customers, though. The Sainsbury’s trial, for example, doesn’t account for people who spend big with the retailer on an occasional basis, meaning they have no incentive to keep shopping at the supermarket and will therefore be up for grabs for competitors that can offer something better.

And for tenure-based schemes, which many airlines offer, brands will need to decide where their loyal customers stand if they decide to take a break.

“At certain life stages, people’s behaviour changes dramatically,” says Charlie Hills, managing director and head of strategy at WPP-owned agency Mando-Connect. “New parents in the travel industry, for instance. You might have people that have been flying numerous times a year for years but as a new family that might suddenly stop. Is that customer still a part of my programme? Where do they sit?”

READ MORE: Tesco readies more changes to Clubcard as it looks to get back to ‘rewarding loyalty’

Many airlines give ‘maternity leave’, and Sky says it is currently doing this on a “case by case” basis. “We’re chatting to customers, not penalising them”, says Chandler, who will review the set-up over time as it learns more about how tenure works from a loyalty perspective.

Sky might call it bribery, but Virgin sees it as rewarding engagement and, through its Virgin Red loyalty app, it encourages users to interact with gaming mechanics to earn points and open vaults.

“We wanted to move away from traditional loyalty programmes and have more of a gamified experience,” explains Gaelle Comte, head of consumer at Virgin Red.

“In 2018, people want loyalty schemes to be easy, convenient and to have control. When we were testing different mechanics, the feedback we got was ‘I don’t want more admin, just make sure I’m a loyal customer and you reward that behaviour’.”

Creating a community

Women’s fashion retailer Simply Be is another brand experimenting with rewarding engagement. In May, it rolled out Perks, which gives customers personalised rewards in return for engagement, after its research revealed shoppers feel they have to work too hard for rewards that come from point-collecting schemes.

“We wanted to create a relationship with our customers based on more than just the transaction, and also to deliver an engaging experience they can relate to,” says Ann Steer, chief customer officer at parent company N Brown Group.

“In such a competitive market, we want our customers to feel like they’re part of something more personal and really interact with the brand. We have seen great results with Perks so far, which demonstrates that being part of something exclusive really resonates with our customers and in turn, increases loyalty.”

Since the Perks scheme launched this year, the retailer says it has seen double digit growth in both website visits and average order frequency from its members – 25% of which are new customers who have been shopping with the brand for less than a year.

But Perks is part of a bigger objective to create an “even more solid community” with customers, underpinned by rewards such as invites to exclusive events, competitions and gifts from third-party brands like Nails Inc, Nyx and Café Rouge.

READ MORE: Sainsbury’s overhauls Nectar scheme to ‘genuinely reward loyalty’

With more than 10 million members, Sephora’s hugely popular Beauty Insider loyalty programme is proof of how building a community can really help to drive loyalty – especially among women, who are more likely to be a member of a loyalty programme than men (84% vs 70%).

The scheme, which is available to customers in the US and Canada, is split into tiers – Beauty Insiders, VIB and VIB Rouge. The latter is obtained once a customer spends $1,000 in the year, with VIB Rougers often taking to social media to boast about their status and the rewards they receive, such as exclusive products and events, access to the Sephora Beauty Studio and early access to products and sales.

Tier-based schemes are effective because people like to feel part of something, especially when they are one of the few at the top and the envy of those on a lower tier.

Asos has had similar success in the UK with its online A-List scheme, which unlocks rewards – ranging from birthday discounts and early access to sales, to exclusive offers and events – based on how many points a shopper has and which tier they are in.

Continuing appeal of points

However, traditional points-for-cash schemes still appear to retain most appeal. Indeed, if Byron Sharp’s thesis on loyalty is correct, brands may be pursuing a lost cause in coming up with complex mechanisms to generate an emotional bond. Sharp argues repeat purchasing is instead driven by making a brand physically and mentally available to the whole market at the right prices, while your customers are almost certainly buying from your competitors at the same time.

In this context, it is easy to see why Boots’ Advantage scheme has picked up more than 18 million members since it launched in 1997 with the simple exchange of four points for every £1 spent.

The consistency of the scheme and the substantial incentive to use it on a regular basis almost certainly contributes to the fact 53% of all UK loyalty subscribers have an Advantage card, according to YouGov. Meanwhile, 61% of ‘super-loyal’ consumers – those who say being a loyalty member makes them spend more, feel more emotionally connected to the brand and recommend it more to peers – have one.

Another 12 million people have signed up to Superdrug’s Health & Beautycard since it launched in 2011, and last month it made a move outside of the health and beauty market with the roll-out of a £10-a-month no-contract mobile service exclusively for loyalty card members, in partnership with Three UK.

“We are always looking at areas where we can add value to our customers,” explains Jo Mackie, Superdrug’s customer and people director.

“They are incredibly savvy shoppers, and they also love their phones. It seemed a great opportunity to offer our Health & Beautycard members a truly great SIM-only deal, which also gives them additional member benefits too, including double points.”

READ MORE: Sky unveils industry-first loyalty scheme that rewards tenure, not spend

Elsewhere on the UK high street, Marks & Spencer’s Sparks programme rewards a number of different behaviours – including engagement, frequency, basket size and social media engagement.

Although points cannot be redeemed for specific cash-value discounts, members can choose from a selection of tailor-made offers sent out every fortnight, supposedly based on what they have been doing in-store and online.

In theory, giving consumers choice and control over which rewards they receive should have struck loyalty gold but the reality doesn’t seem to match – and just like Waitrose’s recently-deceased ‘Pick Your Own Offers’, Sparks has been criticised for being convoluted, confusing to use and poorly personalised.

“It’s worth remembering that loyalty is not a piece of plastic or an app – it’s more emotional than that,” says Bryan Roberts, global insights director at TCC Global. “As choice and competition in retail continues to deepen, a failure to create that emotional bond will be met with further attrition in market share.”

Perhaps loyalty requires a different kind of thinking entirely. There is behavioural evidence to suggest consumers are actually more likely to take action if they don’t know the value of the incentive.

In 2014, Luxi Shen from Nanyang Technological University led a study into what type of incentive encouraged people to complete a challenge. Participants were either offered a certain $2 or a fifty-fifty chance of winning either $1 or $2. Despite the lower value of the incentive, it was the participants in the second condition who were more likely to complete the challenge.

This runs counter to how most brands create loyalty programmes, says Richard Shotton, Marketing Week columnist and deputy head of evidence at Manning Gottlieb OMD. He explains: “Most brands provide a fixed reward, so for example Caffè Nero gives you a free coffee after you have bought nine, but the work from Shen suggests that approach is sub-optimal. Better to introduce randomness into your loyalty scheme: sometimes you receive a free coffee, sometimes a free pastry but most of the time nothing. The psychological evidence suggests it would be more effective.”

READ MORE: Richard Shotton: Uncertain rewards are the answer to enhancing loyalty schemes

Whether the answer lies with points, tenure, engagement, unpredictability or a simple free coffee, when it comes to loyalty it is clear there is no one-size-fits-all approach for brands – or, at least, if there is they have not yet found it.

Human beings are complicated; our needs and behaviours change as we reach different stages in our lives. As such, in the absence of a loyalty mechanic that guarantees success, brands need to work hard to become more than just a card in our wallets. Convincing consumers to keep shopping and engaging on a regular basis is especially important if they want to avoid the relationship ending in divorce.