🔥Hot Take🔥: These Customers Ain't Loyal
What They Won't Tell You About Loyalty Programs
Quick Programming Note:
You may have noticed that I changed the name of this newsletter from “Just Throwing It Out There” to “No Best Practices.”
I have a better idea of what I want this newsletter to be, and “No Best Practices” is a great way to describe it. I’ll be publishing two types of stories:
🔥Hot Takes🔥 = actionable, tactical advice about some aspect of running a modern brand in the post-TOGU era of retail
😎Real Ones😎 = case studies focusing on brands or individuals who write their own playbook
Why read this?
Save millions of dollars and thousands of hours of your precious time and energy.
Learn a framework to transcend “best practices” when it comes to customer loyalty, and understand how your customers really behave.
If you’re looking for an internet diversion, I suggest searching “biggest (brand name) fan” or “largest (brand name) collection”. You’ll turn up stories of ordinary men and women with epic obsessions.
Daniel Morris has the world’s largest collection of Coca-Cola bottles, and scours niche internet forums to locate the latest special-edition bottle designs from around the world.
Frank Smoes has the world’s largest collection of lego sets, a fact acknowledged by the Guinness Book of World Records.
And Andréa Bernholtz, founder of Rock And Republic Jeans, has gone on record with the WSJ about her Chanel obsession. This story from 2009 paints a picture of over-the-top Chanel-inspired interior decor and hints at the eventual bankruptcy of R&R in the wake of the 2008 financial crisis:
The guest room of her 5,000-square-foot house in Marina del Rey is the "Chanel Suite," doused in the brand's signature colors of cream, white and black. The bed pillows are studded with Chanel pins, the armchair is upholstered in vintage Chanel scarves and the bathroom is stocked with Chanel products.
Building collections like these requires an extraordinary level of time, enthusiasm and money. Logically, you know that it would be impossible for every Coke, Lego or Chanel enthusiast to act this way.
Yet…most loyalty programs and retention efforts are built on the assumption that we’re going to turn all of our customers into our most fervent fans, or die trying.
And die, some brands certainly do. To help you avoid the same fate, I’m going to do some loyalty and retention myth-busting and then outline 4 steps you need to take before you spend any time or money on a loyalty/retention strategy.
5 Loyalty Myths
Myth #1: Your brand has the potential to become the next Starbucks or Sephora.
Fact: the product you sell determines the ceiling of potential customer loyalty for your brand.
If you do some cursory research on loyalty and retention, you’re going to see the same brands held up as “best in class” over and over again: Starbucks, Sephora, various airline miles programs and broad retailers like CVS or Amazon.
Let’s take a step back and consider what these brands are selling:
Starbucks sells an unregulated addictive substance (coffee and sugar…sometimes both at once).
Sephora sells cosmetic products that many women consider part of their daily grooming routines. These need to be replenished frequently.
Airlines are unregulated monopolies that collude often—consumers aren’t really spoiled for choice here.
Broad retailers have higher than average purchase frequency by virtue of meeting a wide range of consumer use cases.
So are loyalty programs really changing consumer behavior here? Or do these brands simply have a leg up on repeat rates due to the nature of their product or industry?
The only way we’ll really know if these loyalty programs are effective is if these brands perform longitudinal holdout testing and share the results.
Myth #2: You should attempt to make all of your customers as loyal as possible.
Fact: This violates America’s Karen Culture, but the customer is NOT always right, because some customers lose you money.
Sometimes the customers that appear to be the most engaged with your business are the biggest loss leaders. Think: big spenders who return 80% of each purchase or clearance shoppers who tie up your customer service team for hours whenever they place an order.
You don’t want to encourage these people. In fact, you should probably stop marketing to them altogether. But in a cruel twist of fate, this type of customer is drawn to any kind of rewards-based program like a moth to a flame.
Myth #3: You’ll never succeed at customer retention unless you “fix” your entire user experience.
Fact: Consumers will forgive many sins if the merch is cute.
By now, you’ve probably heard of a little brand called Supreme. Here is a photo of their retail “user experience”:
And here is a screenshot of their online store:
Zero best practices, more than $500 million in sales, mondo PE exit.
Maybe this is an extreme example, and perhaps the frustrating purchase experience is a feature, not a bug.
But what about the airlines from myth #1—no one likes that user experience; it’s been the bread and butter of mediocre standup comics for decades.
Or what about your favorite local dive (paging Guy Fieri)—you’ll put up with slow service, long lines and shabby surroundings for that sweet, sweet brisket, key lime pie, or whatever.
Customers will forgive many UX sins if the product is exceptional. That doesn’t mean you should ignore your path to purchase entirely, but you need to be mindful of the potential return on investment for any UX improvement you pursue.
Myth #4: The only thing standing between you and absolute customer loyalty is software.
Fact: Software doesn’t solve systemic issues, strategy does.
Try to think back to the “before times”, when you were still commuting to work. If you were like me, there were probably some businesses that you visited regularly—a coffee shop where you would grab a cold brew on the way to the office or a deli where you would grab a mid-afternoon snack.
If that coffee shop suddenly stopped selling coffee entirely, would you continue to go there every day? And now that you’re working from home, do you visit those businesses at all?
These examples are exaggerated, but they help illustrate some issues that could be lurking beneath the surface of your business. You need to manage these issues with a holistic strategy, and there is almost no loyalty program in existence strong enough to overcome them. Just ask Sears.
Myth #5: This will be cheap, fast and easy! Trust me, I’m a software salesperson!
Truth: Your mileage may vary.
I have listened to a lot of pitches from a lot of software vendors. They always say it’s going to be easy to get the thing up and running (or at least easier than working with the competition). Reader, it is never easy.
It may be easy for the three year old startup with a technically-minded co-founder and a simple product catalog, running on Shopify. But how many years of data do you have lying around? How many times have you replatformed and tweaked the schema? Is any of that documented?
Do you even have any idea what I’m talking about? If not, you should definitely ask someone who does, because these questions are the difference between “easy” and a twelve month quagmire.
Due Diligence: 4 Steps You Need To Take
So...you’ve reviewed my loyalty and retention myths, and maybe you found a few of them interesting but you want to go all-in on retention anyway.
Here are 4 steps you can take to ensure a successful program launch that drives real bottom line impact. These are the questions you need to ask before you start speaking with vendors and building a business case, which is a separate topic.
1. Mindfulness Moment: Check in with why you’re doing this
Why have you decided to focus on loyalty and retention efforts now? Are overall business results not meeting expectations? Are all your competitors doing it? Did you implement a loyalty program successfully at your last job, and now it has become part of the playbook?
What is your expectation for how this program is going to perform? Have you developed measurable goals for the program? Or is this just something that you feel like you “should” do, because other companies are doing it and they appear to be more successful than you are?
Before you dive into loyalty and retention work, you need to be sure that the project is a response to a real insight about business performance and customer behavior. If you find yourself being swept up by the tide of industry chatter, the work is less likely to be successful.
So literally write it down: what are you trying to do? Then think about how you’ll measure that. I also like to ask myself if I’m even asking the right questions.
2. Do a customer data deep-dive to set expectations
Now you have a measurable goal—good! It’s time to find out if that goal is realistic.
If you were selling cars, and your goal was to increase average purchase frequency to 2x/year...you can tell intuitively that simply isn’t going to happen unless you dramatically narrow your customer base (to the super-rich) or drastically change your business strategy (maybe some kind of leasing incentive).
The same rules apply, no matter what you’re selling. Run the numbers: see what percentage of customers you acquire in a given year come back to shop the following year. Run this analysis as far back in time as your data allows, and try to solicit the same information from colleagues in similar lines of business.
If average YoY retention rates in your industry hover around 25-30% after years and years of strategic iteration...you’re probably not going to double it to 50% overnight.
There is likely something inherent to the way the average consumer interacts with your product category that is capping your retention rate. So if you’re working towards a goal that is wayyy out of line with the averages...you’re gonna have a bad time.
3. Define target audience(s) and realistic goals
Now you know what is realistic in aggregate. But there are sub-segments within your customer base that range from obsessive loyalists (like the “biggest fans” we met at the top of the newsletter) to casual, one-and-done buyers.
One strategy will not fit all. Do you want to win more money from the obsessives? Turn more middle of the road customers into obsessives? Bring back more casual shoppers for a second or third purchase?
The best way to prioritize different objectives is to determine the size of each audience and calculate how much you stand to gain by increasing purchasing frequency a reasonable amount, for a reasonable percentage of the population.
Prioritize these options from highest to lowest potential return. Then start thinking about what types of programs and incentives you would build for each audience. Would you need to offer discounts? Purchase software? Hire additional employees? Weigh the costs vs the benefits to make your final list of priorities.
A quick note on what I mean by “reasonable”: more fiction has been written in Excel than Word. So try to go in with an open, objective frame of mind instead of attempting to prove your own opinion true.
4. Consider a minimum viable solution/proof of concept
Let’s say you really, really want to implement a points-based loyalty program with all of the bells and whistles: tiers, bonuses, 1:1 personalized messaging, etc.
That will be complicated and expensive. And by the time you’re in deep enough to see if it actually works, your boats will be burned. It sounds cool though.
Before you go all-in on any one approach, try distilling that approach to a few essential concepts that can be executed with your current set of resources.
What is the essence of a points-based loyalty program? Customers earn back a percentage of what they spend with you. It is essentially a very long, complex and personalized form of discounting.
You can run a program like this for a small sample of your audience without any third party software:
Select 100 to 1,000 customers who you want to retain (whatever that means to you) who are subscribed to your email list and have opened in the past two weeks. Carve out a holdout group who will not be contacted.
Email them and let them know that they’ll receive x% of their purchases over the next 1-3 months in store credit.
Develop some terms and conditions to prevent abuse (i.e. they will not receive the credit if they return the item).
Let them know that you’ll send an update at the end of each month tallying what they’ve earned so far.
You may be shocked how little of the audience chooses to engage with this. I’ve run sweeter offers and seen fewer than 10% take the bait. But this will become a great data point for estimating the potential financial upside of this type of program at scale.
When you remove technology from the equation, all you’re left with is the incentives you’ve designed and the human behavior those incentives will or will not elicit in response.
If a given incentive isn’t working the way you expected, technology is not going to change that. It may help you run the program wider and faster, but it won’t turn a 10% response rate to a 20% response rate overnight.
Closing Note: Why are loyalty programs so popular?
There are two reasons that we, as human individuals, make decisions in a business context: to make money, and to self-preserve. In a healthy organization, those are the same thing. But under certain circumstances, causes become so detached from effects that people get consistently rewarded for making the right kind of bad decisions.
If your goal is to shock and awe your way up the corporate ladder and let others pick up the pieces, launching a loyalty program is a great way to achieve this. It’s a decision that seems objectively sound, with lots of highly visible cross-functional collaboration and many potential vanity metrics. (#leadership?)
But I write this newsletter for operators, not for sociopaths. If you do have financial interest in a business and a slim margin for error, beware of job candidates that pitch a loyalty program as something you MUST implement.
Why Don’t You…
A list of things to read, watch, listen to and purchase (no affiliate links).
…revisit the fax machine. The ultimate luxury newsletter would be delivered via a limited-edition fax machine that connected to one number only (so no spam). One day I will build this.
…rediscover your sense of creativity and get more out of your indoor time this winter.
…be an artist no matter where you are.