00:00:00
Pete Fader: Absolutely. It's such a
hand in glove relationship,
00:00:02
really, for three different
reasons. Number one, the loyalty
00:00:05
program lets you tag and track
customers in a way that you
00:00:08
might not get just through their
transactions alone. So just
00:00:12
better data. That could justify
the cost, the overhead of the
00:00:15
loyalty program right there.
Number two, being able to deepen
00:00:20
relationships with the
customers. Get them to buy a
00:00:22
little bit more, engage a little
bit more, do stuff that they
00:00:25
wouldn't do otherwise. And
number three, it gives companies
00:00:30
some tactics, some leverage, to
be able to treat different
00:00:33
customers differently, which is
certainly a big deal in all my
00:00:37
work on customer centricity.
00:00:38
Welcome to <i>The Ripple Effect</i>,
the podcast that takes you on a
00:00:42
journey through the minds of
Wharton faculty. I'm your host,
00:00:45
Dan Loney, and in each episode,
we'll be diving deep into the
00:00:48
inspiration behind the
groundbreaking research that
00:00:51
Wharton professors have
conducted and exploring how
00:00:54
their findings resonate with the
world today.
00:00:57
Well, for some time, the food
industry, the hotel industry and the credit
00:01:01
card industry have used loyalty
rewards as a key ingredient to
00:01:06
keep customers coming back to
their stores, as well as using
00:01:09
their products. But how
important are these programs as
00:01:12
businesses in those sectors look
to strengthen the connection
00:01:16
with the consumer? Pleasure to
be joined here in studio by
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Peter Fader, who is a Professor
of Marketing here at the Wharton
00:01:22
School. Great to see you. How
are you?
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I'm doing well, Dan, I'm always
happy to talk to you, and I'm
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always happy to talk loyalty.
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Let me start, if we can, kind of
with the path that loyalty and
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these rewards programs have
taken over the last couple of
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decades, and just from your
perspective, how important you
00:01:40
think they are to these
companies, not only now, but
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moving into the future?
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Oh, sure. And you forgot to mention the
sector where it's probably the
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biggest of all. Airlines.
- Right. Yeah.
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In fact, it's airlines
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that brought us the loyalty
programs as we know them today.
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It was American Airlines, in
particular. It was Bob Crandall,
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a Wharton alum, who kicked it
all off in 1981. And what's
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happened with the airlines is, it
becomes such a monster— is that
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that's kind of where all their
profitability is, is actually
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through the loyalty programs and
the arrangements they have with
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various different banks. So— and
there it's a little different
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than it is with some of the
other sectors you mentioned.
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It's both in terms of how they
use the loyalty programs as well
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as the economics behind it. But
it's become a big deal
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everywhere, to the point where a
lot of companies are jumping in
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and doing it because they have
to, even if they don't quite
00:02:33
know why or how to manage or
how to measure the effectiveness of it.
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So you talk a lot in your
research about lifetime value
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with the customer. It seems like
there's an element of loyalty
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rewards that connects back into
lifetime value, because all of
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these companies are looking to
keep— to get those customers and
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keep them for as long as they
can.
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Absolutely. This—it's such a
hand in glove relationship,
00:02:58
really, for three different
reasons. Number one, the loyalty
00:03:00
program lets you tag and track
customers in a way that you
00:03:03
might not get just through their
transactions alone. So just
00:03:07
better data. That could justify
the cost, the overhead of the
00:03:11
loyalty program right there.
Number two, being able to deepen
00:03:15
relationships with the
customers, get them to buy a
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little bit more, engage a
little bit more, do stuff that
00:03:20
they wouldn't do otherwise. And
number three, it gives companies
00:03:25
some tactics, some leverage to
be able to treat different
00:03:29
customers differently, which is
certainly a big deal in all my
00:03:32
work on customer centricity. So
not to say the loyalty programs
00:03:35
are essential, but they have to
be seriously considered by any
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company that wants to be
customer-centric.
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How much value, then, do companies
put into what a loyalty program
00:03:48
program can mean to their
bottom line?
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And that's the big problem, is
they don't measure it
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particularly well. Very often
they'll just say, just, "How much
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stuff did we sell through the
loyalty program?" But it's hard
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for them to measure. The customer
is actually going to stay with
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us a little bit longer. They're
going to do more with us, not
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only when they're getting or
redeeming points, but truly if
00:04:08
we— if we can measure the way we
deepen relationships, and if the
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loyalty program is letting us do
that, they can be enormously
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profitable. So a lot of it, a
lot of companies sometimes try
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the loyalty program because it's
a competitive imperative. All—
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"Everyone else is doing it. We
have to as well." But then,
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because they don't know how to
manage it or measure it real
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well, they'll sometimes either
give up on it or they'll make
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major changes to it. They never
quite get their arms around it,
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which is too bad, because they
have all the data analytics
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technology to be able to really
do it well.
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Well off of that,
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then, the company has to be very
aware of what those metrics are
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in terms of giving out those
rewards. You know, making sure
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that they're not going maybe too
far and asking too much of a
00:04:53
customer to get a reward, but
hit that sweet spot so that the
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customer feels like, I'll keep
coming back and I'm going to be
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able to get something down the
line."
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That is right. And it's not
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only going too far that way, but
it's going too far the other way
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as well, which might— sometimes
they've given too much away. It's— these
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loyalty programs can be a very,
very addictive drug. You know,
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if we just give out a few more
discounts, a slightly deeper— so
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actually, there's an amazing
case study playing out right now
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before our eyes in the coffee
market. And we all understand
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Starbucks has been changing a
lot with its loyalty program. We
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can talk about that. But there's
the new kid in town, Luckin
00:05:31
Coffee, the Chinese behemoth.
Starbucks entered China very
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successfully. They've been blown
out of the water by Luckin.
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Luckin has opened two stores in
the US now, and they give away
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very generous discounts. And
again, sometimes it's hard to
00:05:49
say how much of it is due to the
loyalty program, per se, or just
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discounts that they just throw
out there, but they're just much
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more dependent on those
discounts. There's a chance they
00:05:59
can give Starbucks a good run
for their money, but are they
00:06:02
going to do so from a lifetime
value standpoint, or are they
00:06:04
just kind of, in some sense,
buying loyalty that's not real
00:06:08
loyalty. Who knows?
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And so let me ask you about
Starbucks, because I'm somebody
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that's in that realm. My kids
like to drink Starbucks. I do as
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well. And it's interesting to
see how they have— with the
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changes of CEOs that they've had
in the last couple of years, the
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change of mindset has occurred
about, how much do we want to
00:06:26
potentially give to the
consumer? How much do we not
00:06:30
want to? You know, some of those
offers where if you buy five
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drinks over the course of a
week, you get 70 extra bonus
00:06:36
points. Those went away for a
while. - Yeah, that's right.
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And now they're just starting
to come back a little.
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Yeah, so they— they keep
blowing like the wind. And
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sometimes that's good. The
loyalty program shouldn't be
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static. You should be adaptive
with it. But sometimes they're
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doing things that are either
trendy or just, you know, some
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executive saying, "Just— just do
that," without a lot of
00:06:57
accountability for it. So—a
very specific example. They
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recently took away a discount
that they gave people if they
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brought in their own— their own
cup.
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That's right. - Yeah.
- It used to be,
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give you all— just whole bunch of
points. And where'd they come up
00:07:11
with that number? Who knows?
They just made it up. - Yeah.
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And they said, instead, now we'll—
we're not just going to give you
00:07:18
that automatic— whatever it was, 25
bonus stars or something? - Yeah.
00:07:22
Now, we will double the number of
stars we give you based on the
00:07:26
overall size of your
transaction.
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I love that.
- Is there, then—
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is there a formula
that companies
00:07:31
have in terms of trying to
figure out how much they want to
00:07:36
get from the customer before
they're giving something back?
00:07:39
So it should be tied to lifetime
value. So if these companies
00:07:43
were smart and they could
calculate lifetime value and
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they would trust it, then they
would use that both to decide
00:07:49
what kinds of— whether it's
discounts, benefits, perks
00:07:52
they're offering, as well as
evaluating the return on
00:07:55
investment of offering some of
those things. Again, Starbucks
00:07:58
has been fairly clever with it,
trying to come up with a wider
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range of things. It's not just
buy nine, get one free. In fact,
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even giving— they're into all
their partner perks as well,
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trying to incentivize their
employees. So they've been a
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little bit more kind of
creative, innovative with it,
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but they don't necessarily evaluate
these things on a financial basis.
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So then for a company like Luckin
that you mentioned, as they are
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starting to build out their
presence, you say they're very
00:08:29
generous. How generous do they
want to be? Because they're
00:08:33
trying to connect with the
consumer against an established
00:08:36
behemoth like Starbucks.
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That's right. So they're, at
this point, just trying to buy a
00:08:39
customer base. Let's just give
everything away. They have very,
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very, very deep pockets, and so
they're hoping that they can
00:08:46
just attract a bunch of people
to try it, and then maybe get
00:08:50
them to make that second
purchase, and then just hoping
00:08:53
and praying that they'll be
locked in at that point, and
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maybe they could kind of tamp
down the discounts and so on.
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But it's not clear whether
that's a profitable way to go,
00:09:05
and I just don't think they're
looking at it from this longer
00:09:08
run, lifetime value standpoint.
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Are we seeing, in general,
companies take a longer look at
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whether or not a rewards program
is right for them, you know, to
00:09:18
incorporate as a component of
their operations so they can be
00:09:21
successful, they can get more
data, they can keep more
00:09:24
customers over a longer time?
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Obviously, it varies a lot from
one company to another. And you
00:09:29
often see it through the things
they're doing in the loyalty
00:09:32
program or adjacent to the
loyalty program. So for
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instance, one of the things I'm
a huge fan of is, in addition to
00:09:39
the loyalty program, at the tippy
top level, instead of just
00:09:42
saying, "You're the best, you're
the kind of, you know, gold,
00:09:45
whatever we're going to throw
stuff at you," to have a paid
00:09:48
membership program on top of the
loyalty programs. For instance,
00:09:51
Best Buy does this. So you have
your— you know, your Best Buy
00:09:54
Total Rewards. You know, "Buy
nine, get one free," whatever it
00:09:57
is, typical kind of thing with
your points and so on. But then,
00:09:59
on top of that they have
their— I forget what they call
00:10:02
it, but their total tech program
where you pay $200 a year and
00:10:08
you get all kinds of benefits.
You get the Geek Squad to come
00:10:11
to your house and fix anything.
Most people wouldn't want that,
00:10:15
and therefore most companies
wouldn't want to institute
00:10:17
something like that, because
only a few people want it. But
00:10:20
those few people are incredibly
valuable. So if we recognize
00:10:23
that those people are different
and should be not only part of
00:10:25
the loyalty program, but part of
something special. That's a
00:10:30
company that's really
thinking through very, very
00:10:32
carefully and recognizing it
shouldn't just be a kind of one
00:10:34
size fits all loyalty program.
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Like everything we are
seeing right now, is there an
00:10:39
element of this process as it
continues to develop out, where
00:10:43
artificial intelligence may play
a role in kind of making these
00:10:47
determinations down the road?
00:10:48
Yeah. So I'm not sure how well
AI is going to help us on the
00:10:51
financial aspects of it— at least
not yet. But it will help us a
00:10:54
great deal in figuring out what
kinds of features and functions
00:10:58
and benefits and capabilities. So
what is it about our best
00:11:02
customers that makes them
different? And let's build some
00:11:05
of that stuff in as perks in the
loyalty program. AI can be just
00:11:09
really, really helpful to— again,
to broaden the nature of the
00:11:13
program, to make it more than
just discount-oriented. To make
00:11:16
it more experiential, to make it
more emotional. It can be really
00:11:20
helpful there. And that's going
to be important for companies to
00:11:23
do, not only to break away from
the pack, but to try to find out
00:11:27
what— what are the features and
functions and benefits and
00:11:31
capabilities that uniquely
identify those top customers?
00:11:35
That, if they're interested in,
you know, visiting the back of
00:11:38
the store and seeing how the
employees do the thing, not just
00:11:42
getting the discounts, it's
going to help us better filter
00:11:46
out customers to know who are
the really good ones, and to
00:11:50
start then building more
programs around them.
00:11:52
But seemingly, the main reason why
companies do this is to get more
00:11:56
foot traffic, to get more people
in the door at their location.
00:12:00
Well, I kind of disagree. - Okay.
- It's to build deeper
00:12:05
relationships. So as a great
example, let's talk about
00:12:08
McDonald's. So McDonald's
launched their loyalty program
00:12:12
and their mobile app a couple of
years ago. And talking to Jami
00:12:16
Guthrie, the senior executive
there who basically runs it all,
00:12:19
he says, we want to turn
McDonald's from a transaction
00:12:22
company to a relationship
company. So foot traffic isn't
00:12:26
enough. If you get a bunch of,
you know, one and done people or
00:12:29
people who are just coming in to
chase the discounts, that's not
00:12:32
nearly as good as getting
00:12:33
the right people's feet
coming into the store.
00:12:36
How much of a challenge, then,
is that for using McDonald's or
00:12:41
another fast food company as
that example, when
00:12:44
realistically, I think the
perception by the consumer is,
00:12:47
get into the drive through, get
your food and get— and keep going?
00:12:50
That's a super good point, that you
don't want the deepened
00:12:53
relationship to get in the way
of convenience. You have to know
00:12:56
when to turn it on. You have to
know when to turn it off. It
00:13:00
takes much more
sophistication. Again, the AI
00:13:02
can help with that quite a bit.
That's— that's part of the Luckin
00:13:05
story. Is that you kind of—
you order, the coffee is ready
00:13:09
for you, you pick it up. There's—
there's no chit chat with
00:13:12
people there. So again, very
different than Starbucks. It's
00:13:15
putting in all this extra effort
to write your name and some
00:13:18
happy slogan on the cup, or
something like that. - Smiley face.
00:13:20
That's— now, the thing is, for—
even for Starbucks, sometimes it
00:13:24
really should be quick in and
out. I'm late for work. And
00:13:27
other times it's, you know, I
want to loiter. I want it to be
00:13:30
the third place. It can't be
one. It can't be the other. And
00:13:34
in fact, you can't even say it's
going to be one or the other for
00:13:36
a given customer. Even for a
given customer, it's going to
00:13:39
change from time to time. And
that's where the data, the AI
00:13:44
and the willing to invest in
these kinds of insights instead
00:13:48
of saying, "Listen, if it's not
getting us foot traffic, we're
00:13:50
not going to do it." Sometimes
you
00:13:52
need to go a level deeper
than that.
00:13:53
Peter, thanks very much for your
time today. Appreciate it. Peter
00:13:57
Fader, Marketing Professor here
at the Wharton School.
00:14:00
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