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Pete Fader: Absolutely. It's such a
hand in glove relationship, really, for three different
reasons. Number one, the loyalty
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program lets you tag and track
customers in a way that you might not get just through their
transactions alone. So just
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better data. That could justify
the cost, the overhead of the loyalty program right there.
Number two, being able to deepen
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relationships with the
customers. Get them to buy a little bit more, engage a little
bit more, do stuff that they
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wouldn't do otherwise. And
number three, it gives companies some tactics, some leverage, to
be able to treat different
00:00:33
customers differently, which is
certainly a big deal in all my 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, Dan Loney, and in each episode,
we'll be diving deep into the
00:00:48
inspiration behind the
groundbreaking research that Wharton professors have
conducted and exploring how
00:00:54
their findings resonate with the
world today. Well, for some time, the food
industry, the hotel industry and the credit
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card industry have used loyalty
rewards as a key ingredient to keep customers coming back to
their stores, as well as using
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their products. But how
important are these programs as businesses in those sectors look
to strengthen the connection
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with the consumer? Pleasure to
be joined here in studio by Peter Fader, who is a Professor
of Marketing here at the Wharton
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School. Great to see you. How
are you? 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. 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 decades, and just from your
perspective, how important you
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think they are to these
companies, not only now, but moving into the future? Oh, sure. And you forgot to mention the
sector where it's probably the
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biggest of all. Airlines.
- Right. Yeah. In fact, it's airlines 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, 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 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 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. 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 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 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 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 these companies are looking to
keep— to get those customers and
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keep them for as long as they
can. Absolutely. This—it's such a
hand in glove relationship,
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really, for three different
reasons. Number one, the loyalty program lets you tag and track
customers in a way that you
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might not get just through their
transactions alone. So just better data. That could justify
the cost, the overhead of the
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loyalty program right there.
Number two, being able to deepen relationships with the
customers, get them to buy a
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little bit more, engage a
little bit more, do stuff that they wouldn't do otherwise. And
number three, it gives companies
00:03:25
some tactics, some leverage to
be able to treat different customers differently, which is
certainly a big deal in all my
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work on customer centricity. So
not to say the loyalty programs are essential, but they have to
be seriously considered by any
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company that wants to be
customer-centric. How much value, then, do companies
put into what a loyalty program
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program can mean to their
bottom line? 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 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 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 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 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— "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 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, which is too bad, because they
have all the data analytics
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technology to be able to really
do it well. Well off of that, 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 that they're not going maybe too
far and asking too much of a
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customer to get a reward, but
hit that sweet spot so that the 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." That is right. And it's not 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, 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 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 can talk about that. But there's
the new kid in town, Luckin
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Coffee, the Chinese behemoth.
Starbucks entered China very 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 very generous discounts. And
again, sometimes it's hard to
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say how much of it is due to the
loyalty program, per se, or just 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 can give Starbucks a good run
for their money, but are they
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going to do so from a lifetime
value standpoint, or are they just kind of, in some sense,
buying loyalty that's not real
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loyalty. Who knows? 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 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 change of mindset has occurred
about, how much do we want to
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potentially give to the
consumer? How much do we not 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 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. Yeah, so they— they keep
blowing like the wind. And
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sometimes that's good. The
loyalty program shouldn't be 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 executive saying, "Just— just do
that," without a lot of
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accountability for it. So—a
very specific example. They recently took away a discount
that they gave people if they
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brought in their own— their own
cup. That's right. - Yeah.
- It used to be, give you all— just whole bunch of
points. And where'd they come up
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with that number? Who knows?
They just made it up. - Yeah. And they said, instead, now we'll—
we're not just going to give you
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that automatic— whatever it was, 25
bonus stars or something? - Yeah. Now, we will double the number of
stars we give you based on the
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overall size of your
transaction. I love that.
- Is there, then— is there a formula
that companies
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have in terms of trying to
figure out how much they want to get from the customer before
they're giving something back?
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So it should be tied to lifetime
value. So if these companies 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 what kinds of— whether it's
discounts, benefits, perks
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they're offering, as well as
evaluating the return on investment of offering some of
those things. Again, Starbucks
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has been fairly clever with it,
trying to come up with a wider 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, trying to incentivize their
employees. So they've been a
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little bit more kind of
creative, innovative with it, 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 starting to build out their
presence, you say they're very
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generous. How generous do they
want to be? Because they're trying to connect with the
consumer against an established
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behemoth like Starbucks. That's right. So they're, at
this point, just trying to buy a
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customer base. Let's just give
everything away. They have very, very, very deep pockets, and so
they're hoping that they can
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just attract a bunch of people
to try it, and then maybe get them to make that second
purchase, and then just hoping
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and praying that they'll be
locked in at that point, and 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, and I just don't think they're
looking at it from this longer
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run, lifetime value standpoint. 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 incorporate as a component of
their operations so they can be
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successful, they can get more
data, they can keep more customers over a longer time?
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Obviously, it varies a lot from
one company to another. And you often see it through the things
they're doing in the loyalty
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program or adjacent to the
loyalty program. So for instance, one of the things I'm
a huge fan of is, in addition to
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the loyalty program, at the tippy
top level, instead of just saying, "You're the best, you're
the kind of, you know, gold,
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whatever we're going to throw
stuff at you," to have a paid membership program on top of the
loyalty programs. For instance,
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Best Buy does this. So you have
your— you know, your Best Buy Total Rewards. You know, "Buy
nine, get one free," whatever it
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is, typical kind of thing with
your points and so on. But then, on top of that they have
their— I forget what they call
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it, but their total tech program
where you pay $200 a year and you get all kinds of benefits.
You get the Geek Squad to come
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to your house and fix anything.
Most people wouldn't want that, and therefore most companies
wouldn't want to institute
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something like that, because
only a few people want it. But those few people are incredibly
valuable. So if we recognize
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that those people are different
and should be not only part of the loyalty program, but part of
something special. That's a
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company that's really
thinking through very, very carefully and recognizing it
shouldn't just be a kind of one
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size fits all loyalty program. Like everything we are
seeing right now, is there an
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element of this process as it
continues to develop out, where artificial intelligence may play
a role in kind of making these
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determinations down the road? Yeah. So I'm not sure how well
AI is going to help us on the
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financial aspects of it— at least
not yet. But it will help us a great deal in figuring out what
kinds of features and functions
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and benefits and capabilities. So
what is it about our best customers that makes them
different? And let's build some
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of that stuff in as perks in the
loyalty program. AI can be just really, really helpful to— again,
to broaden the nature of the
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program, to make it more than
just discount-oriented. To make it more experiential, to make it
more emotional. It can be really
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helpful there. And that's going
to be important for companies to do, not only to break away from
the pack, but to try to find out
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what— what are the features and
functions and benefits and capabilities that uniquely
identify those top customers?
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That, if they're interested in,
you know, visiting the back of the store and seeing how the
employees do the thing, not just
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getting the discounts, it's
going to help us better filter out customers to know who are
the really good ones, and to
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start then building more
programs around them. But seemingly, the main reason why
companies do this is to get more
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foot traffic, to get more people
in the door at their location. Well, I kind of disagree. - Okay.
- It's to build deeper
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relationships. So as a great
example, let's talk about McDonald's. So McDonald's
launched their loyalty program
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and their mobile app a couple of
years ago. And talking to Jami Guthrie, the senior executive
there who basically runs it all,
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he says, we want to turn
McDonald's from a transaction company to a relationship
company. So foot traffic isn't
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enough. If you get a bunch of,
you know, one and done people or people who are just coming in to
chase the discounts, that's not
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nearly as good as getting the right people's feet
coming into the store. How much of a challenge, then,
is that for using McDonald's or
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another fast food company as
that example, when realistically, I think the
perception by the consumer is,
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get into the drive through, get
your food and get— and keep going? That's a super good point, that you
don't want the deepened
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relationship to get in the way
of convenience. You have to know when to turn it on. You have to
know when to turn it off. It
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takes much more
sophistication. Again, the AI can help with that quite a bit.
That's— that's part of the Luckin
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story. Is that you kind of—
you order, the coffee is ready for you, you pick it up. There's—
there's no chit chat with
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people there. So again, very
different than Starbucks. It's putting in all this extra effort
to write your name and some
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happy slogan on the cup, or
something like that. - Smiley face. That's— now, the thing is, for—
even for Starbucks, sometimes it
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really should be quick in and
out. I'm late for work. And other times it's, you know, I
want to loiter. I want it to be
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the third place. It can't be
one. It can't be the other. And in fact, you can't even say it's
going to be one or the other for
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a given customer. Even for a
given customer, it's going to change from time to time. And
that's where the data, the AI
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and the willing to invest in
these kinds of insights instead of saying, "Listen, if it's not
getting us foot traffic, we're
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not going to do it." Sometimes
you need to go a level deeper
than that. Peter, thanks very much for your
time today. Appreciate it. Peter
00:13:57
Fader, Marketing Professor here
at the Wharton School. Thank you for listening to
<i>The Ripple Effect</i>. We hope you found this
00:14:03
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