As retail changes, along with heightened customer expectations, traditional loyalty programs aren’t that effective in creating competitive differentiation.
In this blog we spoke to Doug Stephens, who is the CEO and founder of Retail Prophet.
Doug is one of the world’s foremost retail industry experts. He has worked with many well-known global retailers, agencies, and brands including Walmart, Google, IKEA, L’Oreal, BMW, and LVMH.
Prior to founding Retail Prophet, Doug spent more than 20 years in the retail industry, holding senior international leadership roles. He has written two books, his latest being an international best-seller, “Reengineering Retail: The Future of Selling in a Post-Digital World.”
We caught up with Doug for an intriguing Q&A related to the future of retail, customer loyalty, and The New Age of Consumerism. Here’s what he had to say:
Jim Tierney: How do retailers currently feel about traditional loyalty programs and how are they helping build loyalty from a retailer’s perspective?
Doug Stephens: While many retailers feel that having a loyalty program is a must-have, studies have shown that, all other things being equal, traditional loyalty programs don’t actually foster any greater degree of loyalty.
There is no significant behavioral change when comparing loyalty program participants versus non-participants.
Jim: Do retailers consider premium loyalty programs like those of lululemon, Restoration Hardware, and Prime a strategic focus for the coming year in terms of making a connection with their customers?
Doug: Premium or paid membership programs tend to perform significantly better in terms of renewal, purchase volume, and engagement than non-paid programs.
Even a small sunk cost on the part of a member is enough to forge a greater sense of commitment to a particular brand and, in most cases, a more significant delivery of value from the retailer to the consumer.
Amazon Prime, for example, has 101 million American members that spend 2.5 times what non-Prime shoppers do. Eighty-two percent of households with incomes over 110K are Prime members and they enjoy a 96 percent renewal rate. Contrast this to most run-of-the-mill free loyalty programs and there’s no comparison.
Jim: What are the challenges retailers are faced with when implementing a loyalty program?
Doug: The fundamental problem is that consumers suffer from loyalty fatigue. The average American household belongs to 18 different loyalty schemes. Only 42 percent of loyalty program members are even engaged or know how their program works. Twenty-five percent of consumers have a negative view of loyalty programs.
Jim: More retailers are adding loyalty-specific roles to their organization. How do you expect this to impact the retail industry in the next couple of years based on the success retailers are seeing with loyalty programs?
Doug: Most retailers who feel pressure to add a loyalty program do so because they suffer from a lack of differentiation relative to competitors.
Gas stations, hotels, airlines, and credit card companies all fall into this dilemma. It’s worth noting that brands like Apple have instead viewed the product, service, and experience of shopping at Apple as being the only loyalty program required.
Jim: How has retail changed in recent years and how has that impacted customer loyalty?
Doug: Frankly, there hasn’t been a great degree of change or creativity in the sector.
Jim: What elements should be included in a successful retail loyalty program?
Doug: I’m a big believer that any meaningful program should be paid for. It drives a true exchange of value from the retailer to the consumer.
Secondly, any program should be simple and clear for users to understand.
Thirdly, a successful loyalty program should result in a distinctly different and superior customer experience among members. And lastly, the program should allow for personalization based on customer habits and preferences.
Jim: In this Age of the Customer, where consumers are empowered, informed, and have an abundance of options, how can retailers best impact customer engagement?
Doug: By creating a customer experience that is surprising, unique, personalized, engaging, and repeatably excellent.
Jim: Can you talk about The New Age of Consumerism and what impact it has on retailers?
Doug: Consumers operate with a pervasive sense that anything and everything they need is at their fingertips. They have a universe of choice in the palms of their hands, in the form of their mobile devices.
Scarcity of options, information, or products is no longer their concern. So, retailers have to find a way to break through and become valuable and the only way to do that today is by designing a wholly unique and remarkable customer experience.
Jim: How would you say consumer behavior has changed in recent years?
Doug: In several ways …
1. Value has been polarized. Consumers are shopping at the extremes of the value spectrum and retailers in the middle are dying off.
2. Consumers are choosing experiences over products. More money going to travel, leisure, entertainment, and dining out. Less on hard goods, fashion, jewelry etc.
3. E-commerce dominates growth. If a retailer isn’t growing its e-commerce business, chances are it’s not growing.
4. Digital influences the bulk of retail. Upwards of 60-80 percent of all retail sales are influenced somehow by digital.
Jim: What are retailers doing well today and where do the challenges lie?
Doug: The truth is, most retail remains relatively unsurprising or remarkable. And for most, the challenges are several.
First, focus less on products and more on giving consumers immersive experiences with products.
Secondly, retailers have to begin quantifying the media impact of physical stores. It’s no longer accurate to measure stores on a comp-growth or sales per square foot basis alone. Stores create brand experiences for consumers and the value of these experiences (assuming they’re positive) isn’t being captured in the financials and it should be. Otherwise, as e-commerce grows and brick and mortar comps decline, retailers will just continue to close stores.
The problem is, physical stores in a given market drive up to 35 percent greater e-commerce in that same market. Closing stores begins a downward spiral. The best way to think of it is this: Media is now “the store” and the store is now media. The two have reversed roles.
Traditional loyalty programs don’t foster any greater degree of loyalty.
Meanwhile, premium (paid) loyalty programs tend to perform significantly better in terms of renewal, purchase volume, and engagement than non-paid programs.
Doug believes that any meaningful program should be paid for because it drives a true exchange of value from the retailer to the consumer.
A successful loyalty program should provide a superior customer experience among members and allow for personalization based on customer habits and preferences.
Create a customer experience that is surprising, unique, personalized, engaging, and repeatably excellent.