How Brands Grow (With Loyalty)
Mark Sage - 8 min read - 06/07/2024
I don’t believe loyalty is a tool for customer acquisition.
This may seem counterintuitive when you look at the level of above the line marketing we did to launch yuu Rewards (it was a lot!), the largest loyalty programme in Hong Kong. But there it is — loyalty marketing is not a tool that should be used to acquire new customers for a brand and grow market penetration.
So why did we wrap the trucks blue, take over the cross harbour tunnel, advertise on jumbo digital screens in Causeway Bay and Tsim Sha Tsui — two of the most expensive shopping districts in the world. What was the rationale to take over MTR stations or use full page newspaper wraps? If it wasn’t to acquire customers, why incur this cost to reach people we already had?
The simple answer is that it was for acquisition — but to the loyalty programme, not to the retailer(s).
We needed the loyalty programme to land strongly and whilst in-store marketing works well, to actually build up that mental availability we needed more, much more. By the time customers came to pay and were asked ‘Are you a y-u-u member?’, they would have seen the brand and the marketing messages multiple times.
So the investment we made in advertising for yuu Rewards wasn’t to attract new customers to come shop with us (although that would have been nice if some did), but instead, it was to attract our existing customers to join the programme.
All existing customers — whether light buyers or heavy buyers. Occasional shoppers or every day ‘buy as you need’ shoppers.
Combining in-store marketing, promotion, and prompting, with out-of-home advertising helped to create strong awareness of the programme and maximise it’s impact and acquisition …of our existing customers.
Customers will choose to initially purchase from you for a variety of reasons, but loyalty isn’t generally one of them.
Instead, loyalty is a ‘future value’ focused initiative — a game customers choose to play based on choosing to stay with you. Acquisition to the brand itself needs something to drive that first visit and that first sale and that will never typically be loyalty.
Loyalty is though a fast follower to acquisition, and assuming the customer has made that decision to purchase then loyalty can lock them in for the long term and drive incremental value.
This is why, when I describe what loyalty marketing is, I explicitly talk about capturing customers. I’ll unpick my definition of loyalty in a future article, but I specifically define it as :-
Loyalty Marketing is a set of measurable, cohesive tactics designed to capture customers and their behaviours so as to encourage them to spend more and stay longer
Whilst advertising a loyalty programme may not be too useful for ‘new to brand’ acquisition, it sure is useful for bringing existing customers closer to the brand and really building on their fear of missing out (FOMO) through potential lost future value on that current purchase. With yuu Rewards, the advertising was designed to maximise that FOMO aspect, being built on the brand promise of ‘Biggest Rewards Club Ever’ (so everyone else is already taking part), highlighting key messages around speed (‘Earn faster’), scale (‘2000+ places’) and reach (‘Your favourite brands’).
There will be those that disagree that loyalty can’t be used for acquisition to a brand. They may point to credit cards with loyalty acquisition offers that drive take-up or the fact that in the UK, during the wild west period of grocery loyalty, Tesco’s overtook Sainsbury’s after launching their loyalty programme back in 1995.
Indeed, Marketing Week at the time had a headline of “Tesco plays its Clubcard right”, reporting that “The chain has managed to add nearly two percentage points to its market share [..] and in the process has knocked Sainsbury’s off the number-one spot as the nation’s top supermarket retailer.”
Despite these headlines though, the fact is that, for the most part, the loyalty programme itself won’t drive new-to-the-brand customers.
The credit card loyalty offers you see are attractive to existing loyalty programme members or brand customers — the acquisition play here is to those existing customers already loyal to the airline or retailer and wanting to earn more. Simply ‘selling’ a loyalty credit card to customers doesn’t get them participating in loyalty (and spending on the card) — they need to actually want the loyalty programme too.
Changing embedded customer behaviors like my regular brand for grocery shopping is simply hard, as for many people, these decisions are done on auto-pilot based on a need such as a ‘meal for tonight’ or ‘family shop’. Getting customers to brand switch is even harder if you’re not presently part of their repertoire of brands.
Where loyalty marketing can work very well, is for customers who do have you within their reportoire of brands — you just may not be getting as much as you could. These light buyers are large on volume, but low on value.
Loyalty marketing can essentially contribute to market share (how much value in a given market you capture), but not so much to market penetration (how many consumers have shopped with you at least once in a given period).
As an example of customer inertia, take a look at Search Engine loyalty. Google has been the dominant player with around 85% market share since 2015 — a decade of market leadership. In February 2023, Microsoft’s search engine Bing added in OpenAI technology to extend search with GenAI capabilities. Despite GenAI being the fastest adopted technology in history, for Bing it nudged their search engine market share by just 1.6 percentage points. Microsoft were reportedly happy with the 1m new Bing users they’d attracted, but in the big scheme of things, it was barely a blip. Despite on paper having a better search offering than Google and providing more value, people wanting search simply kept the behaviour they had before.
My experience in grocery loyalty is similar. Customers, in the main, don’t move, they simply consolidate. Whilst Tesco’s market share did overtake Sainsburys after the launch of Clubcard in 1995, I’d bet most of that was due to existing customers spending more as loyalty locked in their behavior, rather than poaching significant new customers from their competitor. What drives new customers within grocery is an increase in physical availability such as a new store in town — something Aldi has been doing very well within the UK to grow their marketshare. From 2014–2018, Aldi saw an average 18% YoY increase in market share (3.1% to 7%) from a corresponding 10% YoY increase in stores (514 to 825).
It’s worth acknowledging here that no brand has 100% customer loyalty. A heavy buyer of Sainsburys is most likely also a light buyer of Tesco’s. Whilst loyalty is a very poor tool for customer growth (i.e. penetration), it is a very good tool for customer spend growth (market share).
Driving one more basket from your light buyers will naturally be taking that spend away from another player in your competitive market.
With yuu Rewards in Hong Kong and Singapore, the programme penetration of the local population pretty much mirrored the grocery brands penetration in each market. These programmes recruited existing customers but wouldn’t have done much to increase market penetration through new (never shopped before) customers.
This is to be expected though. As mentioned previously, loyalty programmes typically won’t drive someone to brand trial, but they will help to capture and grow them.
Sometimes I feel this is where people misunderstand the mechanics of loyalty programmes.
The rationale for loyalty programmes has typically centered on the 80/20 rule — the Pareto principle — which argues that 20% of your customers generate 80% of your sales. The aim then of any loyalty programme should be to help identify them and enable you to protect and retain them.
The argument goes that surely, you’d want to know who your best customers are that drive so much of your value? Do you know who they are? Are you losing them?
I’ve been that consultant in the room, selling loyalty programmes and using this argument; and it’s a strong argument. It’s also a classic consultative sales technique based on building up the perceived ‘opportunity costs’ of not doing something.
More recently though this 80/20 rule has been challenged.
Byron Sharp famously pushed back on this belief in his book ‘How Brands Grow’. He argued that the received wisdom that 80% of sales come from 20% of customers was just a myth and that in reality, it’s more like 50% of sales from the top 20% and the remaining half from the bottom 80% of customers — the lighter buyers. The supposition here being that it would be fool hardy to invest so much budget in loyalty initiatives when this is ignoring at least half of your sales and 80% of your customers .
On that point I’d agree. In fact, I’d argue that it really doesn’t matter what the “sales to top customer” ratio is. It just matters that you know it.
I’ve seen some brands (such as bookmakers) where 90% of their sales come from 10% of the customers and programmes where only 40% of sales come from the top 20% of customers.
Whatever the ratio, there will always be a bias in terms of higher spend to a smaller group of customers (the heavy buyers) who you want to keep happy and who provide one view of your overall brand health. With one client I was working with — again a bookmaker — the company had to restate their profit forecast after a single high-rolling customer left. So that protect and retain strategy has its place.
Where I’d disagree though is that loyalty marketing is somehow only focused on these ‘heavy buyers’ — this top tier of customers.
It may look like that sometimes from a programme design perspective, especially in programmes like frequent traveler where it seems only the top customers get any benefits. This however is confusing the distribution of value (and benefits) versus the distribution of marketing efforts.
Byron suggests that brand growth comes from increased market penetration (and hence customer growth) and that the focus should be on all customers, not just ‘loyal’ customers.
I’d slightly rephrase that to say loyalty marketing should be focused on all customers and not just ‘loyal’ customers. Those 80% of customers who are 50% of your sales — the ‘light buyers’ — are where the loyalty programme can and should mine for acquisition.
Not driving acquisition to the brand itself — that’s already happened — but acquisition to the loyalty programme and acquisition to ‘regular’ so that these lighter buying customers are captured and grown.
Loyalty marketing should then complement brand marketing and leverage sales promotion activity to capture customer data so as to further drive sales through relevant content and offers.
This is where a loyalty programme really comes into its own — by taking these newly acquired ‘existing customers’ and driving additional value from them as they bring more of their spend to that brand.
Whether they are an occasional shopper buying on price or a regular customer chasing rewards, a well-designed loyalty programme needs to recognise and market to them all.
Only then can loyalty marketing truly contribute to how a brand to grows.