When the going gets tough, the market retreats into “loyalty” strategies, often to disastrous results. Here’s how to avoid the same fate.
Acquisition costs are rising, and the drumbeat of “loyalty” is getting louder and louder. Prominent DTC VC Forerunner Ventures just published a comprehensive loyalty rundown titled Your CAC Doesn’t Matter.
I understand that this is hyperbole designed to drive internet clicks. But a lot of people will take this at face value. And if they implement the advice provided as a blanket “best practice” they will not like the result.
Product Drives Loyalty, Points Programs Do Not
The thesis of the Forerunner piece: “lead with loyalty”. There is some merit to cultivating a loyal customer base, but this piece makes the deadly mistake of confusing customer development with loyalty programs. And it jumps right into the usual suspects: hotels, airlines, Starbucks, Sephora, etc.
I’m going to burst your bubble: all of the brands in this infographic have a product offering that lends itself to repeat purchases over a short period of time. Your single-product or single-category brand does not. So your milage will vary widely.
A points program is not going to overcome the purchase cycle inherent to your category. It’s not going to increase the average purchase frequency of mattresses from once every five years to twice in one year.
Loyalty Programs Don’t Make Casual Customers Loyal
The Forerunner piece shares some insight from the author’s time at Bonobos: the brand didn’t focus on “best customers” until six years in to the business. The author views this as a major oversight, but I think that timing and prioritization is just fine.
Here’s why: most “loyalty” efforts focus on super-serving customers who are already loyal but do nothing to nurture more casual customers towards loyalty.
I define a “loyal” customer as one who has a higher probability of returning for another purchase than lapsing. If you run the numbers for your business, the average customer becomes loyal around their fourth to sixth purchase. So there is a huge, unaddressed gap between acquisition (the first purchase) and loyalty (purchase 4-6).
Customers become more reactive with each purchase they make. This means that a customer with five purchases is more likely to respond to any marketing tactic than a customer with one or two purchases.
Unless you craft a targeted strategy to address your casual customers–a strategy that is completely differentiated from your typical marketing calendar–these customers will never make it into the relevant audience for loyalty efforts. And your business will slowly die.
Loyalty Programs Don’t Make Customers Loyal To Your Brand
Loyalty programs, especially points-based loyalty programs, attract a certain segment of your customer base: the deal-hungry segment. The author of the piece even admits this:
As a consumer, I’m loyal and a reward optimizer. I belong to Amazon Prime and Chase Sapphire Reserve, which has given me access to Lyft Pink and Doordash’s Dash Pass. For a few years, I had a JetBlue credit card when my husband and I lived long-distance, and prior to that, an American Express Starwood Preferred Guest card when I had the great fortune of paying rent with American Express for no fee.
No mention of a deep affinity for any of these brands that goes beyond an affinity for the rewards they provide. This is a fragile and expensive competitive moat to maintain when switching costs are low. There are entire blogs dedicated to gaming the credit card points and rewards system.
The Nordstrom Rewards program is a great example here. A few years ago the brand overhauled its points system and pulled back on the freebies and rewards. In comments sections across the internet, you’ll find former “loyal” customers complaining about this. That’s not brand loyalty, it’s promo loyalty.
Of course, the Nordstrom business probably pulled back for a reason. And the reason was probably that these discount loyalists contributed very little profit to the business, relative to the expense of the program.
What Should I Do Instead?
Don’t write off customer acquisition just because Facebook Ads are no longer a slam dunk. Start thinking creatively about customer acquisition. Merchandise itself can be a customer acquisition strategy.
Develop strategies for winning new customers over to their first or second purchase. New customers are less familiar with your brand, and they’re overwhelmed with a sea of alternatives. Focus on ways you can stand out positively and build mindshare.
Learn about the product lifecycle in your chosen line of business. Different product categories have different average purchase cycles. Reach out to peers, or hire an expert who has worked with multiple brands in your category. If the average year on year customer retention rate in your category is only 34%, it will be hard to overcome that with any tactic.
Don’t launch a loyalty program without thorough diligence. And run an internal proof of concept before you commit to any price, complicated software. Making the wrong decision here can become a costly, time-consuming diversion.