Returning the favor (2): Customer experience as the key to successful loyalty programs

Loyalty programs can be a powerful tool for building customer loyalty. In this mini-series, we look at current trends and strategies in the loyalty marketplace and where brands can best start to build a successful loyalty program for their customers in today's competitive environment.

24 May 2023


Dinara Rosow & Tristan Ticken

Established generic offers are a fact of life

Generic loyalty programs such as Payback or DeutschlandCard work so well for two main reasons: First, they are backed by a strong partner network focused on everyday consumer goods. They are therefore extremely relevant to the everyday lives of customers. Second, the cashback bonus is based on an easy-to-understand reward mechanism that can be applied universally to the next purchase. This principle (the "spend something and get something back" or "earn & burn" principle) creates a transactional relationship between brands and program participants that easily becomes an everyday routine with a wide range of applications and can thus be successfully anchored in customer behavior. This is illustrated by the number of participants of the two major players: Payback claims 31 million active customers in Germany. DeutschlandCard claims 20 million participants in its program.

Cashback: Not Without a Clear Target Audience and Issue Focus

This makes it all the more difficult for other programs with a similar approach to break their customers' habits and position themselves firmly in the customer journey alongside or instead of the big players. A good example of how a well-designed loyalty program with a clear target audience can work alongside Payback and the like is Vivid. Vivid offers its customers cashback and other benefits as part of their Prime membership, which are designed to meet the specific needs of younger bank customers. The program is based on a target group-specific curated partner network and includes price advantage promotions and banking add-ons such as simple savings incentives.

The potential of exclusive experiences

Ultimately, however, even such niche-oriented program approaches are still in direct competition with the big players. As a result, loyalty programs are increasingly trying to differentiate themselves from the big cashback programs by offering exclusive experiences or customer-relevant content. They are targeting the end-customer, with the result of strengthening customer loyalty beyond a purely transactional relationship. Instead, they are succeeding in building customer engagement and injecting emotion into the relationship with the brand.

Lululemon: More than just a manufacturer thanks to rewards program

Technical athletic apparel company Lululemon has successfully integrated a value proposition into the daily lives of its customers. The paid program gives customers access to an exclusive community and allows them to participate in workouts. This makes Lululemon more than just a manufacturer to its participants. In particular, the community element has become a fundamental building block of the brand experience, appealing to customers' intrinsic motivations (in this case, the motivation to stay fit and healthy together in a community) beyond pure cost benefits. This makes the loyalty program an emotional connection to the brand. The program is currently undergoing a complete overhaul, and we can't wait to see how Lululemon takes its loyalty experience to the next level.

Intrinsic Motivation Beats Financial Incentives

Such emotionally charged program designs that target intrinsic motivations stand a good chance of building long-term loyalty. In contrast, extrinsic motivation, which is primarily driven by monetary incentives, is a weaker long-term impetus to interact with a brand. It is true that cost benefits are interchangeable - and primarily attract price-sensitive customers. When building a new loyalty program, it is therefore advisable to look specifically for intrinsic motives for strong brand engagement and to take these into account in the design.

The ultimate discipline: building a community

It is far more difficult, but all the more powerful for brand loyalty, to use intrinsic incentives to build a community around your brand. In Lululemon's case, they built an interest-based community that shared workout routines and took advantage of the exercise classes they offered. Belonging to a group of like-minded individuals who enjoy exclusive brand benefits, as well as integrating the program into their personal exercise routines, provides a value-based customer proposition for which participants are willing to pay a fixed annual fee. 

Ultimately, any brand is likely to prefer a positive emotional relationship to a purely monetary, and therefore easily replaceable, cash back commitment. By focusing on customer and community experiences rather than price benefits as the primary end-user benefit, loyalty programs can create a genuine, emotional connection to the brand that cannot be exchanged for better benefits in the competitor's program. 

The next part focuses on the potential of ecosystem approaches to loyalty program implementation. The fourth and final part provides an in-depth overview of Web3 technology as an opportunity space for developing a successful loyalty offering.


Header: Timon Studler via Unsplash