Loyalty programmes can be expensive to maintain,
difficult to differentiate, and almost impossible to measure in
terms of effectiveness. In this article, Wong Wan-Ling, a loyalty
and marketing expert with Insight Consultancy, outlines the
evolving nature of loyalty programmes.

When loyalty programmes first appeared, they were hailed as the
killer application for cards. Issuers scrambled to launch card
rewards from points to rebates to discount vouchers. To this day,
the form of ‘loyalty currency’ has not changed much. All issuers
will profess to have invested vast amounts of energy and resource
in card rewards in the hope they reap great returns. But one must
ask, what are those expected returns?

Most would respond with one or a combination of the

• Differentiation;

• Retention/reduced attrition; and/or

• Increased spend.

On the other hand, if you asked the same group of managers what
their biggest issues with their programmes are, they are likely to

• Differentiation;

• Relevance;

• Cost; and/or

• Legacy.

Card loyalty programmes were originally envisioned to provide a
vehicle for card companies to continuously engage their
cardholders. The credit card, being a payment instrument more than
a consumer product in itself, presented a challenge to marketers in
developing consumer commitment. Therefore, loyalty programmes
presented themselves as a cure-all for marketers who quickly
transposed the idea of loyalty programmes from the consumer product
space to payment cards.

Many of the programmes were created with little direction or
alignment with long-term business objectives. They are often
launched with a great fanfare and then left to be operated in

Since many of these programmes are easily copied, the inevitable
cookie-cutter versions of the programme soon propagate and then
eventually flood the market, making what was once a point of
differentiation a mere commodity.

To make matters worse, there is a common misconception that
retention strategies equate to loyalty programmes.

In reality, retention is an entire life cycle management process in
its own right and loyalty programmes represent one of the ways in
which retention strategies can be implemented.

To analyse the real issues behind loyalty programmes, we might want
to take one giant leap backwards and consider: What is

Customer loyalty means very little, if it does not translate into
profitability or contribute to business objectives. In essence,
loyalty marketing and loyalty programmes must make business

Loyalty and purpose

With the near-feeding frenzy in loyalty programmes, there seems to
be an overwhelming assumption that loyal customers must be
profitable customers. That in itself is increasingly debatable.
Arguably, there is an abundance of available literature that points
to ‘loyal customers’ being ‘good customers’. The underlying
reasoning is that:

• Loyal customers are less costly to serve;

• Loyal customers have a higher value of purchases and will buy
more frequently;

• Loyal customers are less price-sensitive;

• Loyal customers will make natural advocates for your
products/brand; and

• Loyal customers are easier to cross-sell to.

However, many of the studies that come to these conclusions are
usually made on those products and services other than credit
cards. It is therefore important to remember that the studies do
not take into account the specific nuances of the credit card
customer or the buying cycle of a credit card product.

In fact, an extensive empirical study carried out by Reinartz &
Kumar in 2002 shows that profitability reduces as customers’ buying
activity reduces or stops, but the company continues to make
marketing investments to them. The problem here is we confuse
loyalty as an attribute with profitability.

For the card marketer, loyalty should not be recognised as a
concept with a singular dimension, but as a combination of:

• Attitudinal loyalty;

• Transactional loyalty; and

• Demographical loyalty.

Attitudinal loyalty looks at the basic level of emotional
attachment and is best represented by a customer’s longevity with
the company or use of the product. These are usually esoteric and
intangible emotions that can translate loosely to ‘tenure’ and
advocacy in the payment card context.

Transactional loyalty concerns itself with transactional behaviour.
This has been exhaustively dealt with in recency, frequency and
monetary value (RFM) theories. In the case of payment cards, it is
of course considered in terms of billings and transactional

Demographic loyalty refers to the measure of loyalty response that
is typical of the demographic profile of the customers. This is
based on empirical studies that customers of different demographic
profiles will respond with varying degrees of loyalty. For example,
a younger person is more likely to switch cards than an older

True loyalty must make business sense. This means that the loyalty
mix should bring about profitable business, customer advocacy and
cost efficiencies.

Most often, card marketers lose sight of the business sense of
loyalty. Loyalty plays an important role in card marketing, but it
is most-often misaligned with overall business goals.

It is important that loyalty schemes are designed not just to
retain cardholders but also to promote profitable behaviour. Many
loyalty programmes have failed in the past as they have actually
increased the unprofitable behaviour (for example, transacting
versus revolving). A good example of this is when UK issuers
started offering 1 percent cashback deals in the mid-1990s. In a
market where revolve rates are the largest single driver of credit
card profitability, the scheme not only became unsustainable once
interchange rates reduced, but also drove cardholders to move
day-to-day spend onto their cards which in turn drove revolve rates

Optimise by segmenting

Perhaps it is time for card marketers to realise that loyalty must
be managed scientifically, with the understanding that a loyalty
strategy goes beyond a cookie-cutter loyalty programme. As we have
seen, “not all customers are created loyal.”

One of the more innovative segmentation strategies was introduced
by Reinartz & Kumar. This simple yet elegant model draws from
the underlying belief that managing customer loyalty should take
into considerations of:

• Supply-side need for profitability and

• Demand-side customer characteristics.

There should be differentiated loyalty marketing tactics applied to
different customer types. The four archetypical customer categories
are Barnacles, Strangers, Butterflies, and True Friends. In the
context of credit cards, these customer types can be easily
translated to customer segmentation profiles and strategies, using
a combination of transactional, attitudinal, and demographical
attributes of a cardholder. Segmented marketing actions will ensure
that money is spent on the right customers, and we are reminded
that “it is okay to drop a customer, when he is not worth

Rewarding by demand

Just as we see that supply-side economics require that we develop
differentiated tactical approaches to customers, the programme must
be attractive to customers or the desired results will not
materialise. The single most important aspects are that of the
reward structure (the ‘how’) and the reward currency (the ‘what’)

There are three important consumer attributes to assess a

• Aspirational;

• Attainability; and

• Relevance.

These three must strike a delicate balance for the cardholder for
the programme to be successful. In an attractive scheme where one
would aspire to earn the rewards, the effort needed must be just
right, and the rewards relevant.

Aspirational – Cardholders must find the reward currency something
they would aspire to. The perceived value of the reward goes beyond
monetary terms. This is true particularly when the affluent segment
is involved. In many cases, aspirations could mean less tangible
but emotionally engaging things such as exclusivity and brand
affiliation, for example.

Attainability – The most common complaint among cardholders have
about their card loyalty schemes has to do with attainability. We
should do away with programmes where one needs to accumulate
thousands of points for months before a toaster oven can be
redeemed, or where one needs to be a perpetual revolver, paying
full interest and fees to earn enough air mileage for a short-range
return ticket.

Relevance – Relevance of the reward structure and reward currency
is one of the least discussed topics among loyalty marketers. And
yet, it is also the one attribute that most determines the success
or failure of schemes. Loyalty marketers must remember that what
works for one person may not work for another, who prefers direct
rebates or miles.

Loyalty can serve a multitude of purposes, but as with all things,
one must decide on priorities. Desirable effects should reflect the
true nature of the marketer’s needs. One way to prioritise is to
take a simple but effect decision between the shackle effect
(retain profitable customers) or the reward effect (rewarding

These two objectives are not mutually exclusive, but each works to
solicit different results, depending on the business environment
and customer segments. Together with the strategy (segmentation)
model, appropriate tactical approaches can then be developed for
the desired goals.

Beyond cards

With the advent of new technology and growing commoditisation of
loyalty schemes, many marketers in cards and financial services
seek to look beyond the confines of the card for areas of new
development and the ‘next big thing’.

The power of ONE

Relationship rewards

The retail and airline sectors have been relatively successful in
maintaining customer interest and participation in their loyalty
schemes. This is largely because the customers of these sectors are
identifiable due to the singular nature of the products and
services involved, whereas a payment card is more than often an
instrument by which customers utilise to consume retail and airline

In recent years, several financial institutions in the US have gone
beyond the confines of the card product and developed relationship
programmes such as Citibank (Thank You network) and Bank of America
(Keep the Change).

Banks have begun to focus on customer-centric management practices.
The major step taken is to overcome the issues of silos within the
bank, and building the right infrastructure to identify, recognise
and market to a customer who is likely to have different product
holdings with the same bank. The sophistication of loyalty schemes
presents the banks with a unified platform to address this.
Although there are managerial and technical difficulties today, it
is very likely that the banks will gradually move towards a
holistic approach in customer-centricity.

Unite and conquer

Merchant-funded rewards

In the mature card markets in Asia, such as Singapore, Malaysia,
Philippines and Thailand, the banks have been deploying merchant
partnerships to deliver value to their cardholders. In many
instances, these marketing programmes are managed separately
outside of the loyalty framework. The unique quality of such
schemes is the collaborative nature of programmes.

These programmes are co-funded by the merchants and the bank acts
as a conduit for the merchants to market to their cardholder base.
The programmes range from the straightforward direct discounts at
the point of payment, special price-offs and offers, to clever
RFM-type campaigns delivered by the bank’s POS terminal. These
schemes offer cardholders a greater attraction and relevance
because the partnerships are built with reference to
customer-merchant pairing.

Granted that these schemes can sometimes result in ‘price wars’
among card issuers (in terms of the value of merchant offers),
there are nevertheless many ways to play the game to stand out in
the crowd. As the transaction model takes greater precedence over
the lending model, this may be the most direct way to alter
cardholder spending behaviour.

Harness to win (communication and

Technology has redefined communications and the way marketing
should be executed. The consumer goods and retail sector is once
again the first to harness the power of technology-enabled
communications to full capacity, deploying social networking tools
for word-of-mouth marketing and brand building. Financial
institutions can learn from these technologies to benefit from
expanded channels of communication and fulfilment in loyalty

Real-time point of sale

Instant gratification has become a staple and not merely a
good-to-have. As a payment device, the card is only physically
present at the point of payment.

Where in-store purchases are made with a card, the moment of
payment is a precious time to deliver value to cardholders. There
are many providers of technology today that allow instant delivery
of rewards in points, in offers, and monetary rebates.

This mode of communication allows the cardholders to be an active
participant in loyalty schemes and to be party to a tangible
experiential encounter with their card. For the issuer, the
bank-merchant-cardholder relationship provides a strong case for
merchant-funded initiatives. When executed correctly, real-time
point of sale technology provides an opportunity for cost savings
in rewards fulfilment.

Social media community and opt-in

Cardholder communication forms the single largest cost component in
card marketing. It is also one of the least understood and
accurately measured.

With the advent of social networking technology and the internet,
the consumer world is increasingly one that demands customised ‘me’
communications. It is low-cost and self-served, provided that the
infrastructure is built. Consider the statement inserts – the most
direct and tangible form of cardholder communication. What if the
cardholder is able to customise the look and feel, and makes her
own decision on what information she requires and the format and
channel (for example, paper, email, SMS, tweets) by which she
receives them?

Imagine that the bank informs her of a new promotion that she
enjoys so much, she creates a Facebook fan page for it, writes
about it on her 1,000-views-per-day blog, and tweets about her
experience to her 500-odd so followers on her Twitter updates. This
scenario will not be too far away or hard to imagine, and customer
advocacy will form the cornerstone of loyalty communications.

The last word

All too often, loyalty programmes are used as a band-aid for
anything from bad product design to poor marketing.

Let us not fall into the same trap.

Wong Wan-Ling is a consultant with Insight specialising in card and
loyalty marketing. Her 10 years’ experience spans across the
technology and payments space, with a strong background in rewards,
membership and customer retention programmes

Loyalty marketing model