What "How Brands Grow" gets wrong about loyalty programmes

May 23, 2024

Byron Sharp’s book “How Brands Grow” scientifically challenges many accepted views of marketing and appears to suggest that loyalty programmes are a waste of time.

He argues :

1. Loyalty schemes have minimal impact: They are inefficient and expensive in terms of driving sales growth and do not significantly influence the behaviour of regular customers. If a hotel or brand operates a loyalty programme, it mainly rewards guests who would have stayed with them anyway.

2. New buyers are more important than existing ones The success of a brand depends on appealing to new users as well as a broad base of light or occasional buyers”. If you acquire new customers, the loyalty of existing customers simultaneously increases and so regular guests/customers should not be overly nurtured because they tend to be loyal regardless.

3. Deep customer loyalty Is hokum: While buyers and guests display varying degrees of loyalty to brands, deep loyalty to a product or brand is exceptionally rare. The very best customers of one brand are , very often, the best customers of its competitor.

He proves that brand growth comes from attracting new customers and this arises from a combination of a brand’s “Physical Availability” (ie how present is it, how easy is it to find and buy), “Mental Availability – how aware are customers and prospective customers of it, especially when they are in purchase mode, how distinctive and easy to recall is it) and its Competitiveness on the attributes that matter to customers (eg price, quality).

Everything in How Brand’s Grow resonates with my (decades of) experience in launching, developing and promoting brands at P&G, Pepsico, Barilla, Tesco, Asda and many others. The evidential, science based approach is compelling. The brands with the highest market penetration (ie success in attracting new users) also have the highest loyalty (ie customer frequency and spend). Small brands have fewer customers and these customers are less loyal. There are next to no examples of brands with high loyalty and low penetration.

So why would anyone launch or maintain a loyalty programme ?

Because loyalty programmes are not just about loyalty.

They contribute to brand growth exactly as Byron Sharp prescribes – they build mental availability (and sometimes physical availability), they increase a brand’s competitiveness, they also, importantly, enable a brand to better understand its existing and prospective audience and customer base and they can be inherently profitable and valuable in their own right.

Loyalty programmes build physical availability when they act as another channel through which a customer can transact. Many an airline loyalty app is a high value distribution point for car rental and hotel brands and vice versa.

They build mental availability when attached to customer's phones, key fobs, home screens or wallets. Tesco Clubcard, BA/Avios and Sainsburys/Nectar’s distinctive colours and logos are imprinted in millions of memory structures throughout the day. Terry Leahy said that around the world, "Clubcard was more famous than Tesco".

A good loyalty programme will not make an uncompetitive brand competitive. Price, flavour, service, quality – the brand promise or proposition - are all important aspects. It doesn’t matter how many shops you have if you are miles out on price and you are going to lose lots more customers if your competition suddenly builds a much better mousetrap.

In their heyday, Tesco did not expect Clubcard to drive loyalty. Executing the 5 brand promises were what mattered.  This meant (lots of) stores in the right locations (physical availability), product availability (“I can get what I want”), attractive pricing (“the prices are good”), service (“the staff are friendly”), easy to shop (“the aisles are clear”) and not having to queue (“I don’t have to queue”).

Clubcard drove mental availability via millions of cards in wallets, on key fobs and phone home screens. It created differentiation and distinctiveness and attracted millions of new customers.

Tesco saw Clubcard as a marketing platform through which it could say thank you to customers and especially a vehicle for understanding them. If you want to sell pet food or nappies it helps to know who has a pet or a baby. If you want to find new customers, it helps to know more about your existing ones.  If you need to communicate to customers it helps to have their permission to be contacted, if you want to sell new services eg phones, insurance, it helps to have marketing permission to do so.

Latterly, the introduction of Clubcard prices has helped Tesco recapture some of the share lost to discounters and has undoubtedly attracted new users motivated by the big savings on offer. Clubcard has improved Tesco’s competitiveness vs the discounters and Asda’s decision to launch their Rewards programme recognised that without one, their overall proposition was diminished.

Loyalty programmes can also be inherently profitable in their own right. The two largest coalition loyalty programmes in Europe, Nectar and PAYBACK continue to thrive under new owners over twenty years since their inception, both having been sold for £ hundred’s of millions.

British Airway’s Avios programme generates £1 million per day for British Airways – all totally incremental to the profits derived from flying planes. Other airlines have been bankrolled by their highly profitable loyalty programmes.

The first party, permissioned, data that loyalty programmes generate is also highly monetizable as the growth in retail media attests. On track for over $200 billion of incremental profit for retailer’s with loyalty programmes.

So, yes, it is possible to be an advocate of “How Brand’s Grow” (so much so, that I have signed up for the HBG for Executives Course in Bordeaux in June – watch this space for more) as well as being an advocate for loyalty programmes (so much so that I founded a company that advises on how to build, optimise and monetise them).

Loyalty programmes help brands to grow. They drive physical availability, mental availability and build competitiveness. They can be inherently profitable and their data is highly monetizable.

Loyalty programme owners should similarly follow the How Brands Grow marketing science. If you want to grow a loyalty programme you have to acquire new members, that requires physical availability and presence wherever the loyalty programme operates. It has to be easy to join. You have to regularly remind new members about the programme and have distinctive, memorable brand assets that trigger “mental availability”, you have to be competitive on the attributes that matter to loyalty aficionados – recognition, rewards, emotional and transactional benefits.

Back in the day, over a million customers defected from Sainsburys to Tesco when Avios switched allegiance from Sainsburys to Tesco.

How about that for customer acquisition and brand growth.

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