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Loyalty programs feel different from one company to the next, and they probably deliver very different results to those involved.

The reason for this is that most loyalty programs fall into one of three categories: discount-based, free stuff based, or gift based loyalty programs. Let’s review them one by one.

The discount-based loyalty programs

The discount based loyalty programs are based on giving loyal customers coupons with steeper discounts than regular customers can get.

The thing with discounts is that it triggers the pleasure side of the brain — that part of the brain that gets addicted to things. So in order to get the same satisfaction over time, our brain requires bigger stimuli — in this case, deeper discounts are the only thing that will keep us happy. If you bought an item at 50% off, you will never want to buy that item at full price anymore, or even with a 20% discount. Doing so would leave you with the feeling of being cheated. And after awhile the 50% off discounts become routine, and you only get excited if someone offers you 60% or 75% off. And if that someone is an alternative vendor, you might actually switch.

So all in all, and while discount-based loyalty programs may work for awhile, over the long run they suck the profitability out of an industry. They may actually not be a good basis for long term loyalty at all. And if you really think about it, they may actually reward your least profitable customers.

Free stuff based loyalty program

Many loyalty programs fall into this category, including airline programs and credit card programs. The more points you have, the more free stuff you can get and the higher up in status you go. It works really well because people will do anything in order to get something free. Dan Ariely, Behavioral Economist at Duke University has documented this phenomenon — people will do totally irrational things to get free stuff. Most of those programs also have gamification elements, such as leaderboards and levels that give you status — another powerful Human 1.0 motivator that is ingrained in all humans.

But since free is another form of discount, those programs too tend to suck the profitability out of the industry. Plus customers  that acquire free stuff are acting irrationally, and in the end there are often hidden costs for the person who acquired free stuff that they did not really need — think of all those chotchkes that you may have brought from conferences in the past. And except for the leveling part and the status, I am not sure that they result in a lot more word of mouth from your “loyal” customers.

Gift-based loyalty programs

Giving a customer a gift, and in some cases unexpected gifts, in return for their loyalty is the most powerful of all loyalty triggers. Giving a gift to someone triggers one of the most ancient Human 1.0 characteristics — reciprocity. If you give me a gift, I am indebted to you and will be driven to give something back — reciprocity is a reflex, not something we learn from mom and dad or in grade school. A good example of a gift-based loyalty program is the Kimpton Hotel Inner Circle program. When you reach the inner circle, you not only have access to the CEO, but if they have the room they upgrade you free of charge and if they know that you like berries and wine (as I do), they may have a bottle of wine with those berries when you get to your room. They keep surprising you with gifts.

A program like this does not suck the profitability out of the industry. It truly instills loyalty. And it rewards your most profitable customers, not the discount-seekers or totally irrational free-stuff seekers. And because it triggers reciprocity, the word of mouth benefits can be considerable. Look at Kimpton again. According to Steve Pinetti, the SVP of Inspiration and Creativity at Kimpton, 60% of all their first time customers are there because of word-of-mouth — that compares to 20-25% being considered successful in the industry.

We’ve been saying it for years – you need to go where people hang out if you want to be successful in leveraging social media and communities as part of your business. And thankfully, more and more people are giving that piece of advice to their clients or employers who may be trying to figure out what to do in social media.

Increasingly there has been new “bad” advice seeping in that bit of wisdom as well. It comes in two forms:

1) Going to where they are means going to Facebook, Twitter and LinkedIn

STOP – it is not because those sites have the most number of people that this is where conversations actually take place. Maybe they are, and maybe they are not. I am very active on all those sites, but if you want to reach me as part of my photography tribe or as part of my marketing enthusiast tribe, that is not where you will find me.

Going to where they are has nothing to do with the number of accounts – it has everything to do with the places where your tribes hang out.

2) You should never build your own community

WOW, hold on a minute — true, most vendor-hosted communities should have never been set up. And you could make the argument that most successful communities are tribe-led. But that does not mean that you need to become a extremist about that. Many customer support communities (not all) can thrive on vendor-hosted communities – look at Dell, Adobe, and Microsoft just to name a few. Communities to amplify word of mouth can be vendor hosted – look at the Fiskateers by Fiskars, or the financial analyst communities at Thomson Reuters.

The key is to find your tribes, see where they hang out, and see if there might be an opportunity for you to host them. It’s not easy, but to tell your clients or employers that they need to engage on Facebook, Twitter, or LinkedIn just because that is where people hang out is wrong. And to tell them that they should not try to set up their own environment is probably wrong too!

At the recent 2010 CIO Summit – The Year Ahead – Tony Scott, the CIO from Microsoft asked the audience the question: “who here is best friends with their CMO?” Only about 1 in 5 hands went up, to which he made the comment that by next year everyone should be friends with their CMO or risk to no longer be in their role.

That struck a chord with the audience. CIO’s should be best friends with their CMO counterparts and here is why:

1. Changing processes will require a different infrastructure
   Whether companies pro-actively embrace the social wave that is currently hitting businesses or not, most marketing and sales processes have already profoundly been affected by the social. People no longer listen to companies and instead make their buying decisions based on recommendations from peers. The funnel disappeared and is being replaced by a messy, swirly social buying process. Innovation and support can now be turned into social processes involving customers and employees whose job it is not to design and support new products. The CMO cannot enable his team to support these new processes without the CIO and the CIO’s team cannot build the right infrastructure without thoroughly understanding the new processes. They need one another to succeed in this area.
2. Cultural environment conducive to high technology adoption rates
   CIO’s need to find pockets of culture within their company that are ripe for social technology adoption or enterprise 2.0 adoption. In many companies the marketing department may be that department. Most marketing departments are being forced into adopting social tools by their customers, prospects and detractors. So for CIO’s to get a win under their belt with social tools, they may benefit from befriending the CMO.
3. Together create an opportunity to regain senior strategic roles at the executive table once again
   Many CMO’s and CIO’s have lost their strategic place at the executive table. At a recent large investment banking portfolio company retreat, the three execs from the portfolio companies that were invited to represent the  executive team were the CEO, the CFO and the Exec in charge of Human Resources. Look at many executive teams on company web sites, many of them don’t have a CMO or CIO reporting all the way to the top. The CMO and the CIO can team up together to regain a strategic seat by representing the voice of the customer within the company. That will require for the CMO to stop thinking of their role as the company advocate in the marketplace and instead become the customer advocate within the company, and for the CIO to stop thinking about how to build hard walls around the company and instead to find ways to extend the edge of the company to encompass customers, prospects and detractors. 

There are many other reasons why CIO’s and CMO’s should be best friends, but those three alone should make for the divide that exists between them to disappear now.

[self-serving ad coming up]That is also the reason why the upcoming Hyper-Social Mini Summits are now focused on both CIO’s and CMO’s – which should make for a great brainstorm session.[/ad]

Seriously — is it?

I have finally had a chance to catch up with some blog reading and have been struck by the number of people who focus on building social media programs to reach customers and prospects in new ways. And they use advertising metrics like engagement to decide how successful their programs are.

That is not what this current wave of innovation is all about!

While using traditional marketing programs in social media environments may yield some results, they do not leverage the social…they are plain old marketing programs that are driven by incentives, coupons, or other traditional marketing drivers. They die the minute you stop fueling them.

As some people have called it, social media a platform for participation. It’s actually a massive platform of participation that allows the social for which humans have been hardwired, to scale to the point where it makes a difference in business again – both as employees or customers/prospects.

Those companies that are successful in leveraging social media do not use it as a channel to reach audiences. They use it to turn their business processes into social processes – they power their business with people. They get all their employees and customers participate in product innovation processes, customer support processes, knowledge management processes, marketing and sales processes and others. They don’t care about engagement, because in many cases, as is the case when you try glean insights from the marketplace, engagement with the company is not even required – its the engagement among the people that counts.

If you are interested in the topic, you may want to join us for our Hyper-Social Mini Summits coming up in January, where we will be joined by companies who have done it before and brainstorm with executives on how to make that work.

In this social media age, everyone in your company should become a marketer. Like many companies before you, you should empower all your employees to interact with friends, customers, prospects and detractors. Going above and beyond that, let them set up communities within and outside your company’s firewall, about any topic and with whomever they want to hang out with. Many very large (and successful) companies like IBM, Best Buy and Cisco have done it before you – with real success and with very little downside.

Now, as you are harnessing the power of communities, realize that you may have a new asset on your hands – one that some companies have become pretty successful at harnessing, and one which is similar to that of media companies. You now have an audience that others might want to have access to – and that is worth something. Think of Virgin America, which was able to fund the launch of a new hub city through a paid media partnership with HBO. Or think of American Express, with its Open Forum, a community for small businesses, where they are now selling sponsorships on specific sections of their community to partners.

It goes without saying that you should first and foremost think about the value that you will provide to your community members through a partnership. Break the trust they have in you by spamming them and they will leave in droves – leaving you with no asset nor the value that the community was bringing you in the first place.

Ok, so you have a vibrant community. People are submitting ideas for your next generation products, they seem to be having fun, they are engaged and keep referring new members. Your community is growing at a healthy clip and you are happy.

Be careful – your chances of failure are still fairly high.

Let’s look at a couple of reasons why vibrant communities may not achieve the goals they were set up to deliver.

1. You are getting the wrong ideas from your community

There are all sorts of reasons why you could get the wrong ideas from your community. One of them is the use of wrong incentives. If you pay people $10 for 10 ideas you will get 10 ideas – but are those really the ideas that will make a difference in your new product innovation?

Dan Ariely, the author of Predictably Irrational would argue that by tapping into people’s social framework instead of their market framework, which is what you do when when you pay them, would deliver better results. The Economist argues a similar point as it relates to customer reviews (h/t Matt Rhodes).

2. You are getting too close to your community members

There is such a thing are listening too closely to your customers. First off, your customers may not know how to express their needs in a way that would let you help them. They may complain about group scheduling issues, but that does not tell you whether they need a group calendaring or a group task management solution. In new product innovation, there is a huge difference between what is being said and what is being meant.

Second, it is a known fact that innovations based on direct customer feedback leads to incremental innovations at best, not the breakthrough innovations that allow you to steal marketshare from your competitors.

Lastly, and as the late Peter Drucker once said, for most companies a majority of their future revenue stream has to come from people who are not yet customers (Drucker estimates that to be 70% across all industries). If that is the case, then listening too closely to your existing customers may result in products that will stand in the way of acquiring first time users.

So yes, communities are a must in today’s economy. And getting communities to work is hard – really hard. But once you have it working, it may still not deliver what you are looking for. Communities have to be fully integrated with the business processes they are intended to support and need to be driven by the same common sense principles (not that all real world processes are driven by common sense).

Most marketers have been trained to use market segments as part of their strategy to approach certain groups of people. Unfortunately when you try to leverage communities as part of your business that no longer works.

Marketers need to move away from market segments, which are based on characteristics, and instead embrace consumer tribes, which are based on behavior.

To understand the difference, let’s use a hypothetical example. Imagine a large health club chain which decides to leverage communities as part of their business. They could target health conscious people, who want a good quality of life and  believe in balance between mind and body, as a basis from which to build a community – that would be using market segmentation. Alternatively, they could look at the tribes that typically hang out at health clubs – such as weightlifters or stay-at-home moms. Weightlifters like to show off and enjoy an audience, they are competitive, they like talking about how much they can lift and what their goals are. Stay-at-home moms prefer fewer people at the gym when they go, preferable women, and like to talk about children issues and community issues.

Now which communities will be more successful in this case? Those designed around the market segment or those designed around the behaviors of tribes?

Reminder: If you leverage communities as part of your business and have not yet taken the survey for the 2009 Tribalization of Business, please do so now, or visit the new Tribalization of Business Site.

You would think that with the ability to measure everything when you do online marketing, many companies would do so.

Not so say McKinsey consultants – while 91% of the marketing executives who participated in the McKinsey digital-advertising survey (06/08) reported that their companies were advertising online, 80% said that their companies allocate their media budgets by using subjective judgments or by repeating whatever they did the year before.

Heck, only 50% were using click-through rates to measure effectiveness of their online direct response ads. And only 30% considered the offline impact of online marketing.

Surprisingly (not), those who were measuring the impact of online marketing were more satisfied with digital marketing than those who did not, and 55% of them (compared to 43%) were cutting their spending in traditional media in order to increase their spending online.

It is amazing how many marketing departments are still not accountable for results…sigh…

A recent survey from Anderson Analytics conducted for the Marketing Executives Networking Group found that most marketing executives are sick of hearing about web 2.0 and are going back to basics this year – putting renewed focus on satisfying and retaining customers and investing in research and insights.

Duh…what were they doing with their web 2.0 stuff in the first place? Were they trying web 2.0 programs in a way that was not connected to satisfying and retaining customers?

Unfortunately I think that is the case. Many web 2.0 programs are not connected to core marketing business processes and are not measured the same way as you would measure the impact of any other program on those processes. And when the economy hits the skids, the first things to go are those with soft returns or those that fall outside of the core business needs.

It is unfortunate that companies feel that way, because those that integrated their web 2.0 efforts within their core marketing processes, and measured the impact on those processes the same way as you would measure the impact of any other program, derived great results from it and are now doubling down on those social media initiatives. In the long run, they are the ones that will steal marketshare from their competitors.

So how did this happen?

Two reasons: bad advice and low risk tolerance for risk on the part of many marketers.

Let’s look at the bad advice first. The market is littered with companies and individuals who are claiming to be social media/web 2.0 experts. Some claim to understand social media and web 2.0 but in fact they do not, and build pretty websites masquerading as communities or corporate blogs with no or poorly designed and administered commenting capabilities. They stick to their legacy business, whether advertising or PR, and put social media lipstick on their offering. Unfortunately that does not work. Then you have a slew of social media/web 2.0 pundits – many of whom have never been responsible for any marketing process. They think that all marketers are evil and that you cannot put an ROI on any social media program. Unfortunately, their advice does not deliver results either. Now, don’t take me wrong, there are some great agencies and individuals that really grok social media and web 2.0 and how it can be used to improve and transform your marketing results.

Then there is the fear of the unknown that is plaguing many marketers. They knew they had to try something in social media and web 2.0 – often times getting pressure from top executives to do so. But when they did it, they did it in a very timid fashion – starting small underfunded pilots that never delivered results. So now that it is time for cutting, it’s easy to make decisions on canning those.

The other unfortunate aspect of this attitude is that we are dealing with programs that engage people to help us or help one another. When people do engage, they expect someone to engage back with them and they spend or build some of their social capital in the process. When you have programs like that, even in pilot, you cannot just shut them down without angering people. It’s not like an ad or a direct mail campaign, where you can test it and then shut it down if it does not work without getting people upset.

The good news is that those who do it right will gain game-changing results – forcing others to follow suit. So while we may have suffered a temporary setback in terms of adoption, it is only a setback.

This will not prove to be another fad.

Say you are a really honest used car dealer, a truly compassionate personal injury lawyer, or a lobbyist fighting for a real noble cause…how do you create an image for yourself that is believable and disconnected from the bad connotations that characterize your industry?

Can you overcome the perceptions?

And how do people make buying decisions when they need a product or service from an industry that is tainted like that? Sure, they can ask for recommendations…but in a lot of cases you do not need that product or service too often, and many of your friends may have never needed it either.

It’s a tough one…and one that many small businesses are facing.

Thoughts? Good case studies? Let me know…