Startups are disrupting the loyalty industry
The loyalty industry is tough to size, but it touches almost everyone. American consumers maintain more than 2 billion loyalty program memberships, an average of 18 per household. While less than half are active, their combined point balances were worth close to $50 billion in 2010.
Most loyalty programs fall into one of two categories: “Buy ten get one free,” as at your local café, or “Earn and burn” like United Airlines’ Mileage Plus. The former account for over 90 percent of total programs, while the majors represent 90 percent of revenues. As the number of large-scale loyalty programs has grown, their consumer engagement has declined by as much as 30 percent in the last five years. Clearly, something is wrong.
Sensing weakness in incumbents and the fragmentation of retail loyalty, dozens of startups aimed at transforming the industry have entered the market in the last decade but with mixed results. Companies like CardStar and Punchd tried to rationalize retail loyalty cards (and were acquired on the cheap). Innovators like TopGuest strained to bring a social layer to loyalty but have stalled after promising early tests. Others like points.com continue to chip away at the walled garden of major programs with frustratingly minimal traction.
Their mistake was underestimating the inertia and myopia of traditional loyalty programs. Because they are finely tuned financial marketplaces based on game-like virtual economies, they are largely immune to outside pressure. Major programs like those for American Airlines or Starwood Hotels make money by selling their points to other institutions, mostly their affiliated credit card issuers. These partners purchase billions of dollars worth of points each year, giving them away to incentivize consumer behavior. The loyalty operator effectively then buys back the points when consumers redeem, making money by arbitraging spoilage and inflation through restricted award availability. This relationship has become so codependent that during airline bankruptcies, their credit card partners have put up billions in risky loans to keep them afloat. From Chase’s perspective United is just too big to fail, and they have a vested interest in preserving the status quo.
In the last three years however, a quiet revolution is underway. Under the umbrella of gamification, loyalty is being reimagined not by challenging existing providers but by radically growing the market. Pure play gamification companies like Bunchball, Badgeville and BigDoor, gamification hybrids like FiveStars and Punchtab, vertical solutions like Belly and MOGL and gamified payment startups like Square and LevelUp have brought loyalty to companies that never thought they could run, let alone afford, such a program.
Our review of proprietary data and deal flow shows that these fierce competitors have lowered the cost of running a loyalty program by over 75 percent and raised consumer engagement from 30 to 100 percent for the tens of thousands of companies they’ve touched. Their success has been achieved by merging the best ideas from games and loyalty, rethinking three core concepts that are highly disruptive: earn and burn, metrics/attribution and social promotion.
Most loyalty programs are based on so-called “earn and burn models” -- get points for an activity (fly, buy) then redeem those points for free stuff. But earn and burn designs usually depend on slowly tightening the economy over time, making redemptions more expensive and earnings more difficult. If the process is too simple (eg buy 10 get one free) you can't easily tweak the economy without upsetting and confusing users. Now, gamified loyalty has done away with traditional earn and burn and focused instead on delivering non-tangible rewards using my SAPS model of Status, Access, Power, and Stuff rewards.
For example, offering customers early access to new season’s merchandise is a kind of Access benefit, while giving a limited edition badge for commenting and sharing is a Status perk. Consumer desire for free things (Stuff) hasn’t gone away, but non-cash rewards have a long history of being effective in loyalty programs: consider the premium boarding lane afforded elite frequent fliers. Whereas those kinds of benefits used to be expensive to design and deliver, gamified loyalty providers have made it easy to offer virtual rewards even if you’re a small business.
Another problem of classic loyalty is revenue attribution. This might come as a surprise, but it's nearly impossible for most loyalty program operators, whether mom and pop or multi-billion-dollar organizations, to actually understand how much incremental revenue their programs deliver. That is, they can see what each individual is doing, but not what she would have done without the program. In gamified loyalty, however, designers are taking a page from the social games playbook and tracking/incentivizing a wide range of behaviors on the path to revenue, not just purchases themselves.
On a newspaper website, for instance, gamified loyalty might track reads, comments, referrals and subscription creation/renewal all in one view. This allows the company to have a clearer picture of overall engagement and each individual’s level of commitment. Once you understand the behavior funnel and each user’s motivation, you can deliver a targeted challenge, offer or reward to maximize engagement. In retail terms, it's like giving customers points for walking in the store, browsing merchandise, sharing it on Instagram/Pinterest, trying it on, and then purchasing -- not just for the final step.
Critically, social promotion has become integral to gamified loyalty instead of an afterthought. While most programs have “refer a friend” offers supported by big annual pushes, these efforts to socialize loyalty are not particularly effective. Not only do they encourage users to spam, but they do nothing to ensure actual activity. To wit, users have a tangible disincentive to bring more people into the loyalty game: e.g. the more premium fliers there are, the most competition there will be for those upgrade seats. Gamified loyalty often puts referrals in the direct path of progress/achievement for the user. That is, if they want to get ahead, they need to bring others into the experience, and engage in collaboration or co-opetition to get what they want.
As evidenced by the faculty and attendees of events like GSummit 2013, this has radically expanded the number of companies, range of industries, and types of individuals interested in implementing gamified loyalty systems. While we may think of the loyalty game as being over, and existing players to be huge, it’s nonetheless true: The vast majority of major companies don’t have loyalty programs at all. For example, none of Forbes’ Top Ten US Brands has a comprehensive loyalty offering, and only two have even experimented with gamified loyalty. The same is true in key categories in retailing, financial services, education, and even government -- where gamified loyalty schemes will be increasingly tested and rolled out.
The reason for this explosive growth is a need for consumer engagement, the success of gamification at delivering results and the incredible scale delivered by its providers. I’ve seen firsthand the frustration of consumers with boring loyalty programs and the inability of traditional loyalty operators to figure out how to deliver the challenge, surprise, and rewards they seek. And as their programs age, they’re being forced to make their programs more complex and less rewarding, opening up even more opportunities for the upstarts.
After 30 years of unchallenged growth, walled gardens and anti-consumer decision-making, it seems loyalty is in for both massive growth and disintermediation led by gamification startups. It may not be time to panic and redeem those frequent flyer miles just yet, but suffice it to say there’s a new game in town. Instead of just thinking about loyalty when you travel, or not even thinking about it at all when you swipe your credit card, this new breed of gamified loyalty will engage you everywhere -- while you read, surf, shop, dine, and socialize.
The world is about to get a little more fun and a lot more rewarding. You can bank on it.