The Future of Consumer Loyalty

Table Of Contents

Loyalty

Blast From The Past

Flash Forward To 2018

Changing Expectations, Changing Relationships

Two Types Of Loyalty

Emotional Loyalty

Behavioral Loyalty

Three Steps To Building Loyalty For The Future

Step 1: Know Your Customer

Step 2: Build A Customer-Centric Strategy

Step 3: Leverage Technology To Deliver The Right Experiences At The Right Time

A Few Companies Who Have Gotten It Right

Final Thoughts

3

4

5

6

7

8

9

10

11

13

16

17

19

Th

e Fu

ture

of C

on

sum

er Loyalty | 2

LoyaltyEmpowered by technology, the demands of the 21st century consumer

have drastically changed. The modern consumer expects brands to provide

tailored products and services—how they want it, when and where they want

it—and they are willing and ready to switch to brands that best serve these

demands. Even with a superior product, brands that only rely on traditional

loyalty programs primarily focused on driving behaviors can find themselves

losing to competitors who are able to create a superior experience that fosters

emotional attachment to their brand. In fact, brands that leverage the power

of emotional loyalty by building personalized, value-add experiences achieve

higher market share, program ROI, and customer advocacy. This whitepaper

explores the focus areas required to build a seamless, highly-personalized

loyalty program that will help your brand drive revenue impact by enabling

customer connection and cultivating emotional loyalty.

Th

e Fu

ture

of C

on

sum

er Loyalty | 3

Blast from the PastThe year is 1998, and Jennifer is a writer for the

local newspaper, The Gazette. She works at a

small desk among dozens of others on the floor,

while her boss occupies a lush window office.

On a typical Friday night, Jennifer leaves work

at 5 p.m., where she is stuck in an hour-long

traffic jam. During the slow drive home, she

listens to a local radio station that always plays

Meow Mix commercials and Kid Rock.

Jennifer stops at Blockbuster to cash in on her

“rent 5 get 1 free” loyalty program reward, only

to find that Shakespeare in Love is out of stock.

Disheartened, she leaves with a copy of The

Waterboy instead.

She then heads over to the grocery store to

shop for dinner, standing in line for another

20 minutes while she thinks about taking up

her geeky neighbor on the offer of a date this

weekend. Sighing, she wishes it were easier to

meet quality men in her area—luckily, the cashier

accepts the coupons she cut out from the

Sunday paper, putting her in a brighter mood.

She arrives home at 7 p.m. to find the house

colder than her box of Hot Pockets. In 1998, this

was a typical Friday night for Jennifer.

Th

e Fu

ture

of C

on

sum

er Loyalty | 4

Flash Forward to 2018Jennifer leaves The Gazette office at 5 p.m.,

bypassing the parking lot, ignoring the

row of waiting taxis, and instead hopping

into the Uber she ordered 3 minutes ago

from her phone. She still sits in traffic

(unfortunately, that hasn’t changed yet)

but she has synced her Spotify account

with the car’s audio system and is listening

to the latest Discover Weekly mix, a

collection of songs Spotify recommended

based on her preferences.

She also uses this time to catch up on

eligible dating candidates on Bumble. She

finds someone she is really excited about,

and they arrange a date for this weekend.

When Jennifer arrives home, she finds the

Amazon Fresh groceries that she ordered

earlier in the day waiting on her doorstep.

As she opens her front door, she walks

into a warm and toasty home thanks to her

convenient Nest app.

After dinner is made, she asks Alexa to dim

the lights and turn on Netflix, glances at

the shows recommended for her, and then

continues binge watching the new season

of Stranger Things right where she left off,

because, you know, she can.

Th

e Fu

ture

of C

on

sum

er Loyalty | 5

Changing Expectations, Changing RelationshipsOver the last 20 years, a lot has changed for the average consumer thanks to

technology—from the way we watch our Friday night movie, to how we meet and interact

with the people closest to us. For today’s businesses, the important takeaway is how this

technology has changed consumer expectations. Consumers now expect businesses

to know who they are, what they want, how they want it, and to provide it to them in the

easiest and quickest way possible (thanks, Amazon).

In this landscape, it is imperative that businesses adapt to create and maintain meaningful

and direct customer relationships—or risk going the way of Blockbuster. Some of today’s

most successful companies don’t merely adapt, they transform their entire business to

focus on that direct-to-consumer relationship. A good example of this is Starbucks, and

how the company has changed the entire coffee industry—starting out as a “third place”

where customers were invited to linger and spend time together, and evolving into a

technology-driven daily staple, anticipating and predicting customer needs through

features like prepay and mobile ordering. A direct link to consumers allows a company

to not only react to behavior but use information to predict future behavior. It enables

companies to craft personalized experiences, products, and services that meet ever-

shifting consumer needs.

As companies undergo this transformation, they cause massive disruption to the

traditional consumer experience. The rules are changing: Amazon, a historically online

retailer, opens physical stores; Best Buy, a traditional wholesaler, now has stores within

stores; Netflix resets the expectations for entertainment at home. Disruption is the

name of the game. The question becomes how to augment core competencies with

offerings that resonate with consumers and provide value that inspires them to engage

and consolidate share of wallet with one retailer. In short, how can a business build an

experience that fosters long-term emotional and behavioral loyalty?

Th

e Fu

ture

of C

on

sum

er Loyalty | 6

Two Types of Loyalty

Loyalty has two dimensions: behavioral loyalty and emotional loyalty.

Consumers develop behavioral loyalty through highly rational decision making,

which manifests as repeat purchasing. Behavioral loyalty can be seen and

measured: Does the product or brand deliver a high perceived value for

consumers, as indicated through repeat business? Does the product or brand

help consumers avoid pain or inconvenience, as evidenced through feedback?

While valuable, behavioral loyalty has limitations to fostering long-term loyalty.

For example, consumers can be behaviorally loyal to specific retailers, but easily

change their preferences if a competitor offers a compelling enough difference

in price, product, or convenience.

Actions that can be seen and

measured, and are the result of

rational decision making.

E.g. Repeat purchase in retail,

or subscription renewal.

Behavioral Loyalty Emotional Loyalty

Emotional responses that are difficult

to measure, and result from intangible

perceptions, attitudes & values.

E.g. Preference for a brand based on

alignment to personal values.

91% of retail customers

who feel valued stay

with the brand.

(Forrester, 2017)

Th

e Fu

ture

of C

on

sum

er Loyalty | 7

Emotional Loyalty

Emotional loyalty works in tandem with

behavioral loyalty, and manifests as a

consumer’s affinity to a brand—going

beyond rational reason. An emotionally

loyal consumer raves about the brand

to their coworkers, friends, or family,

and feels a genuine attachment to the

company. Emotional loyalty develops from

connecting with a brand on a values level—

such as making a customer feel confident,

appreciated, or valued—and a strong belief

in the brand’s mission; emotionally loyal

consumers feel that the product or brand

aligns with their aspirations, wants and

needs, and their values.

While emotional loyalty endures the test

of time, it doesn’t always neatly translate

to a repeat purchase every six months.

However, it does mean that a consumer

will purchase from this brand over others,

and that they will be an advocate in the

marketplace. In fact, in the traditional

retail industry, among customers who felt

valued, 91% plan to stay with the brand,

89% plan to increase their spending with

the brand, and 90% will advocate for

the brand (Forrester, 2017). Given these

statistics, advocacy especially should not

be undervalued in a world driven by word

of mouth and social media.

As an attitudinal relationship, emotional

loyalty can be more difficult to measure

and translate into ROI. However, this type

of loyalty wins out over behavioral loyalty

in the long-run. According to Forrester, a

one-point improvement in the CX Index

score can lead to an incremental $244

million in revenue for a big-box retailer

(Forrester, 2017).

Th

e Fu

ture

of C

on

sum

er Loyalty | 8

Loyalty as an Outcome

Traditional loyalty programs, like those

we saw in 1998, were rooted in behavioral

loyalty—the programs were based on

rational decision making, and served

a highly transactional function. They

rewarded members who followed certain

habits and routines, like dropping by the

video rental store every Friday night.

The space quickly became crowded,

with very little differentiation in the value

these programs offered to consumers.

As companies and technology have

evolved, the need for differentiated loyalty

programs has also become more critical to

a business’s success.

The new role of loyalty focuses on

developing an emotional connection,

based on trust and likability, in addition to

repeat transactions. Companies are now

focused on gathering consumer data to

understand how they can help people

by making their lives easier, reducing the

stress of certain activities, or by making

them feel good. In this new world, loyalty

is not necessarily a discrete program

so much as it is an outcome—a state

of relationship achieved by delivering

a superior experience that stimulates a

positive emotional response.

Th

e Fu

ture

of C

on

sum

er Loyalty | 9

Three Steps To Building Loyalty For The Future

In 2018, companies need to be agile,

proactive, and innovative to get an edge

over the competition, as the battle for

a consumer’s wallet and mindshare is

heating up. In order to stay ahead of the

competition, it’s important to not only have

a superior product or service, but to deeply

understand consumers and predict their

needs. A robust and differentiated loyalty

program is a key ingredient to long-term

success. While there is no single correct

way to go about building this, there are

three key steps a business can take to

set themselves on the right path towards

building loyalty for the future.

“...it’s important to not only have a superior product or service, but to deeply understand your customers and predict their needs.”

Th

e Fu

ture

of C

on

sum

er Loyalty | 10

Step 1: Know the Customer

This is much easier said than done. The

challenge most businesses have in today’s

environment is not the quantity of data

they have about their customers, but rather

having the right data. Even with innovative

marketing technologies and an abundance

of consumer data, knowing one’s customer

is still a struggle today. This is due to a

variety of factors—legacy systems don’t

talk to each other, data lives in five different

databases, laws regulate what data can

be collected, data is available but not

useful—the list goes on and on. While

each obstacle to having actionable data

may have its own solution, addressing

each of these factors enables the ultimate

outcome: a single source of truth for

knowing your customer.

“Consumers want to feel that the product or brand aligns with their aspirations, wants, needs, and values.”

Th

e Fu

ture

of C

on

sum

er Loyalty | 11

Stitch Fix is a great example of a company that does this well. The incredible success

Stitch Fix has achieved in its first six-years is due primarily to its tenacious desire to

know its customer.

The company takes a two-pronged approach to this—the analytical, data led method,

in combination with the human touch. By virtue of its business model, Stitch Fix collects

information on a customer’s physical measurements, their taste, preferences, past

purchases, reasons purchased, etc. Further, the company keeps a database full of

additional attributes such as seasons, past trends, designers, and so on.

With all this information, plus advanced mathematical algorithms, Stitch Fix has a strong

foundation for knowing who its customers are. However, even Stitch Fix acknowledges

the difficult part is bringing this information together to make the right recommendation

at the right time through predictive analytics—since ultimately, humans don’t always

make rational and predictable decisions.

This is where the human element comes in through personal stylists; they understand

and can respond to their customers to truly personalize recommendations. For example,

when a customer expresses the need to create an outfit for an upcoming event, the

stylist can make a recommendation that uses the algorithm as a baseline, but truly

personalize it to match what the customer is telling them about their needs for

this specific occasion.

The stylists are the secret sauce to knowing the customer. As Stitch Fix CEO, Katrina

Lake explains, “Our stylists know exactly how special such life moments are and can go

above and beyond to curate the right look, connect with the clients, and improvise when

needed. That creates incredible brand loyalty.” (Lake, 2018)

Th

e Fu

ture

of C

on

sum

er Loyalty | 12

Step 2: Build a Customer-Centric Strategy

Once a business has a solid understanding of its target customers, it can build a loyalty

strategy that is relevant, resonant, and meaningful. The strategy depends on the target

consumer, the industry, the business model, and the overarching strategic direction of

the company. Successful loyalty strategies are commonly built on the following tenets:

Offer members utilitarian benefits

Design complementary services, products, and offerings to ease consumer pain points.

Amazon has led the charge on this front and succeeds by using Prime as a vehicle to

deliver meaningful customer value.

Amazon quickly learned that a large barrier to shopping online was the cost of shipping.

By providing free shipping to paying members, this obstacle was removed. From here,

Amazon continued to learn more and more about their customers and their shopping

habits, further iterating on their customer-centric business model. From these learnings,

Prime has expanded to offer additional value to members, from movie streaming to

grocery delivery to deferred payments for apparel.

At its core, Prime solves for a core consumer pain point: not having enough time in the

day to get everything done.

Today’s consumers are incredibly busy between work, family, social obligations, and

hobbies. Prime offers utilitarian benefits that allow members to free up time that would

otherwise be spent shopping by providing fast, convenient, and personalized services.

Th

e Fu

ture

of C

on

sum

er Loyalty | 13

Make members feel special & recognized

People like to be recognized. It confirms that they are valued by others, both in their

personal and professional lives. When people feel valued, their satisfaction rises and

they are motivated to continue the behavior that results in recognition.

The travel industry has this one well-figured out—top fliers in airline programs receive

special treatment, from first class lounge access and upgrades, to status for life. When

the experience of spending time and money with a business makes a consumer feel

valued, chances are they will continue to consolidate their spend for ongoing special

treatment, which in turn, makes them feel valued—and the cycle of behavior goes on.

While some industries excel in this area, research shows there is room for improvement

in others. According to Forrester, negative emotions such as annoyance, disappointment,

and frustration can have severe impact on ROI, with TV service providers notoriously only

retaining 17% of their customers—translating to $104 million left on the table.

(Source for all quotes: Forrester, The US Customer Experience Index, 2017)

Th

e Fu

ture

of C

on

sum

er Loyalty | 14

Member-aligned values

Consumers spend their money with businesses they respect. They also have the potential to be

vocal advocates for the businesses they support, which is easy to do in today’s world of instant

status updates and social media. Word of mouth is a powerful tool, with 84% of millennial women

reporting that comments, customer ratings, and reviews influence purchase decisions (Merkle

and Levo, 2018). Further, a brand’s alignment with personal values is important to over half of all

millennials (Euclid, 2018), making a strong case for businesses to stand for something meaningful.

However, to align values with members, a business must first know who the target customers are

and what they care about. REI’s “Opt Outside” campaign is an excellent case in point. On the largest

money-making day of the year, REI shuts its doors to business and instead encourages members

and employees alike to go do what they love to do—be outside. This brilliant campaign was a

big gamble that has paid off, as it has successfully aligned business activities with what the core

customer base cares about, resulting in members who are more loyal than ever. Per REI’s Chief

Creative Officer, Ben Steele, the key metrics are “less about sales and more about a healthy brand,

a brand that’s got a relationship with customers, that’s got a healthy relationship with its employees,

where you see engagement on both fronts. It’s been a huge success.”

On a larger level, Steele acknowledges that while “it’s awesome if 7 million people raise their hands

and say, ‘I’m going to #OptOutside with you,’ it’s a heck of a lot better if people start saying, even

beyond Black Friday, ‘I’m going to make the outdoors a bigger part of my life. I’m going to protect

public lands, because they’re places that I care about. I’m going to step forward for things that

I believe.’ At the risk of sounding grand about it, we’re looking for impact at the societal level”

(Nudd, 2017).

While there is no single “correct” way to build loyalty, it is critical that the loyalty “vehicle” is designed

around consumers. As these examples show, loyalty is no longer a punch-card at checkout—

leaders in loyalty have set the bar quite high with personalized and experiential offerings.

Th

e Fu

ture

of C

on

sum

er Loyalty | 15

Step 3: Leverage Technology to Deliver the Right Experiences at the Right Time

Just as a brand’s loyalty strategy should work in concert with the overall approach to consumer

engagement and customer experience, loyalty technology should not be viewed in isolation. The role

of technology in building consumer loyalty is twofold: First, the company needs a loyalty platform that

integrates seamlessly with other core systems and digital tools to deliver core loyalty functionality

wherever it adds value to the experience. Second, brands should build digital and fusion (digitally

enabled physical) experiences to deliver consumer value and build emotional attachment.

Loyalty Platform: In the past, loyalty programs followed a fairly set “spend and get” pattern and they

did not change much over time. As we’ve outlined in this paper, the imperative in loyalty now is to

offer a multi-dimensional program that evolves over time in response to consumer preferences.

Meeting this new imperative requires placing loyalty in the context of the overall customer

technology stack and choosing an API centric platform that is built to integrate well with CRM,

email, messaging platforms and commerce technology. Many long-established loyalty programs in

need of a refresh are supported by proprietary and inflexible systems that were built to handle high-

volume point transaction workloads. Loyalty program redesign moments are also an opportunity

to re-platform on modern loyalty solutions that can not only handle high transaction volumes but

also have a modular and engagement oriented architecture that can flexibly support innovation in

program design.

Experience: Consumers look to digital tools to provide them with experiences that emphasize

ease, efficiency and speed. Brands that build these characteristics into their experiences have been

shown to achieve greater consumer loyalty. Simply put, if you make things easy for consumers you

are more likely to reap not only their behavioral loyalty but their emotional loyalty as well. As you

will read in the examples on the next page, membership based loyalty programs offer the perfect

vehicle for brands to invest in digitally driven experiences for their best customers.

Th

e Fu

ture

of C

on

sum

er Loyalty | 16

Sephora

Sephora continues to pioneer the mobile

commerce space, with frequent new

features that enable personalized mobile

experiences in the company’s Virtual Artist

application. For example, the company just

released a mobile contouring experience,

Pocket Contour, which lets members

superimpose contouring on their face

to see how it would look. First, Sephora

recognized contouring as a beauty trend

among millennials (step 1, know your

customer), and realized that their target

customers were having a hard time

achieving the look—contouring can be

complicated with many steps involved.

They then developed a customer-centric

strategy to walk customers through

this step by step (step 2, customer

centricity). To bring this experience to

life they partnered with a technology

company, Map My Beauty. Lastly, and very

importantly, they integrated the new tool

with existing capabilities, so the customer

can purchase products directly in the app

in a seamless journey.

Hilton

Hilton has invested heavily in digital tools

to improve the travel experience. For road

warriors, these seemingly simple tools

make all the difference in a smooth work

trip. Hilton used data to better understand

target travelers and their travel pain points

(step 1, know your customer). They saw

that there was an opportunity to ease pain

points by expediting the check-in process

and empowering travelers to have more

control over their experience (step 2,

customer centricity). They then addressed

these pain points by creating a technology

strategy that gives the traveler the option

to check-in digitally from their mobile app,

along with the ability to select their own

room. Hilton has continued to build further

utility into the app, including the ability to

order an Uber directly through the app

(which comes in handy when you get out

of the airport and are tying to figure out

how to get to your hotel) and providing

a digital room key (forget demagnetizing

those pesky cards!).

Nike

Lenati helped Nike connect physical and

digital experiences for core retail scenarios.

The “Nike App at Retail” solves real

shopping challenges:

• Finding and reserving a pair of your shoes in

your size that is available the very same day.

• Getting in-store assistance on your

terms, from self-serve (scanning product

barcodes to get real-time inventory

information) to personal assistance by a

store associate.

• Unlocking offers and rewards in real time

while in the store or even before entering,

based on proximity.

All of these technology-enabled

conveniences and benefits are available

(only) to members of the Nike Plus loyalty

program – providing a clear incentive

for joining the program. This is a great

example of mobile-led and omnichannel

experiences deepening brand relevancy

and driving customer loyalty.

These are a few companies who have gotten it right:

Th

e Fu

ture

of C

on

sum

er Loyalty | 17

Every Company is a Tech Company

These examples come from companies that are traditional brands spanning beauty, travel,

and retail. However, as they have illustrated, in today’s world every company is a technology

company, even if indirectly through working with technology vendors. To succeed in the

digital era, companies must demonstrate a deep commitment to embracing technology as a

capability to augment their core competencies. Further, each of these examples also reinforces

the idea of “mobile first,” real-time technology, and easy customer engagement—all of which

pave the path to loyal customers.

Th

e Fu

ture

of C

on

sum

er Loyalty | 18

Final Thoughts

The way consumers shop and engage with brands is rapidly evolving, and companies

have to adapt to keep up. As companies like Amazon continue to take market share

from traditional businesses, it becomes ever more critical to develop direct-to-consumer

relationships. Fostering loyalty based on an emotional connection is important, as emotionally

loyal relationships are more valuable and stand the test of time. That said, it is important

to develop and design a program with an understanding of one’s target customers, and

to leverage technology to enhance their experiences. A program should be seen as an

enhancement to the core experience and relationship with the brand—not a disconnected

experience: This is how you can keep Jennifer shopping with you for the next 20 years.

Th

e Fu

ture

of C

on

sum

er Loyalty | 19

Clay Walton-Househead of consumer strategy services

cwaltonhouse@lenati.com

Laurie Meekloyalty engagement lead

lmeek@Lenati.com

Graham Millssenior consultant

Lenati Many of the world’s most valuable brands and retailers engage Lenati to help them acquire, grow & retain customers. Our

expertise is aligned to achieving a stronger customer connection. We are a marketing services and experience design firm that works

on critical initiatives that transform marketing and the customer relationship.

We are recognized by industry analysts as a leading strategic advisor on loyalty and retention. From individual programs to holistic

brand strategies, we can help you build your approach to fostering behavioral and emotional loyalty to drive deeper engagement

with your customers. Our focus is to deliver results and we work hand in hand with our clients to implement market leading advanced

marketing practices including CRM, personalization and membership and rewards programs.

Graham is a member of Lenati’s loyalty team and has experience designing and

launching several retail loyalty programs in the US. He has advised many clients on

how to select loyalty platform providers that best support their long-term goals.

Clay is a Principal at Lenati and leads our Customer Retention and Loyalty Team. Clay

helps Fortune 500 companies adopt and implement customer engagement strategies

that accelerate growth and build loyalty. He has a proven track record of delivering

successful organizational change, program design, optimization, and CRM operations

that unlock business-wide impact. Past clients include Hilton, Nordstrom, Expedia,

Airbnb, Uber, Capital One, DSW, Microsoft, and T-Mobile.

Laurie leads Lenati’s loyalty team, with over 10 years of experience working with

Fortune 500 clients to design, launch and redesign loyalty programs, across all

industries. Laurie has worked with top brands including Nordstrom, DSW and Vans.

Contact us today to learn more about how we’ve helped companies transform their loyalty customer experience.

info@lenati.com

Th

e Fu

ture

of C

on

sum

er Loyalty | 20

References

Forrester, The US Customer Experience Index (2017). https://www.forrester.com/report/

The+US+Customer+Experience+Index+2017/-/E-RES136424#

Lake, Katrina (May-June 2018). Harvard Business Review. Stitch Fix’s CEO on Selling

Personal Style to the Mass Market. https://hbr.org/2018/05/stitch-fixs-ceo-on-selling-

personal-style-to-the-mass-market

Merkle and Levo (March 8, 2018). Why Millennial Women Buy; the behaviors and

motivations of the most powerful purchasing segment, p. 15.

Euclid (June, 2018). Evolution of Retail: Consumer Survey Report – June 2018. The Brand

Perception: How Strong Brand Values Inspire Consumer Trust and Loyalty

Nudd, Tim (November 20, 2017). Adweek, Inside Year Three of #OptOutside With

REI’s Chief Creative Officer. https://www.adweek.com/creativity/inside-year-three-of-

optoutside-with-reis-chief-creative-officer/

Th

e Fu

ture

of C

on

sum

er Loyalty | 21