Preparing for loyalty’s next frontier: Ecosystems

McKinsey, 2020-03-06

This post is about ecosystem-centric loyalty and reiterates Alex Danco’s thoughts on emerging ecosystems. For more on loyalty see also Adam Posner’s For Love of Money.

Problem Statement

  • Modern consumers shop across multiple channels and sites, and loyalty programs don’t catch up to them. Customer data gets patchy at best.

  • Rewards and redemption strategies of the past are increasingly getting outdated.

Proposed Solution

  • Joint loyalty programs between multiple partnering brands (not necessarily from the same vertical). Improvement of UX and increases engagement.

  • Such ecosystem-centric loyalty programs will show higher success rate at changing customer behaviour.

Benefits to be Reaped (descending adoption)

  1. Choose brand over competitors’

  2. View brand as their favourite in the category

  3. Increase frequency of purchases

  4. Pay higher price to stay with the brand

  5. Recommend the brand to others

  6. Intend to increase spend

Phase 1. From Rewards / Redemption to Experience / Content

  • Earn / burn or pure discounts are too yesterday.

  • The game is in creating additional touchpoints via experiences and services.

  • Balancing monetary rewards with experiential offers provides value beyond the transaction.

  • Offering unexpected gifts or benefits [MK: outside the scope of the transaction] to make people valued and recognised – early access, unique discoveries, exclusive events, [MK: or something low-cost at scale].

Phase 2. From Siloed Programs to Connected Offerings

  • The most logical step is looking into the brand’s complementary product and service offerings to create their own brand ecosystem.

  • After this is done, brands can move to “underwater” tactics where the published loyalty benefits are just a fraction of the total consumer value.

  • They can only be possible with personalisation.

  • Amazon Prime is a fantastic example of such programs, integrating, Prime Video, Prime Now, etc.

Phase 3. From Company Focused to Ecosystem Enabled

  • Replicating Prime is not possible; one company can’t go it alone.

  • Partnerships across categories, even between competitors.

  • Pick the pieces of the member brands to create a personalised experience for a customer.

  • [MK: having multiple brands allows for multiple redemption “price” points, increasing the short-term attractiveness of the program]

  • Benefits for ecosystem members – broader access to customer data, cross-marketing opportunities for customer acquisition and engagement, [MK: not so sure about the following] economies of scale stemming from shared IT infrastructure.

  • Competitors may work together in different territories and even channels.

  • Loyalty is to the ecosystem, not individual players.

  • In this case ecosystems evolve, and the levels of involvement are up to individual brands, there’s no top-down player assembling them.

  • Supposedly, brands still gain more from such ecosystem-centric loyalty than they lose. [MK: in my opinion, the perceived unfair split of benefits is the key roadblock to adoption.]

Putting It All Together

  • Old loyalty programs will stick for a while but may in the medium term seek consolidation under an overarching ecosystem.

  • If done right, consumers earn loyalty rewards faster.

  • Rich customer profile consisting of logically connected pieces of data provides competitive advantage vs traditional loyalty programs.

Seven Design Principles for Success

  • Shared consumer in mind. Brands should mutually understand the consumer whose profile is built on these brands’ data – in order to customise their offers to this consumer.

  • Brand synergy. Every brand should make sense and provide value within the ecosystem.

  • Diversity of products and services. Brands should develop common features and benefits together to deliver goods, services and experiences to the consumer.

  • Seamless consumer experience. Sign-ups use and redemption must be intuitive, responsive and simple to consumers. [MK: sadly, without a single customer identity this is tricky, and there are entrenched ID providers: Google, Facebook and Apple.]

  • All-in brand commitment. Fair data share (within legal limits), commitment to the partnership.

  • Alignment on governance process. Aligned strategies, goals, roles, responsibilities and risk management for each brand.

  • Data and tech focused on connectivity. Data needs to be portable and its use must comply with the purpose. Compliance with a huge body of privacy rules.

  • [MK: I would add the 8th principle: the frequencies of interactions between the consumer and each of the ecosystem member should be compatible to capture value more or less equally.]