- Autozone legal precedent
- Media focus on loyalty unfairness
- Customer advice on how to leave a loyalty programme
When national newspapers and magazines start offering advice to readers on how to leave travel loyalty programmes; what to join instead, and also, how appallingly unfair some schemes are, it is time for the loyalty business to take notice and address whether current practices are fair.
USA Today for example, has a long article suggesting people should use points based credit card loyalty programmes because the value of the reward is more likely to stay the same, (rather than decline) and they are less likely to find their points have been expired or the rules changed.
The newspaper quotes a travel agent from Seattle and million-miler Steve Danisek. He says airlines have added new fees, made it harder to get an award seat and continue to dilute their programs. “The programs are in decline,” he says.
Up for particular criticism is “dynamic” award pricing that changes the value based on demand. This takes many award seats out of reach for the average saver. Also, instead of rewarding loyalty, travel companies are giving their best perks to the big spenders, making the loyalty game almost unwinnable for many travellers.
To quote USA Today: “Remember, points and miles almost always lose value. In other words, a “free” award ticket that cost 25,000 points last year may require another 10,000 points next year. You might also have to pay a fee to redeem the miles.
And one other thing: Check the terms of your program, which are absurd. For example, did you know that your miles don’t really belong to you? Your travel company can change the rules at any time, for any reason. It’s all buried in the fine print. Why collect something that doesn’t even belong to you?
Rob Markey, a partner and director at Bain & Co, writing for the Harvard Business Review puts the source of the problem firmly at the door of the finance department.
“It should not be this way. Earning customer loyalty is firmly in the interest of both shareholders and management. My research shows that loyalty leaders—companies at the top of their industries in Net Promoter Scores or satisfaction rankings for three or more years—grow revenues roughly 2.5 times as fast as their industry peers and deliver two to five times the shareholder returns over the next 10 years. Yet companies and investors continue to prioritize quarterly earnings over customer relationships, for three main reasons: Public-company financial disclosure rules and corporate accounting practices require little to no reporting on customer value; most firms lack the capabilities needed for managing it; and organizations’ traditional structure puts functional priorities ahead of customer needs.
The roots of the problem, says Markey, can be traced to the 1890s and the birth of modern financial accounting, but the situation worsened in 1970, when Milton Friedman introduced the age of shareholder primacy, which held that companies exist to maximize shareholder value. Since then, companies have perfected sophisticated systems and practices for delivering on that promise.
“A decade ago, Roger Martin, then dean of the University of Toronto’s Rotman School of Management, inverted this notion. He espoused a new “age of customer capitalism” in which companies that put customers first would create even greater value for shareholders. He was not taking issue with Friedman’s basic assertion but pointing out that its practical application had gone awry. The blind pursuit of shareholder value had devolved primarily into managing investor earnings expectations.”
The true purpose of a business, author and loyalty guru Peter Drucker said, is to create and keep customers. Most managers understand this, but few behave as if they do.
Markey suggests four key ways to keep customers at the top of the business agenda and build customer value:
1. Develop robust customer-value management processes and tools.
2. Combine design thinking with loyalty-earning technologies.
3. Organize around customer needs.
4. Make loyalty among all stakeholders a priority.
Accounting for Customers – this means defining customer value as the total lifetime value of a company’s customer base.
The importance of this approach can be proved by reminding anyone who disagrees that:
“Loyalty leaders grow revenues roughly 2.5 times as fast as their industry peers.”
Given the importance of customer value, leaders should track it as rigorously as they track other key assets, such as buildings, machinery, inventory, and marketable securities.
However, Markey gives the following warning: “We won’t truly enter the age of customer capitalism until financial-accounting standards bodies enact rules that require reliable, auditable disclosure of customer-relationship health. This has long been a topic of debate in the accounting world. Over the years the Financial Accounting Standards Board, the International Accounting Standards Board, and others have attempted to improve reporting on intangible assets including customer value. Those efforts have consistently run into challenges related to valuation methodology, differences in industry practices, and the cost of compliance.”
What investors need to know
While we await clear standards and rules, companies should take the lead, disclosing reliable and consistent information about the progress they are making growing customer value as part of their earnings releases. Only then can investors systematically reward those investments.
Lead for loyalty
When a company focuses on loyalty, it makes customers’ lives so much better that they keep coming back, and they bring their friends. Employees become inspired by the satisfaction that comes from making customers’ lives better. And don’t forget the superior performance of the companies that lead their industries in Net Promoter Score or satisfaction. Their revenue growth and shareholder returns far surpass those of their peers. Companies that don’t pursue customer value risk being put out of business by those that do.
Health Warning
As customers become more knowledgeable about their loyalty programme rights, so the danger of a class action to claw back perceived points losses becomes more likely. In the US this month, AutoZone had to pay almost $50 million to settle a class action over changes the company made to its loyalty program. See story