Loyalty 3.0: How to Revolutionize Customer and Employee Engagement with Big Data and Gamification

Loyalty 3.0: How to Revolutionize Customer and Employee Engagement with Big Data and Gamification

by Rajat Paharia

ISBN: 9780071813372

Publisher McGraw-Hill Education

Published in Calendars/Games, Entertainment/Puzzles & Games

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Sample Chapter

May You Live in Interesting Times

The Three Faces of Loyalty

When you think of the word loyalty in the context of business, what comes to mind? If you're like most people, the first thing that will pop into your head is a typical loyalty program, where you earn points for your purchases and can redeem them for rewards. These programs are meant to drive customer loyalty, and according to studies, you're probably a member of 18 of them. And yet I'm willing to bet that you're deeply ambivalent about all of them and, if given a better offer by another business, would gladly defect. These programs, on which billions of dollars are spent annually, aren't generating loyalty to a business; they're generating loyalty to the best deal and so are completely failing at their fundamental purpose.

What is that purpose? It's to give customers a compelling reason to continue to patronize the business and to resist competitive offers. If a new store opens across the street or a competitor slashes prices, businesses with loyal customers won't lose those customers because they've elevated their relationship from a transactional one to something more meaningful. They have engaged those customers.

Now let's switch gears to employees, arguably a company's biggest asset. Shouldn't the same thinking apply to them? Managers want their employees to be loyal so that employees perform to the best of their abilities, do what's best for the company, and resist competitive employment offers. Yet, while businesses acknowledge that they want loyal employees, most are not actually doing anything about it. They spend billions attempting to engage their customers and a fraction of that, if anything, on engaging their employees.

Finally, companies today rarely accomplish anything alone. You work with partners to source critical raw materials, enhance product offerings, and amplify your sales efforts. The efforts of these partners are critical to the success of your business, so you need those partners to be engaged. You need them to be loyal. And yet again, we find that today's businesses generally have only rudimentary, if any, systems in place to drive that loyalty. And what systems they do have in place feel remarkably like the 18 loyalty programs that consumers are ambivalent about.

Clearly, something needs to change. And the companies that figure it out, that create true loyalty, are going to realize a sizable and sustainable competitive advantage and win in their markets.

The Road to Loyalty 3.0

Loyalty 3.0 is about taking back the word loyalty and making it actually mean something. It does this by combining the latest research on human motivation with the big data generated by your customers, partners, and employees as they interact with you to empower your business to motivate, engage, and create true loyalty.

But before we can understand where we're going, we need to understand where we've been.

Loyalty 1.0

We all know Loyalty 1.0 programs; they're the frequent-flyer programs, cash-back credit cards, and "buy ten get one free" punch cards from the local sandwich shop that have been around for many years. These are purely transactional, completely focused on customers, and absolute failures at generating the kind of loyalty that businesses actually want. For customers, at best, they're mildly pleasing, and at worst, when a business isn't living up to its brand promise, they feel like a way for a business to hold them hostage. For businesses, at best, they're table stakes in an industry where everyone else has one, and at worst, they're a giant cost center eating into the bottom line and creating a huge liability.

Loyalty 1.0 programs also suffer from fundamental structural problems. There's an exciting part at the beginning when you sign up for the program and dream about how you're going to earn spectacular rewards and another at the end (if you get there) when you actually redeem for a (possibly spectacular but maybe not) reward. In the middle is just a very long grind with no motivation, no engagement, and no loyalty being generated. There's a gulf of lost opportunity in the middle.

Loyalty 2.0

In the early 1990s, 1- to -1 marketing emerged, focused primarily on making the loyalty experience more targeted through segmentation and personalization, with a big emphasis on direct-mail and e-mail campaigns. Data had a bigger role here as businesses took the information they were learning about their customers and used it to "speak to their interests." While this was effective for a while, open rates on these communications plummeted as the overall level of direct mail and e-mail increased. Consumers were overwhelmed by the sheer amount of noise, and the problem has only gotten worse.

Loyalty 3.0

After Loyalty 2.0, things got stuck for a while. Sure, new technology meant that you could now interact with your loyalty program from your mobile phone and that you could build a Face-book page for your brand, but nothing fundamentally changed. Not until now, when the pieces have finally come together to enable Loyalty 3.0. Loyalty 3.0 has three major enabling components that, when combined, are much greater than the sum of the parts:

1. Motivation. Recent social-science research has much more clearly defined what compels and motivates human behavior, and what causes people to do things or not do things in life and in the workplace. Knowing what truly motivates people—and what doesn't—enables us to create stronger engagement and true loyalty.

2. Big data. Technology has taken over how we communicate, socialize, work, and play. The amount of data that people are generating as they interact with these systems is exploding, and new technology is enabling businesses to capture that data with more granularity than ever before. Smart businesses can consume this data and use it to understand, engage, and motivate their constituents in ways not previously possible.

3. Gamification. Game designers have been using data-driven motivational techniques for years. Our new understanding of motivation, combined with the emergence of big data streams, has enabled these techniques to be used outside the gaming world, where they can be powerful tools to drive engagement, participation, and high-value activity for customers, employees, and partners alike. (See Figure 1.1)

By leveraging these three components together, we can make our customers, partners, and employees more engaged, more active, and truly loyal. We'll spend the next few chapters in Part 1 covering the building blocks on the left side of the equation—motivation, big data, and gamification. In Part 2 we'll take a deep dive into numerous case studies of companies that have successfully used Loyalty 3.0 in their businesses so that you can see exactly how it works in the real world. And we'll finish up in Part 3 with a step-by-step guide that will walk you through the creation of your own Loyalty 3.0 program.

The Four Tiers of Loyalty

Barry Kirk, my colleague at Bunchball and a veteran of the loyalty industry, wrote eloquently in Chief Marketer about the various tiers of loyalty that people really experience. See if any of these sound familiar to you:

* Inertia loyalty. If a brand's loyalty strategy involves such terms as barrier to exit, it most likely falls into the inertia loyalty category—making it inconvenient to leave the program rather than irresistible to stay. Customers in this tier stick around because it's too inconvenient to escape. Classic examples include airline loyalty programs (where a lack of alternate flights produces loyalty) or banks and grocery stores (where loyalty is often proximity-based). With inertia loyalty, customers have no incentive to stay once a competitor makes it easy to switch.

* Mercenary loyalty. Just as a mercenary will swear allegiance for a price, marketers can pay or "bribe" customers for their loyalty. Most traditional points- and discounts-based loyalty programs operate in this tier because of past effectiveness, but the industry now sees a leveling off of participation rates for this type of program. Yes, the tactic may work, but its major weakness is that the loyalty generated is emotionally shallow—it's simply about getting freebies or a better price; these programs amount to a complex method of discounting. Here, too, there's little to stop your competitor from taking customers simply by discounting or paying more.

* True loyalty. Brands reach this tier when a customer has a compelling reason—ideally, an emotional stake in the brand—to resist competitive offers. If a new store opens across the street or a competitor slashes prices, a brand with true loyalty won't lose customers because the relationship is based on a deeper connection of trust and shared value. Good examples include Starbucks (people go out of their way to spend more for it) or Chipotle (which appeals to consumers' values around sustainability and humanely treated animals). All brands can attain true loyalty if they are committed to a win-win relationship with their customers.

* Cult loyalty. Ever see someone who proudly sports a brand logo as her favorite tattoo? Or maybe just a friend who consistently refers to himself as a "____ guy" (fill in his favorite brand name). At the cult loyalty tier, the customer and the brand begin to merge so that rejecting the brand would be like rejecting your own values. Customer commitment becomes a virtual lock at that level (congrats to Harley-Davidson, Apple, and Coca-Cola). Unfortunately for marketers, cult loyalty is next to impossible to artificially manufacture. It emerges only organically—but once it does, it can be cultivated.

The goal of Loyalty 3.0 and this book is to show you the way to true loyalty, not just for your customers but for your employees and partners as well.

We Live in Interesting Times

While on the surface this sounds like a blessing (who wouldn't want to live in interesting times?), it is in fact meant to be a curse. In a speech in Capetown, South Africa, in 1966, Robert Kennedy explained:

There is a Chinese curse which says, "May he live in interesting times." Like it or not, we live in interesting times. They are times of danger and uncertainty, but they are also more open to the creative energy of men than any other time in history.

Fast forward to today, and the world of business is experiencing its own "danger and uncertainty." The rate of business change is faster than ever before, technology is disrupting everything, and companies are rising and falling at warp speed. If you're looking at this maelstrom with the right lens, however, you can see that a series of important trends is converging and making engagement and true loyalty essential to the success of any business. For those who can see the signs and steer their businesses in the right direction, opportunity awaits.

We're Living in the Age of Distraction

We are living in a crowded, 24/7, global marketplace—a "flat world." Your customers are confronted with more competing messages, more options, and more distractions than ever before—more websites, more social media platforms, more media vehicles, and more mobile applications, all aggressively fighting for their attention. Over a billion people now spend hours each day sharing, posting, tweeting, and commenting on social networks. And they're doing it everywhere—at home, at work, at school, waiting for the train, and at the dinner table. They are always "on."

Amid this never-ending cacophony, how do you earn and maintain customer attention? Because customers will buy from the businesses that most effectively engage with them, whereas disengaged customers will grow disinterested, delay purchases, abandon carts, and wander off to competitors. Businesses need to cut through the clutter and engage their customers to prevent their messages and relationships from being lost in the noise.

The Workforce Has Disengaged

According to Gallup surveys, 70 percent of people who go to work every day aren't engaged in their jobs, costing the U.S. economy up to $350 billion per year in lost productivity. These disengaged employees are unproductive and are just as likely as disengaged customers to defect. And disengagement can be viral, spreading from one department to the next, leaving entire teams frustrated and unmotivated.

Engaged workers, on the other hand, can drive meaningful increases in productivity, profitability, and product quality, as well as less absenteeism, turnover, and shrinkage. Given the benefits, it's imperative that businesses figure out how to engage their employees in a scalable, cost-effective manner.

Social Media Have Changed the Power Dynamic

Social media have fundamentally changed how we interact with each other and with businesses. Sites such as Facebook and Twitter have ushered in a new era in which businesses no longer control the conversation. In the broadcast era, businesses controlled the means of transmission at scale, and all consumers could do was to passively receive. In the social era, the rules have changed. Peer-to-peer conversations about a company and its products have become as important as the company's communications, if not more so. Recent Nielsen studies tell us that 92 percent of consumers trust a peer recommendation compared to a 29 to 47 percent trust rate for company advertisements.

Consumers now can have their own discussions about businesses and brands, with or without the brand's involvement, and can voice their opinions on a global scale for everyone to hear. Opinion, kudos, and dissatisfaction all can spread globally, like wildfire, completely outside a company's control. As a result, companies need to engage their customers and work to make them advocates, not instigators.

Corporate Information Technology Is Being Consumerized

The consumerization of computing and personal technology has been going on for years—what started in the military made its way into business and then into the home. Cheap, easy-to-access, easy-to-use PCs, tablets, and smart phones have spread to most corners of the earth.

What's new today is the consumerization of the corporate information technology (IT) landscape. For decades, we all used more technology at work than at home, and because of that, our expectations of technology were set by our experiences at work. Technology vendors designed primarily for the work context, and our employers dictated the technology that we used in a top-down, command-and-control manner.

The balance has shifted in recent years, and now we're all using as much, if not more, technology at home as at work. And we're bringing that home-based technology into the workplace, where it's working its way into our companies bottom up. What starts with an individual using BOX for cloud storage or an iPad for mobile work quickly turns into teams, entire business units, and entire companies using these technologies.

And what happens when those consumer technologies, with their user experiences designed for ease of use, simplicity, and delight, are contrasted with the existing enterprise platforms for collaboration, expense reporting, and human resources? The enterprise systems pale in comparison, and workers demand better. Functional isn't good enough anymore; business technology now needs to be usable, simple, and engaging.

Generation Y Is on the Ascent

The emergence of Generation Y (also called Millenials), people born from the early eighties to the mid-nineties, as a demographic force is driving dramatic change in education, technology, media, and most critically, at work. There are currently 80 million Millenials in the United States, and every day another 10,000 of them turn 21. They make up 25 percent of the workforce today, and by 2025, that number is expected to increase to 75 percent—three of every four workers globally will be from Generation Y.

Millennials are "digital natives." They live and breathe online—play, school, and now work. They're accustomed to cutting-edge technology and innovation at home and expect the same quality of technology in the workplace. They've grown up with and expect always-on instant communication coupled with real-time feedback and responses to their creations and communications. They've also grown up in a time of rapid change, where new becomes normal overnight, so engaging them requires evolving, changing, and constantly staying fresh.


Excerpted from "Loyalty 3.0: How to Revolutionize Customer and Employee Engagement with Big Data and Gamification" by Rajat Paharia. Copyright © 2013 by Rajat Paharia. Excerpted by permission. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher. Excerpts are provided solely for the personal use of visitors to this web site.
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