This blog is part of our Life on the Digital High Street series. Join the conversation on social with #LifeontheDigitalHighStreet.
Looking for the highlights? Here are three things you need to know:
- Loyalty schemes only have the ability to engage one customer at a time
- Referral attracts high-value customers who spend an average of 11% more on their first order
- The social psychology behind referral ensures these customers are genuinely loyal
Some years ago, when I was editor of Marketing Week magazine in the UK, I hosted a conference for CRM professionals.
In a tea break I approached a small cluster of guests having a seemingly spirited conversation.
They fell immediately silent the minute I joined them. Journalists are used to that.
“Sorry,” I offered awkwardly. “I didn’t mean to interrupt.”
“No problem,” replied a head of CRM for a UK household retail brand. “As long as this conversation remains off the record, we were just talking about how all of our loyalty schemes suck.”
Why so bad, I asked them.
“Because most loyalty schemes are built around what retailers can deliver,” said another of the marketers, “rather than what customers actually want.”
“Customers don’t come into our stores hoping to gather more points, “ he added.
I’ve thought about that conversation a lot.
Loyalty schemes have held an entrenched value in the marketing toolkit for decades.
In the sectors where they work well, they work very well. And customers love them (or rather, customers have come to expect them).
The marketing team’s goals behind a loyalty programme are easily understood: prevent churn; increase frequency; drive sales.
Travel, leisure and hospitality is an example of a sector where loyalty works well; where it does exactly what it’s meant to. Air miles and similar points schemes that speak to the promise of adventure and escape, carry a powerful appeal and are both loved and conscientiously used by frequent travellers.
Few marketers achieve much more through loyalty programmes than putting the right ticks in a few boxes. The coffee shops sector is one where loyalty schemes have traditionally amounted to a relatively blunt instrument. There was very little sophistication involved in ‘loyalty’ cards being carried by unnamed customers looking to get enough stamps to qualify for say, a ‘free 10th coffee’.
Maybe the simplicity of such schemes was their beauty. I’m all for putting up strong barriers against unnecessary layers of complexity added onto a good marketing tactic.
I’m declaring an interest at this point that three months ago I joined Mention Me, the leading referral marketing platform, as its marketing director.
Strictly speaking, referral marketing isn’t new but neither is it widely thought of as a prevalent or even commonplace ingredient of modern marketing. I edited Marketing Week for three years; earlier in my career I was a news reporter for the same publication. I don’t once recall us writing about referral marketing.
Even now (I left my role as a trade press editor in 2012), there’s still a large need for education when new prospects start investigating how a good referral scheme can generate new, sustainable growth.
Loyalty however, they know all about. In many cases, it’s often a loyalty programme that brands come looking to acquire when they approach us.
And yet, in terms of the customer dynamics and business benefits of the two strategic activities, there is clear daylight.
As those frustrated CRM professionals told me at the conference, many loyalty programmes are more about points than they are about people.
But even when loyalty is done well: when it’s more than an obtuse coffee shop card; when it’s more an automated generator of key insights - it’s still a ‘closed system’.
That is, a loyalty programme represents a lid - fastened tightly shut - on growth in terms of customer acquisition. However successful it is, a loyalty scheme can only (re-)engage one customer at a time.
And yes, if retention is what you’re looking for, most loyalty programme customers will continue to buy your product in order to earn a reward. But those customers aren’t out there connecting you with new, high lifetime value customers like referral does.
What the team I’ve just joined knows from driving 4 million referrals totalling £1bn revenue for more than 450 brands, is that referral is a customer-led growth engine.
Referral marketing grows customers. Referred customers not only spend more from their first order onwards, they’re also five times more likely than non-referred customers to refer onwards.
Referral marketing: marketing tactic or acquisition channel?
I could see how it can easily get mistaken for a mere marketing tactic. But, besides the frankly crazy ROI referral is able to drive, it also has the capability to find and activate your most valuable customers in droves.
Right from the beginning of their relationship with a brand, referred customers spend more than non referred customers - 11% more on their first order. They’re also five times more likely than others to refer onwards.
Switching some marketing budget from advertising to organic, customer-led growth, is a strategic play.
And it engenders greater loyalty than most loyalty schemes. For it’s not the tactical nature of a loyalty programme I question, but the strategic aim: loyalty.
Is it loyalty if someone just chooses your brand because you’re about to throw them a treat? I’m not convinced. If it works to successfully encourage repeat purchase, that’s fantastic for the business but genuine loyalty (in the wider sense of the word) is a strong and deep human emotion and can’t be easily fabricated.
If it’s only your ‘loyalty’ scheme keeping the thinning connection between you and your customer intact, rather than a brilliantly strong brand, then those same customers are likely to jump ship for your competitor the moment your rival’s loyalty scheme offers more than your own.
Can it really be loyalty you’re generating if your customer is taking the opportunity to accept your free coffee - without the loud confirmation of brand love and connection that a referral has at its heart?
‘Private’ loyalty versus ‘public’ referral
Successful referral schemes have loyalty already baked into each transaction. Your referrers - especially those that introduce multiple new customers are, by definition, loyal customers.
The reverse is not true. Traditional loyalty schemes do not have referral capability built into them. When a customer claims their reward as part of a loyalty programme, they do it in private. They don’t have to tell anyone. There’s no social proof.
By contrast - a good referral programme (it should be said, not all referral programmes are equal) delivers two tangible and powerful measures of success that can and should be tracked.
The first, is that your referrers - your most loyal customers - have to feel comfortable (even proud) in publicly aligning themselves with your brand or product. There’s a deep psychological aspect to referral, both pre- and post- the act. Referring a friend to a specific brand is an open declaration of love; of fandom - safe in the knowledge that the referred brand, product or service reflects well on them or even enhances their image.
The second element of a beautifully designed and well-tested referral scheme that a loyalty programme doesn’t possess, is that it’s contagious. It grows customers - exactly what marketing is supposed to do - in a way that sits agreeably within the hardened, cynical and over-enlightened social awareness of our time. Consumers today are more than alert to badly crafted advertising campaigns or promotions. Their interest in a brand’s offer decays a little more whenever its well-intentioned personalised and automated digital campaigns miss the mark.
But they’ll listen and respond to their friends, family and colleagues. They want to connect, to share and recommend the good stuff in their lives.
As a relative newcomer to referral, albeit one with a grounding in how the rest of the marketing landscape fits together to grow business, I’m wondering how I haven’t seen referral as a marketing channel in itself before now. One that - with the data and insights and understanding of customer behaviour that we have at our fingertips - doesn’t just stand alone like email or SEO, but can enhance and increase the potency of other channels around it.
I’m not stupid enough to be one of the (seemingly) many marketers that pronounce the ‘death of’ some tried and tested marketing discipline on an almost weekly basis.
Loyalty schemes are going nowhere fast. They serve a purpose and they’re deeply embedded in the relationships between so many brands and their customers.
But I’m also not silly enough to believe that marketing doesn’t evolve. Loyalty schemes are fine but they’re static rather than dynamic and transactional as opposed to personal.
Crucially, I’m not at all sure they breed the genuine loyalty they’re designed to. With customer expectations continuously being raised, they often end up driving more disappointment and complaints than anything else.
Referral schemes meanwhile, necessitate that magical moment where a referrer hears him or herself saying out loud that they would highly recommend your brand to a peer. The psychology and post-rationalisation that’s loaded into that single moment - where you’ve actively demonstrated that this brand makes you happy, is more powerful than a thousand of anyone’s loyalty points.
Want to learn more about how your business could acquire customers and nurture loyalty through referral? Talk to Sales.