• by D. Daniel Ziv , December 27, 2011

Loyalty programs have become a standard tool for attracting and maintaining repeat customers. Just about every industry and vertical market offers one -- retailers, financial institutions, airlines, hotels and more. The question lies in whether these programs really manage to build long-term, loyal relationships with customers or instead end up disappointing them.

The travel industry seems to be the largest, and most common, culprit. As a frequent and global traveler, I have reaped the benefits and also felt the shortcomings of many of these programs. I have also had the opportunity to speak with fellow travelers who are generally disappointed with the many aspects of and processes related to these programs. So where do these initiatives go wrong? In many cases, the “fine print” is to blame. Typically, the advertised benefits of the loyalty program are driven by marketing, but the fine print is driven by other departments.

Airline Industry: To Be or Not to Be Loyal

In the airline industry, loyalty programs are usually successful at the onset¾increasing customers’ short-term preferences. However, in the long term, when customers go to cash in on their earned points and miles, they find small details hidden in the fine print that prevents them from enjoying the fruits of their dedication. An example is finding out that although airlines may promise you a free upgrade or a flight for 25,000 miles, they actually allocate a very small percentage of seats for reward travel. This makes it almost impossible to use your miles without needing to pay extra fees or doubling the miles you should “technically” need. This was confirmed in a conversation I had recently with one airline, which shared that only 8% of available seats is actually open for reward miles or free upgrades on their planes.

In the name of transparency and building customer trust, airlines should consider showing how many seats are available for reward travel on each flight. For some reason, this information is kept under lock and key, which has a big impact on customer expectations¾and, ultimately can lead to potential disappointment and eventual customer churn.

Rental Car Industry: When You Pay for Perks

Car rental agencies provide another example of offering perks for loyal customers. These offers sometimes come in the form of free weekend rentals. Again the problem often lies in the fine print details. More often than not, this particular promotion is usually designed to empty their full lots on the weekends. However, if you return the car in fewer than the designated 48 hours, you may end up paying the full amount for the “free” rental.

From the customers’ perspective, the loyalty program is an integral part of why they may choose to fly or drive with that organization. Yet, from the internal view, many loyalty programs are run by a separate division or business line with its own profit and loss, and this is the challenge. Customer feedback regarding the loyalty program may never even reach other influential departments. Unfortunately, Voice of the Customer (VoC) insight is typically absorbed by a small team or deflected. Much of it stays invisible to the rest of the organization.

Many online and brick-and-mortar retailers also offer various reward programs. The problem is that many are poorly managed and employees don't know much about them and can't really help consumers when they try to reap the benefits or understand how they work. This is why, in the long run, many loyal customers end up either switching companies or even lashing back via social channels. Rather than building long-term loyalty these programs end up creating a feeling of betrayal from the most loyal customers, and thus achieve a boomerang effect.

Build Loyalty, Don’t Break It

MIT Sloan School Management Review published a report earlier this year titled “When Unhappy Customers Strike Back on the Internet.” The research interviewed people that actually went online and complained about specific experiences they had as consumers. What it discovered was that most consumers who share their experiences on social networks feel betrayed. In many cases, these are very loyal customers who feel that the company they have been connected to for years deviated from its existing promises, offerings, services, or even misled them in some way. These customers strike back online by sharing their frustration with all their social friends. The result in such actions can have a tremendous impact on the brand or company perception. Losing the trust of your customers can be very costly. In the social customer era, a disappointed loyal customer can lead to much more damage.

In many cases, companies run focus groups and survey panels to make sure their key messages in a television commercial or advertising campaign are understood, memorable and effective. Maybe the same kind of practice should be applied to the fine print language. Some organizations have taken steps to draw more attention to these details to prevent setting the wrong expectations.

Amazon offers a great example of an organization that builds loyalty without a fancy loyalty program. For example, the company usually advises, before you click “pay now” on a product, if you’ve already purchased the same item in the past. It wants to be sure that you really want to buy the same product twice. Although this practice may actually reduce some initial transactions, it helps build the perception that Amazon is looking out for its customers’ best interests. The end result: building trust and long-term loyalty¾which in turn translates to customers trusting them with their credit card information and preferring transactions through them versus an unknown website even if it is cheaper.

Perhaps it's time to flip the loyalty program formula upside down. Rather than promising benefits to attract new customers, try building a loyalty program that centers on offering less up front. Once you get customers signed up, surprise them with unexpected benefits, coupons, bonus points, and more. You may find this to be more rewarding in return for the continued loyalty over a period of time. Social word of mouth will do the rest in promoting the good “perception” tied to your program and organization.

KLM Airlines is exploring this very concept by supporting the journey its customers are making on its airline. Click here to see how a few acts of kindness from the KLM team have generated more than one million Twitter impressions for this European airline. Other airlines, such as Air New Zealand, bmibaby and Estonian Air, have also started to reward virtual advocacy from their flyers with real-world rewards.

As we close on 2011 and start thinking about the year ahead, it’s time for all of us to innovate, think about and approach our programs differently. Extend focus beyond your standard products and services, and instead look to create an “experience” for your customers. Give them a reason to be loyal to your company. Perhaps your goodwill and support will become a best practice in the New Year!