How to think about loyalty programs
Loyalty programs have been the latest buzz in the Indian markets. Amazon Prime gave all Indian consumer internet companies a serious reason to think about building customer lock-in. Zomato has launched Zomato Treats and Zomato Gold, Flipkart is planning to launch Flipkart First, Ola and Uber have launched Premium Pass etc. In a recent discussion a budget hotel chain was also exploring ideas on how they can launch their loyalty system.
Building customer loyalty is crucial but not all loyalty programs work. Here’s my framework to differentiate between a successful and not so successful loyalty products out there.
- What do you control — Product/Pricing/Delivery?
Its critical for a business to understand which aspect of the consumption lifecycle does it really control. Marketplaces often don’t control product selection or pricing. They control the delivery experience.
(Please note that this doesn’t include any artifical price controls based on out-of-pocket discounts)
Amazon is a marketplace so the only factor it can control is speed of delivery (logistics). It cannot differentiate product selection or pricing as its core proposition is unlimited selection at best price. So providing faster delivery is a clear value-add.
Ola/Uber — virtually control nothing, other than perhaps the driver quality (based on driver rating, which I think is circumspect). Mind you they ideally don’t control pricing as market clearance pricing should prevail. The no-surge pricing model offered to consumers is an artificial pricing control.
OTAs — virtually control noting. Hotels list themselves at particular price points and do the eventual delivery.
Hotel Chains — control product, pricing and eventual delivery.
2. What can you differentiate on?
‘What do you control’ — mental model is important so as to think where the real value addition occurs and where can you differentiate. The differentiation is the most critical piece here. Amazon cant differentiate on product selection, it has to offer all the products to all users, Uber can’t limit supply for any particular user, OTAs can’t provide a limited selection to some users. Thus, there is no value-add they can differentiate on.
From the above table its obvious that players who can’t differentiate have to offer discounts as a way to encourage repeat usage. Thus, OTAs, cab aggregators have gone the discount route of free nights, no cancellation charges, no surge pricing route to buy customer loyalty. Amazon, on the other hand goes for faster delivery offering, which is far superior to discount model and is a real value-add.
Interestingly Ola is providing value added services like in-car entertainment, wi-fi etc. Also, I don’t buy the argument that people with pass get better cars as quality should be a guarantee and everyone should get clean cars with good drivers. Saying there are better cars and bad cars shows a lack of quality control
3. How frequent is the use case?
Frequent use cases like cab aggregators, dining out etc can help a company ramp up the subscription numbers but it most often comes from heavy users who are able to extract more than the price paid up-front.
This one is perhaps the reason why hotel loyalty programs are not that popular, I may have 5–6 hotel chain cards but eventually I make my decision on location and pricing offered. Only frequent business users tend to gravitate towards a particular hotel chain.
I have shared my early thoughts, let me know what you think.
