A brief look into How Economic Crises affect Consumer Behavior towards Loyalty Programs
The global pandemic is one of the most significant damaging forces to hit our global economy since World War Two. In a recent study commissioned by the Brookings Institute in Washington, the global economy contracted by 3.5% (Yeyati et al., 2021). Even though most of the economic sectors in the developing world are recovering, there is evidence to show that some sectors are still slow in their recovery (Yeyati et al., 2021). This isn’t a surprise as we have had a steady stream of global economic crises in the last century, impacting and changing the world we live in. A few examples of these are the Great Depression of the 1930s, the 1980s and early 1990s recession, and most recently, the 2008 financial crisis. From these extenuating circumstances, many key companies in various industries have used these scenarios for opportunity, resilience, and embrace change. It has been said that loyalty programs have their inception but more so proven their value in these troubling times. A few excellent examples of such behavior are:
1. During the Great Depression, Betty Crocker invented a modern loyalty program in the late 1920s by introducing the so-called “box tops” (redeemable coupons printed on product packages).
2. American Airlines stirred up the loyalty industry with its Frequent Fliers program in 1981 during the early 1980s recession.
3. Card-based loyalty programs became popular during the 1990s in the western world, again during the recession.
4. Starbucks launched its widely successful loyalty program in April 2008, right when the financial crisis of 2007-08 was reaching its peak.
Furthermore, to even add more evidence of such programs gaining success, as of March 2019, Starbucks attributes 40% of its total sales to the Rewards Program (Brown & USA TODAY, 2019).
Loyalty Programs and their Benefits
So as we can see from the evidence above, it is evident that loyalty programs themselves are a saving grace during times of hardship. Even though an economic crisis can shake up various industries, it is always important to consider those who prop those industries up: the customers.
Loyalty programs are a great way to show your customer base that you support them and offer them rewards or incentives for their loyalty. Moreover, building a stronger relationship with customers can further galvanize and solidify their bond with their chosen company or business. It costs 6-7 times more to acquire a new customer, so customer retention is the key goal that loyalty programs should serve during a crisis (Lipovic & Struto, 2019) (Yoo & University of Nevada, Las Vegas, 2011). Loyalty programs themselves provide numerous benefits to the customer but are also a powerful tool for businesses to be able to assess their current model and garner some insight into which areas they can improve. These various benefits come in the form of customer data, communication, feedback, and overall implementation of customer relationship management. For example, businesses obtain customer data by tracking the services and products purchased by loyalty program members, which can be further utilized in product planning, promotions, and other areas, including human resources. Most importantly, there is an assumption that loyalty programs provide value to customers, which ultimately encourages customers to stay with the brand (Yoo & University of Nevada, Las Vegas, 2011). This is of particular importance during a pandemic or crisis, as companies can selectively target products at their customers and tailor offers that would seem more essential during this period.
Furthermore, loyalty programs work as an incentive by creating avenues and benefits based on cumulative purchasing over time. This, in turn, encourages consumers to shift from myopic or single-period decision-making to dynamic or multiple-period decision-making. The encouragement of repeat buying improves retention rates by providing incentives for customers to purchase more frequently and in larger volumes (Magatef, 2015).
The end goal for customer loyalty programs is to inspire a positive emotional experience accompanied by a physical attribute-based satisfaction and perceived value of an experience, which includes the product or services that they purchase. During a pandemic or an economic crisis, it is beyond paramount for businesses to nurture and protect this sentiment.
Fighting the Economic Crisis
As the COVID-19 pandemic is still in full swing, several businesses have tried to use independent solutions to counteract the overall economic downturn. One of the hardest-hit industries has been the airline sector, as travel has been severely restricted globally, only allowing for essential services to run.
Currently, the US airline industry’s estimated loss is at $35 billion net losses in 2020 alone (Airlines for America, 2021). American Airlines, using their already established loyalty program, American Airlines’ AAdvantage program from the 1980s, played a vital role in assisting in alleviating the financial burden and safeguarding their interests. This was achieved by using almost raising $30 billion as collateral from its loyalty program (Pascual & Cain, 2021). This is only possible because most airline loyalty programs are usually four times the value of the airline itself (Bailey & Simple Flying, 2020). This has allowed American Airlines to secure its financial position and be able to be more attentive to the needs and requirements of their loyal customers so they can reinvigorate travel interest in the future to their target market.
Within the confines of the travel industry, the hospitality industry also suffered severe effects from COVID-19. Recently a survey commissioned in Japan looked at the impact that COVID-19 had on its tourist sector. The number of tourists who visited Japan drastically dropped from 2,496,568 in October 2019 to 27,386 in October 2020 (a decrease of 98.9%) (The Japan National Tourism Organization 2021, 2021). As a result of this, Japanese hotels, particularly several Five-Star hotels, needed to create strategies for trying to promote business for their establishments. A six-pronged approach was used; this included;
1) Emphasizing cleanliness and safety
2) Using signature stories
3) Providing cultural and seasonal offers as the new normal
4) Developing new takeout menus and delivery
5) Recommending staycations and daycations
6) Improving branded loyalty programs
Focusing on the last approach, the hotel chains used various schemes to attract their loyal customers by incentivizing higher points that would be received at certain periods of the year. Another tactic utilized was offering potential upgrades for rooms or a focus on giving its loyal customer more benefits, such as free drinks or free restaurant meals (new take-out menus), all in conjunction with COVID-19 regulation (Nakai, 2021). This emphasis was predominantly aimed at its most loyal customers.
Another sector that was affected during the COVID-19 crisis was the retail sector. Some argue that it wasn’t as severely affected as other industries due to its core foundations and user interaction. This is due to many retail companies already operating in a cross-platform environment, whereby internet stores or mobile applications are easier to implement in a crisis or pandemic situation. As a result of this transition from a physical to a digital platform, many companies focused on strong marketing strategies to retain their customer base and reward their loyal customers. This was also supported by the integration and adaptation of digital loyalty programs instead of traditional card-based ones. Also, by the use of customer relationship management processes, many companies were able to specifically target their customer base with effective communication and sales offers during this period (Linina et al., 2021). Notably, ascertaining customer feedback was paramount as it allowed companies to react to the changes in their customer needs in a changing environment. This changing environment plays a heavy factor as many individuals were forced to work from home, which in turn has a massive impact on consumer behavior (Puttaiah, 2020).
How to Safeguard your Loyalty Program against another Crisis ?
Out of all moments of great crisis, valuable lessons are always available to be learned. Many businesses have used this rationale to create better solutions for their customer base. By safeguarding their interests, particularly those customers who actively participate in their loyalty program, financial losses can be alleviated and kept to a minimum. Adaptability to changing commercial environments is vital, as more than ever, businesses are adopting online and digital modalities in which they offer their services. A recent study done in the Czech Republic has shown that up to 63% of individuals opted to use online shopping as a means for them to shop for their groceries in 2020 (Bauerová & Zapletalová, 2020).
Other methods have been established to help loyalty program users get the most out of their programs, as some companies have provided extra features with their services. These include;
1. Offering home deliveries
2. Incentivize home deliveries with bonus rewards
3. Promote solidarity between your customers with eGifts
4. Creating contactless payment options such as mobile payments or GooglePay
Further optimization of features that impact the consumer is also of utmost importance. This can be related to loyalty programs being re-examined and further refined, so the user experience and features are up to date and in time with the current situation. Also, companies can strive to overhaul their approach to consumer behavior by diving deeper into the world of digital platforming and payment methods.
During economic crises, loyalty programs have been the staple in helping businesses retain their loyal customer base and safeguarding their interests for the future. Not only are loyalty programs a wealth of customer data and a bridge of communication, but they also provide heavy insight into consumer behavior. This insight is vital to being able to prepare businesses in the event of scenarios such as the one we are experiencing. As long as businesses listen to what their customers want and pay extra attention to maintain their standards of operation, normal fiscal conditions will return, and perhaps with even a higher rate of growth following thereafter.