How Amazon Prime is the next evolution of Loyalty Programs! And why other loyalty programs don’t work.
Most people do not consider Amazon Prime as a loyalty program. It is, in fact, one of the best loyalty programs that there is. That was the reason why in my last post, I mentioned that Amazon does not have a loyalty program. When I asked people to list three top loyalty programs, the usual answers I got were credit card loyalty programs, some specific retail loyalty programs or the likes. Only 1 of the 200 odd people I asked, mentioned Amazon Prime.
So, are programs like Amazon Prime, Ola Select or Flipkart First loyalty programs or premium subscription programs or something else? What are the traditional loyalty programs? Why do most loyalty programs today don’t work? What is the difference between traditional loyalty programs versus the new age programs like Amazon Prime? Why does Amazon prime work so well, when similar programs like Ola Select or Flipkart First don’t?
Evolution of Loyalty Programs
The simplest form of loyalty is probably giving a discount to the customer on their purchases. This can be found in your local kirana stores today as well. They recognize you as their loyal or repeat customer and give a discount on the total amount. This is a form of direct discounting to reward loyalty. While this is practiced in many places even today, direct discounting at scale is no longer considered as a loyalty program.
The first form of organized loyalty program started sometime in the 1700s. It was in the form of copper coins. These copper coins were given to customers on purchases. They could exchange or redeem these on their next purchase. The next evolution was a form of a stamp in the 1800s. This was similar to copper coins, where stamps replaced the coins. Both these were a different form of discount coupons. Loyalty programs evolved from direct discounts to discount coupons model.
In the 1980s, American Airlines came out with their frequent flier program. On every transaction, customers would get points based on the amount spent. After reaching a certain level, they would be able to redeem these points for different rewards. With this came the era of the rewards program.
Rewards Program as Loyalty
Soon enough rewards program got popular. Other airlines and retailers followed with similar programs. The credit card companies also came with their version of rewards program or cash back program. It was similar to the rewards program of the airlines. Customers would get points on every purchase. After a few days or some spend, they could redeem the points for cash back. These credit card reward programs got popular as they were applicable across all spends and not limited to a specific airline or retailer.
The concept of loyalty programs has changed over a period of time. While direct discounting, discount tickets/vouchers are still common, they are considered business as usual now or sometimes taken as a pricing strategy. They are not to promote loyalty but actually to promote sales. Every other competitor is also offering similar discounts and vouchers.
The same is the case with rewards or cash back program today. They are everywhere. They have become business as usual. Every credit card is offering a rewards program. Every airline has got a frequent flier program. Every retailer gives you points for purchases. So where is the differentiator? What value add is your loyalty program adding to your customers? Or more appropriately, do your customers care about the loyalty program?
Every product is being designed to cater to and often promote impulse purchases. E-commerce or retail stores are designed to attract customers to make impulsive purchases. Discounts, offers, and sale are promoted multiple times a year. Even airlines promote low-cost fares to promote and cash on the impulsive purchases.
Today, we are impulsive and we take decisions to satisfy our immediate cravings. Earlier we had immediate access to only a limited stuff. These would satisfy our needs, but not our urges or wants. For that indulgence, we had to plan, and wait. Vacations were planned months in advance. We would save for these vacations and then indulge in it. Today, there is an immediate access to everything. While long vacations are still being planned, most vacations are replaced by weekend getaways. Not only can we fulfill our needs, but also all our wants or urges, almost instantly.
While as a generation, we crave for instant gratification, the loyalty programs are designed to delay gratification.
Amazon Prime has inverted the rewards program on its head. The program aids in promoting impulsive behavior. When there is an urge to buy something, it is unlikely that you would want to wait 3 days to have your hands on them. Also, would you actually go and add more products to your cart, so that you actually meet the minimum amount, to be eligible for free shipping?
Our impulse shopping habits are different. She wants that cute little black dress now, like immediately. There is nothing else on her mind. By being a prime member, she can get that dress the very next day. She also does not need to get a minimum amount on the cart to be eligible for free shipping. Every time the shipping is free and it is delivered the next day.
Is instant gratification the only factor for the success of Amazon Prime? Even Flipkart First offers the same. Why has that not worked as well as Prime?
Amazon Prime is not a rewards program, but a privilege program.
After rewards programs, the next evolution of loyalty programs would be privilege programs. Some credit cards have slowly moved to privilege programs, along with giving reward points. Today, you ask for a credit where you get free airport lounge access or get golf access.
There have been VIP membership programs in the past, giving you access to exclusive events or places, which otherwise is restricted or has an entry fee. These membership programs also gave discounts at clubs and restaurants. Traditionally, these programs have been at a local scale targeted to a small niche audience. Now, these benefits are being offered by credit card companies at a larger scale and wider audience.
Amazon Prime is a very well designed privilege programs. The fact that Amazon has a bunch of offerings gives them a leg up. Irrespective of that, the program is designed to cater to needs and wants of different customer segments. For those who shop often or are used to impulse shopping online, the free 1-day shipping with no minimum purchase limits fulfills their need. For those who seek value, Prime membership gives them access to a variety of exclusive deals and discounts. This also further promotes the impulsive purchase behavior. For those who seek exclusivity, there are exclusive products which are launched first to prime members only.
Lastly, Amazon is giving access to the entire content of amazon prime videos. Amazon is still building their content. They can not compete with the likes of HotStar or Netflix yet. Giving it free to all the prime members is a great way to build a consumer base while getting insights into consumer’s likes and dislikes. These insights are then looped back to build more original content for members.
Amazon Prime is a privilege program having a suite of offerings. In fact, they would be adding more accesses and offerings to the already popular program.
Other privilege programs
Contrary to Amazon Prime, Flipkart First only focuses on free 1-day delivery aspect. They are leaving a lot on the table, which can be bundled and given to their loyal customers. In addition, Flipkart also faces another problem. They are popular in tier II cities. One-day delivery is not possible in these places. Amazon has arrested the market share in the Tier I cities. Now they are going for the kill, by rewarding their loyal customers. They are actually losing money on the average prime customer. That is not a problem though. They are focused on the long term.
What do you like to talk about, privileges you are getting from a brand, or the reward points you have accumulated?
Loyalty vs Privilege
We and our behavior are driven by needs. As Maslow’s pyramid had laid out, these needs can be divided in to 5 layers. The fourth layer is about our need to seek self-esteem or respect. There are two versions of esteem, inner and outer. As human’s we always strive to seek this external validation to gain self-respect or at times to boost our ego.
Between a privilege program, rewards program and loyalty program, you are more likely to talk about the privilege program to your friends and colleague. Hence, privilege program are perceived as elite, higher in value and offering than a rewards program.
In fact, people are perceive it to be so high, that they are ready to pay a fee to be a part of the program. Amex cards have a higher annual fees. Getting an Amex card symbolizes that you have arrived. The privilege extended by the program is sort after. And you don’t mind paying an annual fees to get this privilege. Similar case with Amazon Prime membership. It is not free.
Going against the norm of gifting rewards programs, privilege programs asks customers to pay a fees to get these privilege. That also works as a buy-in from the customers, and as a trigger. Earlier, some rewards program used to have a fees associated with it. That was the time when rewards program gave a boost in self-esteem. Now, all reward program are available for free, and in plenty.
The entirety of a loyalty program is a pretty wide topic and tough to cover in a single article. It also varies with respect to businesses and industries. A cab hailing company needs to think differently, from an online grocery or an online payments company.
That said, in part 2 of this article, I will talk about “How to build a well-designed privilege program?” What are the core aspects to consider when designing a program? And more importantly, is it really a top-up program which can be built like we see rewards program today?
By the way, what are your views on Reliance Jio Prime? Is it a privilege program? Telecom business is a commodity, even more so than any e-commerce marketplace. What did Jio do right? Do share your thoughts. I will be presenting a case study of Jio in the part 2 of this article.
This article was first published on YourStory here.