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The loyalty disconnect of customers

Learn how its critical for your business to build a loyal customer base by avoiding the loyalty disconnect
David Friel

/ Last updated on 16th October 2017

For some merchants and businesses, Groupon and its many imitators have been, without a doubt, a godsend in terms of short-term revenue. One early success touted by Groupon was a $25 ticket for a Chicago architectural boat tour that was sold for $12 in 2010. Groupon dealt 19,822 tickets in eight hours and split the $238,000 in revenue with the boat tour company. Without Groupon, that $119,000 cash infusion would have likely been lost to the tour operator in the form of empty seats. But how many of those $12 boat riders are apt to come back at full fare? And how did those hoards of casual Groupon day-trippers (who were quite possibly bored by architecture) affect the experience of loyal boat tour customers who had paid full fare?

Related: 21 ways to get your first 100 customers

It’s perhaps unfair to single out Groupon for these kinds of problems because the rise of the Internet has created similar problems in almost every industry. Online purchases of everything, including even college degrees, have made customers so price-focused and lacking in loyalty that merchants have responded with any number of price-dependent gimmicks to win them back. The most common are the reward based “loyalty” programs, which don’t create relational loyalty at all but merely drive repeat business, at ever-lower prices. With the help of e-commerce, rewards programs have moved far beyond what they were just a few years ago when Subway would punch your ticket for a free hoagie after ten purchases. They have grown more sophisticated, more complex, and more costly.

Many industries have begun to head down the same road that the hotel industry took more than fifteen years ago. At first, e-commerce was greeted by the hotel industry as a potential cost savings bonanza. Since then, as the number of hotel reservations made online has crept up to 70 percent, e-commerce has instead evolved into a grim necessity at best, and a ruinously complex headache at its worst.

Expedia, Orbitz, and Hotels.com, known collectively as OTAs (online travel agencies), have become the tails wagging the dog in the travel industry. When the industry was hit hard following the terror attacks of September 11, 2001, OTAs scooped up unsold rooms from struggling hotel owners and resold them to bargain-hunting travellers. By training us to think regarding comparative price, location, and basic amenities, e-commerce has tended to obscure the importance of service, staff, and reputation related differences.

In the following years, hoteliers found themselves heavily dependent on OTAs for reservations, even as they were forced to compete with them in the sale of their rooms. Although the hotel companies eventually developed their own sophisticated websites in an attempt to recapture online sales, the price transparency driven by the OTAs forced them to match OTA prices or risk losing otherwise loyal customers to them.

A digital arms race eventually emerged, in which hoteliers, OTAs, and other online travel resellers have used increasingly sophisticated revenue management systems and teams to constantly monitor and tweak hotel rates, trying to gain an edge and squeeze just a few extra dollars from customers. The hotels’ reward-based “loyalty” programs had been one of their few competitive advantages, but now the OTAs are creating their own rewards programs.

So all the convenience, efficiency, and savings offered by e-commerce have greatly diluted whatever trust and loyalty might have existed between hoteliers and their customers. Lost in the process are the warmth-and-competence-filled contact, interactions, and relationships between guests and hoteliers that once resulted in relational customer loyalty. It was once cost-effective to fully staff a hotel with warm and competent employees capable of demonstrating worthy intentions toward the guests because those guests could be counted on to reward such treatment with their loyalty. Now the temptation of bargain prices, gained at the click of a mouse, has placed that model of hotel management in danger of extinction.

Similar changes have been visited on the airline and rental car industries, thanks to e-commerce and the influence of the OTAs. Groupon wants to spread it even further. Deflated by the public’s weariness with chasing daily deals, Groupon has launched an incentive program called Groupon Rewards, which the founder once proclaimed would make Groupon the “operating system for local commerce.” If it were to gain steam, Groupon Rewards would spread this logic of race-to-the-bottom discounting throughout the economy.

The power of the Internet to drive down prices while commoditising products and services provides evidence for the idea that there is something inherently inhuman about e-commerce. But that’s hardly the case. As we know from studies of the Internet’s effects on social life, it is easy to use computer technology to maintain rich friendships that don’t differ appreciably from face-to-face relationships. The closest previous technological analogue to the Internet was the telephone. An influential paper published in 2004 noted that the telephone, too, was initially greeted with concerns that it would damage loyal face-to-face relationships between and among friends and family. The effect, of course, has been the opposite. The telephone increased our ability to connect with people we value, even if they live far away, and it has also served to strengthen, rather than weaken local ties. 1

 

About the authors

Chris Malone is the Founder and managing Partner of Fidelum Partners, a research-based consulting and professional services firm that helps clients achieve sustained business growth and performance.

Susan T. Fiske is Eugene Higgins Professor, Psychology and Public Affairs, at Princeton University. She investigates social cognition—especially groups’ images and the emotions they create—at cultural, interpersonal, and neuroscientific levels.

Related: 5 Ways to build a customer focused business

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