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Breaking Loyalty - Part 1: Unraveling the Loyalty Crisis

• Mike Giambattista, Mike Ribero • Season 2 • Episode 40

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What if the loyalty programs you rely on are actually failing you? Join me and loyalty expert Mike Ribero, the architect behind Continental OnePass and Hilton Honors, as we uncover the troubling realities facing the loyalty industry in our first installment of "Breaking Loyalty." With member satisfaction plummeting below 50% and a tidal wave of negative social media sentiment, it's clear that something is seriously amiss. We dive into the financial conundrum where U.S. businesses spend nearly $80 billion annually on loyalty programs while grappling with a staggering $125 to $150 billion in unredeemed points and miles. 

Discover the root causes of these issues as we dissect the evolution—or stagnation—of loyalty programs across travel, retail, and dining sectors. We highlight the critical missteps brands have taken by neglecting both the rational and emotional needs of their consumers. Mike and I stress the importance of continuous improvement and the reciprocal nature of personal relationships in fostering genuine loyalty. We also discuss the adverse impact of reduced human interaction due to technology. Tune in for actionable insights and practical solutions designed to rejuvenate and transform loyalty programs for better customer retention and satisfaction.

Mike Ribero:

One of the ideas behind loyalty was building a personal relationship. Personal relationships are inherently reciprocal. You give, I give right. In today's world, brands expect you to be loyal, but are they reciprocating in any way? Are they showing any loyalty to you If you stop flying for a couple of months because you're sick or you had to take some time off, and then you try to come back, you're bucked down to another level and they don't care.

Mike Giambattista:

I'd like to welcome you to a three-part series we're calling Breaking Loyalty, and you'll find out why we chose that name in a little bit. Loyalty and you'll find out why we chose that name in a little bit. But for the most part, what we think we want you to understand right up front is that this is not a series of rah-rahs. We're not going to spend three parts talking about success stories. Rather, our intent here is to do something that we feel the loyalty industry really needs, and that is be instructive. Let's talk about things that are actionable because they need to be talked about. To help me with that conversation is someone who has architected, designed, fixed more loyalty programs than you can shake a stick at, has his name on some of the biggest ones in the industry. I'd like to welcome Mike Ribeiro to the conversation.

Mike Ribero:

Hi Mike, thanks for having me on. This is obviously a subject matter I'm very passionate about and I look forward to the conversation.

Mike Giambattista:

So can you tell us a little bit about your background? I skimmed high level, but I think what you've done specifically is going to resonate with so many of our listeners.

Mike Ribero:

Sure, I'm actually one of the original architects of modern day loyalty. I guess you could say that that might date me a little bit, but after starting my career at Procter Gamble in brand management, I found myself in the airline industry and led one of the teams that created the Continental OnePass program. It was the combination of the Eastern Airlines and Continental Airlines loyalty programs, and it was a very innovative program at the time. It was the first to offer two tiers of rewards, a Sabre level that kind of paralleled the fair market the regular fair market. It introduced you could buy miles so you could travel when you wanted, and it was the first to have a branded credit card where you could earn for spending in other areas.

Mike Ribero:

From there, at an age where I was too young for the job, I became the chief marketing officer at Hilton Hotels Corporation Hilton Worldwide now and created the Hilton Honors Program literally from the ground up, and that posed some really unique challenges in that, unlike the airlines, hotel companies typically don't own all their hotels, and so you had to create a completely different economic system to make it work, and we were able to do that. Since then, I've worked on probably 20 different programs, from the insurance industry to financial services, entertainment, including Warner Brothers and Sega, and companies like eBay and E-Trade, helping them build, drive customer behavior and create loyalty. And I more recently started really kind of thinking about loyalty again and realizing that I believe the loyalty system is broken and tried to develop some solutions to the issues that are facing the industry with the creation of a company called Reach, where we develop some unique approaches to address some of the problems that I think the industry has to address, and quickly, to maintain its viability.

Mike Giambattista:

So full transparency. Mike and I have known each other for three or four years. I've had a pretty close view as to what reach is all about, and it's pretty exciting technology, but that's not what this is about. This is about fixing loyalty because we both believe and I think anybody who will, who will give you a uh kind of sidebar conversation and loyalty business, will admit that it's broken. The thing is, I think a lot of professionals and, by the way, this industry is populated with some very, very smart people understand this broken, but may not have a full understanding to what extent. So we want to structure this in a sensible way. We're going to spend episode number one talking about what went wrong and why. Episode number two is going to focus on what customers want and what brands need, and episode three we're going to get around to the fixes. What does fixing loyalty take? So, for this first episode, what went wrong? I think it might be helpful to talk about the current situation, mike, and how we got here.

Mike Ribero:

Well, it all started, mike, when I started looking into member satisfaction as it relates to their loyalty program and realized that for several years now, member satisfaction has gone well below 50% across every conceivable industry. There aren't too many businesses that can succeed when satisfaction is under 50%. And then that was further underscored and the negativity around it really came into focus when you look at social media sentiment, where 89% of social media sentiment around loyalty programs today is negative, making only 11% positive. Digging down deeper into the causes of it and what the challenges are, the increased level of complexity and restrictions trying to manage growth has resulted in skyrocketing cost of loyalty program operations. So today it's almost $80 billion a year that US companies spend on operating their loyalty programs and it represents 25% of the typical marketing budget for the companies that have them. Almost 90% 92% of companies have some kind of loyalty program. 90, 92% of companies have some kind of loyalty program.

Mike Ribero:

But the real concern, I think, mike, is the fact that if you look at in the US alone, the liability that has been created by unredeemed points and miles, you're looking at an economy that's probably the size of the 55th to 60th largest economy in the world. It's $125 to $150 billion. That's the estimate of unredeemed points and miles in the US today, and that's a concern because redemption rates are continuing to decline and with US consumers accumulating roughly $50 billion worth of loyalty currency every year, that number is going to become unmanageable here fairly quickly, especially for those companies that are publicly traded where the reserves against those unredeemed points and miles shows up as a big, big chunk of their short and long-term liabilities.

Mike Giambattista:

Can you just repeat the number you said a moment ago how much accumulated.

Mike Ribero:

repeat the number you said a moment ago how much accumulated unredeemed points and miles are there in the US right now ballpark it's between 125 and 150 billion, and some estimates have it higher. And if you think about it, Mike, with roughly 16 to 18 billion of the 50 billion that people are accumulating annually continuously being accrued, that number is just going to continue to get bigger and with redemption rates continuing to decline, that number is going to grow each year, and so you're going to get to a point where it's just not feasible to maintain that level of reserve.

Mike Giambattista:

Just to put a finer point on it. We've had this conversation before, but the loyalty programs for a couple of the major airlines, the value of the loyalty programs, exceeds the value of the actual operating airline. So you can imagine what would happen if, for instance, an accounting rule came down from whoever they come down from, that said that all of that liability that is right now held in reserves on your balance sheet has to be dealt with within some period of time. You'd see a big chunk of this economy go dark Right.

Mike Ribero:

And again, it's getting harder because, if you look at the airlines as an example, their load factors are significantly higher because there's fewer flights, so flights are fuller. There's less inventory to play with when it comes to redemption for redemption purposes, and so they either have to displace a paying customer, which they hate doing, or or frustrate them, and unfortunately, there's much more frustration taking place now and loyalty is being affected. There was a recent study done by McKinsey that showed that net promoter index for programs are down significantly for airlines, hotels and crews, where the people willing to recommend the program has dropped precipitously from 2021 to 2023. I think people are starting to feel the impact of not only the fact that their currency is being constantly devalued and they can't use it when they want to, but the frustration associated with trying to obtain value from it has gotten to the point where people are just forgetting about it.

Mike Giambattista:

I have a sneaking suspicion that if you talk to a loyalty professional right now and I'm the first to admit, I think that people in loyalty are some of the smartest people in business, because if you're good at it, you have to think about almost every aspect of business to have a successful loyalty program operating. But I think a lot of professionals would acknowledge that loyalty is broken on some level, but I don't think that many people see just how broken it is, which begs the question how did we get here?

Mike Ribero:

Well, there's no easy answer to that, but the kind of the overriding reality is that in the almost 40 years since the programs were first introduced and became part of the kind of fabric of ongoing brand marketing, they really haven't evolved, really haven't evolved despite the fact that you've had a massive level of social, economic and behavioral changes that have taken place since the mid-80s, and that's, I think, one of the roots of the problem. We have changed just by virtue of the number of demographic or generational segments that a company has to address in today's world, the amount of technology that's been deployed and its impact on human contact and things like that. Yet loyalty programs, who are in a perfect position to lead and facilitate these transitions, have been kind of oddly silent in their role that they've played.

Mike Giambattista:

How so? Can you describe that a little bit, because I think that's really interesting? Again, referring to a lot of people I know who work in this industry, we're all very forward. They are I'm a sidelines guy, I just comment on people doing the actual work but all very forward-looking people. These are people who have a really good handle on the technological capabilities, are trying to figure out the smartest ways to audit existing programs and make them more efficient. But when you say that loyalty programs and the people behind them aren't a perfect position to lead that discussion, what do you mean by that?

Mike Ribero:

Let me give you two examples, mike.

Mike Ribero:

Number one is originally, loyalty programs were developed with the idea of providing reward and recognition, hitting the rational and the emotional side of a person and learning about them so that you could forge a more personal relationship.

Mike Ribero:

The data component of loyalty was critical.

Mike Ribero:

That would be a very easy way of addressing the level of multi-generational segments you have today and being able to understand the needs of millennials and Gen Zs as much as programs do today for boomers, who were the core audience when they were first launched. Similarly, if they had focused on the data component, loyalty programs represent the ideal solution for the data privacy issue today, because of the trust they are supposed to be able to build and the fact that they have a currency that they can use to help their best customers or members monetize their personal information in a way that still gives the customer the wherewithal to decide who they want to share that information with and how they share it. And so those are two areas where loyalty could have been at the forefront of solving a real problem and challenge for the marketing industry today, where they have been at the forefront of solving a real problem and challenge for the marketing industry today, where they have been all too silent and haven't really stepped up to the opportunity that's been presented to them.

Mike Giambattista:

It sounds to me like what you're saying is they? Let's just paint a really broad stroke. Here they major loyalty programs. A really broad stroke here they major loyalty programs just haven't evolved according to what consumers' needs are right now. I'm paraphrasing so you can correct me if I'm wrong, and what the data might allow us to do.

Mike Ribero:

Absolutely. I mean they haven't evolved period number one but the evolution that has taken, the changes that have taken place, have been more to manage growth and have resulted in things like increased complexity, more restrictions and the devaluation of the currency, which I think all could have been avoided had the programs been more fluid and been more responsive to the changes in consumer and societal behavior. And I think a big part of that, mike, was the fact that loyalty programs were designed for the travel industry specifically initially. And one of the reasons they made so much sense for the travel industry was because of travel as a currency itself.

Mike Ribero:

Travel is aspirational, it's appealing, it's romantic, it has emotional elements that make its perceived value far greater than its actual value, and so that's what made the currency attractive. When you try to apply that down to retail or restaurant or other services and products, it just doesn't translate the same way. And yet those companies just tried to replicate what the travel industry did, and that's why so many of them have to go back to the travel industry for the currency. So, and that's what's created that secondary market of selling currency, selling miles and points to third parties, which is a part of the problem, by the way selling currency, selling miles and points to third parties, which is a part of the problem, by the way, a groundswell starts small, quietly building into something powerful, unstoppable.

Mike Giambattista:

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Mike Ribero:

their bonus. I think it's the latter, mike. I think it was a focus.

Mike Ribero:

Originally, loyalty programs were created to forge a relationship with your best customers in a way where you created an opportunity cost by virtue of answering two basic questions what do I get for doing business with the brand? How do I feel about doing business with the brand? How does the brand make me feel? In the quest for profit, they forgot about the how do I feel part and focused exclusively on the rewards as a way of driving short-term revenues. They became so myopically focused that they forgot about the fact that they had to offer continuous improvement to keep the customer engaged. That was one of the basic principles.

Mike Ribero:

There were four basic principles, mike, that when we were building or designing the original loyalty infrastructure, it was create an opportunity cost for non-exclusive use of a brand. Address both their rational and emotional needs, because you need them both to forge an effective relationship. Accumulate data so you get a better sense of who each customer is, and use all of that to build trust Again. With that, in order to keep them engaged, you had to make a commitment and demonstrate a commitment to continuous improvement.

Mike Giambattista:

Which one of those four do you think we fell apart on the worst?

Mike Ribero:

I think you can make an argument that there is no more clear opportunity cost. The focus has been on rewards and not recognition or rational factors, pricing discounts, and that's why I think many loyalty programs have become reward programs and the worst of them have become discount programs in disguise. And then I think that undermines trust. And because of the failure of the industry to evolve, there had been no continuous improvement. So that doesn't give consumers any level of permission to believe that things are going to get better. So the more frustrated they get, the more they give up and say the points aren't worth anything or they're being devalued to such a certain level that it really doesn't matter and um and, to paraphrase what a consumer might be thinking, they don't care.

Mike Ribero:

Thus, exactly, and and again. You know, one of the ideas behind loyalty was building a personal relationship. Personal relationships are inherently reciprocal. You give, I give right um in. In today's world, um brands expect you to be loyal, but are they reciprocating in any way? Are they showing any loyalty to you If you stop flying for a couple of months because you're sick or you had to take some time off, and then you try to come back, you're bucked down to another level and they don't care.

Mike Ribero:

And again, mike, the other kind of real concern here is over the last 20 plus years, with the advent of technology that's been implemented, what we don't realize is the more technology you implement, the less human contact you have. The less human contact you have, the harder it is to form an emotional bond with a brand and, as a result, we've lost that critical component. So when you are asking the question, what do I get from the brand? Yeah, I get my points and everything, but how do I feel? Or how does the brand make me feel? That part has for a lot of brands, many brands, I'd say most brands has been completely forgotten.

Mike Giambattista:

Just evaporated. Well, and it becomes even more complex when you think about the differences in the way some of the younger generations kind of demand to be interacted with Gen Z and millennials. They grew up with an entirely different paradigm for what interaction and engagement really means, so they might be a little bit more comfortable with something that's purely digital. But what you find out you look at the data is that the interpersonal relationships that they have with brands that are solid are very, very, very deep.

Mike Ribero:

And they're all driven by personalization, which is important to them and which is where loyalty I think is failing fairly significantly and which is where loyalty I think is failing fairly significantly. And again, it really is about changing the paradigm and I don't want to get ahead of ourselves here but it really is about changing the mindset. You're not a customer, you're a partner of mine and there's value you can add to my business that extends beyond you making a purchase on occasion, and if I can harness that potential, your value to me can grow exponentially. And I think that's kind of the first realization that we need to make. And then we need to go back and say, hey look, things have become far too complicated.

Mike Ribero:

Programs have done a very poor job managing their growth. Instead of trying to innovate, they've added more complexity, they've added more restrictions, they devalued the currency. They have not done a good job of managing growth. Look, things happen. Covid happened and other things happen. Those are catastrophic situations you have to recover from. There's been almost a systematic devaluation of currency as a way of managing growth, as opposed to looking for other ways, expanding the scope of currency utility and other things that could have easily solved that problem. And I look at it for example, american Express, what they've done with Amazon. I look at it for example, american Express, what they've done with Amazon, where you can pay with points on Amazon. The value of expanding the utility of an American Express point was so great that people are willing to sacrifice 30 cents on the dollar to be able to do that.

Mike Ribero:

Isn't that crazy 100 cents on the dollar. They're getting 70 cents on the dollar and that's still their largest redemption area, because it adds true value to the customer.

Mike Giambattista:

And that's still their largest redemption area, because it adds true value to the customer. So I'm thinking back to the original four premises and goals that you outlined a moment ago Creating opportunity costs for not joining, making sure the program has rational and emotional needs that are addressed and values accumulate valuable data. And then to build trust. And it seems to me that you could overlay that kind of grid if you will onto any loyalty program that's out there today and grade them on it, and you'd find at least one of those actually probably more like of those that are sorely lacking, absolutely. So again, it begs the question does this require an entire rethinking of what loyalty is and should be, or can fixes be achieved? Stay tuned for episode three, when we'll tell you the answer to this. Can fixes be achieved Stay tuned for episode three, when we'll tell you the answer to this by implementing incremental improvements on existing programs.

Mike Ribero:

I think, again, you have to start somewhere, and the loyalty industry is so big and it has so much inertia behind it that trying to make a wholesale change is something that nobody's going to buy. You have to do it incrementally. I think one of the big problems we have, and one of the reasons we've gotten here, is we're several generations removed from the people that develop the programs for most companies, and so you have program managers that may not completely understand the architecture of their existing system and certainly don't want to break anything, and so I think wholesale changes are, at this point in time, not a real, feasible strategy. So you have to look at things incrementally and everything and again, it's not rocket science, mike Everything starts with the customer and thinking about how does a customer want to be treated?

Mike Ribero:

There's tons of research out there from Bond, from Ebo, from others that tell you exactly what customers want. The challenge that companies face is being able to provide customers with what they want in innovative ways that also meet the needs of the brand, and there's ways to do that. We figured it out in certain areas how to deal with the data privacy issue and turning that data privacy challenge into a competitive advantage, how to deal with the incentive side of things, the rewards, in a way that is a win-win, finding different ways of addressing the complexity issue. Unfortunately, one of the, I think, the errors that the problems that exist today is a lot of companies tailor their platform to the less than 1% of people that are going to try to cheat them, as opposed to the 99% that are acting, that want to engage with the brand and do so in a way that's not frustrating. And so, again, it's really about thinking what it's really about collaborating with your customers and finding a solution, working in collaboration, that works for everybody.

Mike Giambattista:

So I want to recap a couple of things and then we can touch on a couple of final points here. But the four main premises, goals of a loyalty program. I don't think you can overstate the importance and this applies to every single loyalty program out there. A couple of minor variations to the theme, but listen to this again. Goal number one creating an opportunity cost for not joining.

Mike Ribero:

Or for non-exclusive use For non-exclusive use. Yeah, If you buy another brand, you should feel some level of pain for not having bought the brand, that you belong to their program and again there'll be situations where the brand's not available, that they don't have a flight to that particular market. But there should be a cost that you feel when you are forced to buy away from the brand.

Mike Giambattista:

Point number two, goal number two rather needs to address rational and emotional needs.

Mike Ribero:

Yep, if you're a member of the program, you should feel like you're treated better, you have unique experiences, that you're recognized for the value that you give, that you're treated as an individual, not as part of, and that the company knows enough about you and this that gets into the data part of it where they can have an ongoing conversation, where it feels like you're talking to a friend, not an automated attendant or a chatbot that can't answer your questions and has no empathy.

Mike Giambattista:

And I like the way you just put that. Every one of those factors you just mentioned were emotional ones, how it made you feel, because there's lots of ways to provide for rational benefits but you find out that, sum total, it's the emotional ones that really pay the dividends.

Mike Ribero:

And the ones. Those are the ties that bind right. It's easy for somebody to, for a competitor to buy you out of the rational side of the equation. They can always price it cheaper, provide more. But it's very, very hard to buy somebody, to buy the way somebody feels, based on a history that you have with that brand.

Mike Giambattista:

Thirdly, accumulate data.

Mike Ribero:

Absolutely. And again, loyalty programs are ideally positioned because there's a mechanism to remunerate the customer for sharing information that's actionable and that is guaranteed to be compliant with GDPR, CCPA, any of the new privacy standards Because if you're sharing data directly, I as an individual own that data and can do what I want with it. It's really a function of me trusting a brand enough to share it with them.

Mike Giambattista:

Right, and then, lastly, use those mechanisms to build trust. Lastly, use those mechanisms to build trust. Yep.

Mike Ribero:

And there's. Steve Jobs said, a brand is simply trust, and again, trust is an emotional driver, right, trust is the door opener, trust makes things possible and without it you're not going to get much headway, make much headway. And then, obviously, there's the underlying thing of continuous improvement, which is what helps keep people engaged.

Mike Giambattista:

Yeah, and put another way, that there is no such thing as one size fits all loyalty. There's not even one size fits most loyalty, unlike my sweatpants, which you can fit. Basically anybody in Loyalty today demands to be personalized to a level that will create an emotional response, and that can't happen if you're applying the same old criteria that have been applied to loyalty since day one.

Mike Ribero:

And the best example I use and people don't even realize this is a loyalty initiative but vanishing deductible for the insurance industry, where every year you stick with a company, your deductible goes down to the point where it's zero. Now, even though you might be able to save on insurance for another company, there's that perception that I'm going to lose my zero percent deductible and that becomes a huge opportunity cost for switching. So there's a lot of different ways to skin this cat and it just takes a little innovation and knowledge of a specific industry to decide what kind of behavior and what kind of psychology you want to implement to forge the strongest relationship possible.

Mike Giambattista:

Mike, I can't thank you for the time and the thinking Very much looking forward to episode number two, part two of Breaking Loyalty. We're going to address what customers want and what brands need, and we're teeing all this up because the third episode in this series will address fixing loyalty with actionable practical steps that companies of all sizes, in all verticals can take, understand and apply and improve their loyalty programs. Mike Ribeiro, thanks a million for joining me.

Mike Ribero:

Sounds good, See you. Part two.

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