Paula: Welcome to Let’s Talk Loyalty, an industry podcast for loyalty marketing professionals. I’m Paula Thomas, the founder and CEO of Let’s Talk Loyalty. Today’s episode is hosted by Phil Rubin, the founder of Grey Space Matters, an innovation and growth advisory firm in the US focused on driving profitable growth.
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Phil: Hi everybody, and welcome back to Let’s Talk Loyalty. I’m Phil Rubin, founder of Grey Space Matters, and your host for today’s podcast. Today’s guest is Rory Sutherland, the Vice Chairman of Ogilvy Group in the UK, and the founder of the Behavioral Science Practice at Ogilvy. Rory’s been with Ogilvy for 35 years, starting as a copywriter in the direct group, and then as a creative director.
In addition to his work at Ogilvy, Rory is a prolific writer and the author of several books, including The Bestselling Alchemy, the Surprising Power of Ideas that Don’t Make Sense. He also writes the Wiki Man column for the Spectator Magazine, that column being named after his first book, and he’s a sought-after speaker with a number of TED Talks to his credit.
Rory’s, a true intellectual instigator reflecting his unquenchable thirst for knowledge. He’s both provocative and remarkably grounded with a large dose of humility. You’ll realize this when you listen to him, read his writings, and at the same time increase your own awareness of the value in thinking differently.
Specific to loyalty in this podcast, it’s worth noting that Rory is the featured keynote speaker at the Loyalty Summit CXM this month in Zurich, which will feature leading brands and attendees from Europe, North America, and the Middle East. With that introduction, let’s get to talking with Rory and learning about the valuable differences between nonsense and nonsense, as well as logical and psychological.
Rory Sutherland, thank you so much for joining us today and welcome to Let’s Talk Loyalty.
Rory: Ah, it’s a pleasure. Thank you very much for voting me, you’ve, you’ve hit my hot topic.
Phil: Well, same here. So, uh, w with that, let’s get into it because we have so much to talk about and, and as always, never enough time.
So, Rory, we always start with the same question, and that is, what’s your favorite loyalty program? Or should I say, what’s your favorite loyalty scheme?
Rory: I was thinking about this and actually I liked lots of them. Um, some of them, by the way, which I admire didn’t work. I always thought there was a kind of brilliance, uh, to, um, the invention of the First American Airlines loyalty scheme.
Um, which, uh, we ought to acknowledge, uh, as the work of Bob Crandall, um, who, uh, not only effectively pioneered computer booking. He pioneered the loyalty scheme. He also came up with some mad ideas, which subsequently went wrong, one of which was a quarter of a million-dollar ticket that entitled Due to Free First-Class Travel on American Airlines for Life, uh, which was a brilliant scheme, which became so badly abused by some participants that they effectively had to apply private detectives to track people down.
Found cases of misuse so that you can actually deny these people any future, um, uh, future to the scheme. But for my real favorite, I’m gonna go back into the slight myth of time, not quite as far as Bob Crambles invention of the scheme, but to friends and family, which in the US was, I think pioneered by AT&T, uh, and the UK.
Uh, BT bought the rights to effectively the, the program. I think it was invented by a man called Ed Carter. So, we actually know the originator of the scheme. This, for the younger people among you effectively meant that with your phone company or long-distance provider, you could nominate, and I think it started with 10, you could nominate 10 long distance numbers.
The 10 numbers typically that you called the most or spent the most on calling and you received typically fairly newly discount of about 10% when you call any of those 10 numbers. Now, this fascinated me because it’s absolute proof of behavioral economics. In other words, to an economist, um, a much more attractive proposition would simply be to reduce the cost of all calls to anybody by 10%.
However, had you done that one, it wouldn’t have been nearly as exciting to the consumer bizarrely as engaging them and getting to choose the 10 numbers on which they received a discount. Secondly, it would’ve lost its meaning as a discount. Almost immediately people would’ve forgotten that calls were once 10% more expensive and you know, and across the board, 10% discount would’ve basically lost any kind of behavioral motive power.
After about six months, friends and family went on being engaging for years, you know, you’d occasionally agonize as to whether you had the optimal choices of 10 numbers, for example. And while it lasted, it was a brilliant, brilliant idea because it shows the difference between reduction in cost and perceived value.
It also exploited, I think, a slight bias, which is that most people. Most people’s calling patterns kind of followed the Pareto principle in that, you know, 80% of calls were to 20% of people they called. And so most people made the vast, vast majority of their calls to one of these 10 people. So, it made them feel that, oh, in my case, I’m getting particularly good value for money because I’m saving money on so many of my calls.
But we have to go back to that because it was, it was an absolutely perfect test case of what I call the science of knowing what eco… what economics is wrong about. And so, friends and family, although not perfect in many ways, it didn’t have much in the way recognition and so on and so forth. Uh, it was a wonderfully interesting pioneering scheme, nonetheless, for what it proved about human behavior.
And by the way, I’ve extrapolated from that the same argument. That governments should never offer tax cuts. They should instead promise a tax rebate at the end of every year because if you simply cut people’s taxes two years later, they’ve forgotten what the old tax rate was and they have no further gratitude.
Whereas the rebate paid annually would actually, um, get people highly attuned to the value of tax cuts for, you know, 3, 4, 5, 10 years. And, it would also probably get them to accept the fact that in extreme years, 2008, for example, maybe 2023, a rebate simply wouldn’t be parable, and that wouldn’t be perceived in the same way as a tax rise would be.
So, I think it would give government quite a lot more mobility and also would probably be valuable to many consumers because a lump sum payment is different from a regular but not very exciting reduction in out.
Phil: Very interesting. I love both of those examples. In particular, the tax rebate scheme. Underscores an idea that I have around loyalty, that part of what loyalty’s function is, is to merchandise all the best aspects of a brand.
Rory: Yeah.
Phil: And by putting that tax reduction in the form of a rebate, it gives the government another opportunity to merchandise that tax effectively, that tax discount in the form of a rebate.
Rory: I think really it, it, I think, concretizes it, it’s real money in a sense. Um, and as I said, it’s, this will be a much more intelligent approach.
I mean, there are other really interesting things. I mean, I agree with you that, that a loyalty program. Now we ought to, we ought to answer a, a bit of a question here, which is a few brand aficionados and people I respect greatly. In particular, Byron Sharp, author of How Brands Grow argues looking at the Berg Bass data that the most successful brands are those which have the most customers.
And because they have the most customers who have that brand in their repertoire, and those people tend to buy that brand more frequently within their repertoire, they argue that loyalty is actually a mistake because you’re concentrating discounts on people who would be heavy customers of yours anyway.
Now, I think the loyalty industry should answer that. Now, what I would say there of Byron Sharp is that he is perhaps making the is what fallacy in that that tends to be the pattern of expenditure in, um, FMCG, um, package goods. Okay? That doesn’t mean, however, that you can’t create differential value in many service industries in particular for the people who buy from you most frequently.
So I’ll give you an example where I think it’s a very intelligent value exchange. Okay? If you fly once a year, you know on and, and there are millions of people who do that, just that there are millions of people who never fly. Okay? The length of the check-in queue is obviously a factor, but it’s not actually a deciding factor in your choice of airline. It happens once a year going to the airport’s, a bit of a novelty. What the hell? It’s 40 minutes. It’s 10 minutes, doesn’t matter if you fly once every two weeks. Okay? Then the length of the queue becomes absolutely critical. In fact, you know, if you spend literally, you know, um, you can spend literally three or four years of, sorry, days of your year in aggregate queuing at airports. Well, that’s a problem. And so that understanding that frequent customers occasionally have a different need set to infrequent customers and having the ability to serve them differentially is, for example, really, really important. And it’d be silly to deny that. Um, Amazon Prime.
Okay. If you look at it that way, um, we ought, we ought to also talk about Amazon Prime stroke, Costco, stroke, uh, you know, all of those, what you might call pay one’s upfront, save many times schemes.
Phil: Yes.
Rory: In many ways, the simplest form of loyalty scheme that also acknowledges the fact, I think, which is that if you don’t have Amazon Prime, there’s a limit to how A, whether Amazon can have frequent customer.
And B, there’s a massive limitation on people shopping across the Amazon range. So put it simply, okay. Maybe regardless of their own wealth, a hundred people, let, let’s put it another way, okay. 10 people don’t mind paying a delivery cost once a month, but one person intensely, minds paying a delivery cost 10 times a month.
And so, it makes sense to, to disproportionately discount delivery costs by charging them in a different way to those people who are buying from you most frequently. For two reasons: One, it it enables ’em to buy from you frequently in the first place without becoming resentful. And two, it it, it encourages them to shop the range.
And we gotta remember, of course, it was introduced when people thought Amazon basically sold books. I can remem… I can remember actually in the very early days of Amazon when they started selling a book shelf and people thought this was hysterically funny and started reviewing it as if it were a book going, you know, I found the style somewhat wooden.
Now in days when Amazon is the everything store. Okay, that seems like a ridiculous reaction. But you’ve gotta remember, I’m old enough to remember the kind of late nineties when Amazon was just, the place where you went to buy your books and buying a CD rack from Amazon was, you know, so something, an anomaly.
And so, no, I mean, we. We, we, we have to look at this and understand that in many cases, um, differential, uh, uh, frequent customers either require differential treatment or appreciate differential treatment or expected, you know, that, that then aids the, that, that then aids an intelligent value exchange because there are things you can’t offer to everybody.
Okay? It would simply be uneconomical for an airline to allow everybody to have lounge access, and it would also render the value of the lounge somewhat meaningless. Okay? So, the question is, will you know, for whom do you differentially innovate?
Phil: And you talked, you touched on the, the notion of time in a couple of different places that…
Rory: Yeah.
Phil: That I think is also worth considering because your point about the airport cues as well as the foundational proposition of Prime, which was essentially removing that time gap from when UPS or FedEx or whatever courier was gonna deliver your package relative to going to the physical store to go collect your package and return home.
They started to blur the line as well as create certainty around, around that time and in my mind, the fee for Amazon Prime is analogous to what the air, what the smart airlines do in recognizing that second example, the person who flies every couple week or flies every week in that, yes, they’re willing to pay a premium to do business with that airline more frequently and aviate, the need to sit in a queue to check in to board, to, to retrieve their bags. If they check their bags, that seems very analogous to, well, no, I can get two-day delivery or even, you know, now same day delivery from, from Amazon.
Rory: And part of that trade-off is if you give us a greater share of your repertoire, okay, will give you differential value.
And so, now, obviously I think, you know, most of the Berg bass data comes from packaged goods. Uh, there’s a limit to how economical it is to offer loyalty programs for, uh, individual packaged goods for obvious reasons.
Phil: Yes.
Rory: You know, the margins simply aren’t high enough and so on and so forth. But what I do find so valuable about loyalty programs and so interesting is, um, the, in very way, in many ways, the kind of Galapagos Islands of experimental economics in the the, they create a parallel currency. Now, in some cases, what is interesting, and we find this in the UK, people prefer the loyalty currency to the cash equivalent. Now that seems irrational until you realize that the currency offers them the potential for guilt-free indulges.
You feel unless said, because you can’t use your Boots advantage points to pay the gas bill or to pay the electricity bill. Okay? You feel less guilty spending your points on a bottle of Chanel number 19 than you would do spending the cash equivalent on that thing. Okay. So, you know, there are all manner of psychological things going on where we quite like to be able to cookie each jar our wealth so that a certain amount is reserved for treats and another amount remains for staples and essentials.
You know, so what, what loyalty programs reveal I think about and also, so the other thing that they reveal to an extraordinary extent is how capitalism is not merely a series of one-shot anonymous transactions that ordinary human beings desire, relatedness and reciprocation and recognition with the people with whom they do business.
And when they do business with those people more frequently. Maybe that’s not true of packaged goods purchase, okay? But it’s certainly true of something like an airline or a restaurant or a hotel that if I do differently more business with you, I expect you to make it known to me that you are cognizant of the fact.
So, one thing we did, for example, when, when we worked with British Airways was a very simple thing and okay, there was a benefit attached to it. Lifetime tier points. So, in other words, the way tier point, tier points determine the tier, the, the status level you have in the airline, uh, for the next 12 months of travel after you reach a particular tier.
Now lifetime tier points, unlike tier points, did not reset to zero. At the end of the calendar year, they continued adding up. Now, ultimately, if you hit 35,000, you got gold status for life. That’s pretty much unattainable to all, but you know, maybe, you know, I don’t know, 20% of gold card holders at any one time. However, what it did say is that we know your life have value.
Simple as that. Okay? It’s if you like the digital technological equivalent of a restaurant, maitre d greeting you by name. In other words, you are not a stranger. And that massively instills confidence in us because if we know that they know our past value and assume therefore, that our future value may be equivalent.
Okay. We trust them more, not to let us down simply because, um, when given the choice, they’d prefer not to lose our future revenue. And therefore, if they see us as a source of future revenue, they’re much, much less likely to, um, uh, make a short-term saving by disappointing us in some shape or form. And so, this extent to which actually capitalism is relational, it’s not purely transactional by the way, I think interestingly, um, we can also talk about, you know, employee relations in this respect, in the relationship between employer and employee has become very transactional. Meet this target for this quarter, you get this. Okay.
Phil: Very much. Yeah.
Rory: But at some level, and I, you know, this is my bring back the company car campaign when companies sent you on training courses. Or they gave you a car or some other, uh, perk, it was sending a signal that they had a long-term investment in your future and that your future interests over the medium to long-term were actually aligned, and as a result, I think this transactional relationship, although it seems completely rational to economists, this highly transactional relationship with employees basically means that Gen Z don’t stick around anywhere for two and a half years.
That’s not because Gen Z is psychologically totally different to any other, um, previous generation. It’s simply because the way employers invest in them has changed and Gen Z has noticed. Simple as that. It’s a perfectly rational response to the fact that if my employer is not really invested in me, then it will be foolish of me to invest my future with this one person.
Phil: Which is ironic in, in your example, cause you’re, what you’re suggesting is, and it’s actually very rational that the brand selling to customers is mindful of their lifetime value.
Rory: Yes.
Phil: But, but employers seemingly, especially given your, your Gen Z example, seem not to have that outlook and you know, they look differently at the employees than they do at customers, which is a challenge.
Rory: Partly a data problem, which is most data is collected and most data we use is a byproduct of data collected for reporting upwards to finance the shareholders.
Okay. They favor recent aggregate snapshot data over longitudinal data. Okay? And as a result, most companies tend to operate with a, it does matter whether it’s 10 customers buying one, so it’s one customer buying 10 times. Okay? They don’t really distinguish between those because once you aggregate the data, those, uh, tho… those distinctions disappear.
Actually, one of the things I’ve always said is that if there’s one question I’d want to know if I were running a startup of any kind or any kinda innovative product, is when people buy from us, do they buy from us again or is there a point? By the way, this may also be the case, uh, in which you want to drive frequency.
Let’s take online grocery shopping. There seems to be a kind of phenomenon that if you can get people to do it three times. Effectively, they’re kind of hooked to habit it to habit. Yeah. When do you think about it? By the way, the first time you buy groceries online, it would be cheaper to crawl to Walmart over broken glass because you have to type everything in, find everything.
It’s not, it’s not aware of your favorites, your regular items. You know, some of the ways in which online stores are laid out are particularly bizarre and so on. And you know, it’s quite a tedious thing. Once you’ve done it five times, it becomes easier, but also it becomes somehow system two rather, sorry, it becomes system one rather than system.
You know, a lot of things, which when we do them the first time, require an awful lot of cognitive effort become progressively just easier over time. And so, one very important role of loyalty is simply generating frequency in behaviors. Now, there’s a lovely way of putting this. There are certain products and there certain goods where the experience or the repeated experience of the good fundamentally changes your utility function or your preferences to such an extent, that one, that once you’ve done something four or five times, the alternative suddenly seems hopeless. Okay, now this is quite important, I think. In that, um, uh, funnily enough, writing, you know, in a much more elevated topic about economics, Russ Roberts, the Stanford economist, talks about say, having children.
Okay. Which from the point of view of a childless couple, is a completely irrational thing to do. Okay, because what you enjoy as a childless couple going out, having loads of discretionary income, you know, taking drugs and going woo on your spare time, almost all of those things you enjoy as a childless couple are massively, massively prevented by having children.
But once you have a child, your preferences, interests, utility function. What you think is important in life changes to such a dramatic effect. That actually the idea of saying to is saying that it is irrational for a child who’s coupled to have children is missing the point. Now, I would make the same point about I’ve got a Japanese toilet.
Okay, which cleans your bump here, okay?
Phil: Yes.
Rory: The point about that is no one really wants to install one, but once you have had one, and you’ve experienced it five or six times, the idea of going back to a standard dry wipe toilet seems like a reversion into the stone ages. Okay? So, one of the things that’s important is just simple frequency.
Getting the same customers to get over that point where, actually, I mean, by the way, it happened with mobile. Um, we forget this because we, we tend to forget how difficult it is to sell most new ideas once those new ideas have become current. But there was a long period in the late eighties, early nineties where the majority of the British population said, I don’t want a mobile phone.
Why would I want to make phone calls on the street, for example. What was significant was that once people got a mobile phone, virtually nobody went back. And by the way, I think this is important, um, uh, to understanding markets because I think that’s also true to about a 95% level with electric cars. It isn’t the speed of adoption of electric cars.
We should look at. The real question to look at is once you go electric, does anybody actually revert to petroleum?
Phil: Yeah, very much so.
Rory: I, I think what we’re seeing is, what we’re seeing is that people don’t. So, stickiness actually, which is a subset of loyalty, is I think becoming a more and more important thing to understand.
Phil: Well, it, it… it does tie, it ties back in my mind to two things. Number one, this, this notion that we already touched on, which is habit. Um, but it, it also seems as though, it just reflects the way we build relationships with other people. The difference in, in, in, in, in, in the context of what we’re talking about being, it’s the relationships that we form with brands.
Which when you peel back and think about what creates loyalty, it’s that mutual exchange, the reciprocity and the idea that if I’m the customer and you’re the brand, we need to be loyal to each other. And that’s what sort of creates…
Rory: Yes.
Phil: The virtuous circle going forward where it’s easier, more profitable and, and to borrow that line from the film.
You can’t quit. Like when, you know, when they say, I can’t quit you. That’s that. You, you, you sort of strive to achieve that mode of relationship between a customer and a branch, or between an employee and an employer.
Rory: So, there’s a wonderful experiment in this about the, the, the extent to which we actually have a desire for, uh, reciprocity, uh, in our business dealings, which is why I think procurement sometimes gets it wrong, by the way.
Um, because if, if I know that after a three-year relationship, uh, with a client, the entire, um, relationship will be set to zero. And I have to go and pitch again against three other people. Okay. Uh, as if the past four years had never happened. Okay. I actually have no incentive to differentially invest in that relationship because there are many, many things I can do in an ongoing relationship, which can’t be charged for.
Okay? Let, let’s say, okay, I’ve got a client and I’ve noticed something really, really interesting. And I discover a business that they might find very interesting and I put them in touch with that business. Okay. It would be fairly crass to invoice them for that in proportion to its value. Okay. The reason I would do it very willingly is I would expect the value to be recognized at some unquantifiable level in the longevity of the relationship.
In other words, if I’m disproportionately helpful to you, I would expect you to be disproportionately loath. Simply put me on a beauty parade as if nothing had ever happened. And yet, procurement sometimes makes that relatedness, um, impossible, and they create therefore visible and quantifiable savings, but at the price of unquantifiable costs, in particular opportunity costs.
It’s always much easier to quantify savings than it is to quantify opportunity costs. But there is an opportunity cost in making a relationship transactional, which is no one has an incentive to innovate, no one has an incentive to go the extra mile. Everything becomes, how much did that cost? How much do I charge for it?
And actually, let’s say you’re an advertising agency, the most valuable things you can do are probably things that you can’t explicitly charge for. They’re coming up with spontaneous, coming up with spontaneous work. I can’t come up with work unask for and then ask you to pay for it. Okay? The reason I do it is because it’s an investment in the relationship, and now there’s a great economic experiment about this, which is that in Marsai, Marsai boats come in, they sell the fish-to-fish merchants.
The fish merchants sell the fish to restaurants, for example, hotels. Okay? Now that is in a sense, economically inefficient because you have an intermediary and they tried to replace it with a system where all the fish came in and was sold an auction to the end consumer or the end buyer cutting out the middlemen.
Now, obviously, not surprisingly, the fish merchants hated this idea because it left them in their future role. What they didn’t expect is that the buyers hated it as well because their ability to engage in relational capitalism, to engage in anything tacit or implicit with the fish merchant had been destroyed by the auction process, and therefore the relationship had basically become transactional and the product had become commodified.
Now what they valued about the fish merchant was the fact that the fish merchants, they knew that if they were disproportionately loyal to fish merchant A, he would go, I, I actually found this fantastic slice of now I’m gonna get the fish. Right. Um, I don’t know what, what would it be in the Mediterranean?
I don’t know. Goodness. Well, swordfish, okay. Disgusting fish in my experience, but don’t mind. Okay. Um, and I actually kept it back for you. For example, you know, there, there all, there was all this kinda implicit barter going on alongside the cash transaction. When we buy frequently from someone, the nature of the relationship implicitly changes in a way that economists don’t notice, but normal human beings do.
I’ll give you a perfect example of this. If you read letters of outrage to utilities, okay, they start with the phrase. I have been a customer of yours for X years. Imagine my surprise. Well, now you know, to someone who’s just really the finance director, the length of tenure is irrelevant to your degree of outrage, but it isn’t, okay?
Because over time I have sort of played fair by you and I expect you to give me the benefit and doubt in return. And to some extent you could say that brands are… you know, at some level the benefit of the doubt, that’s what a brand gives you. Okay? And if you remove this, if you remove this, you are destroying in many ways, brand value.
And I, I, I just find this so interesting because it’s such an interesting area where, actually capitalism as it evolved in homo sapiens. Okay. And capitalism, as it is presented by homo economicus, or in economic models, are very, very different. You know, I mean, the urge to punish someone, for example, who’s treated you unfairly, uh, is, you know, irrational in many cases from economic stand point.
But it’s completely rational from a game theoretic standpoint of if you basically don’t play to the implicit rules of our relationship, um, there’s a cost of defection.
Phil: Absolutely. And I think relative to the example you used before, this notion of soft benefits and the relationship that’s constructed or it’s deconstructed when you take out the intermediary literally removes or figuratively removes value.
From the transacting and makes it purely transactional versus having the relationship component to it.
Rory: Well, I have to confess that when I fly with an airline whose loyalty program I don’t belong to or with whom I’ve flown very, very sporadically in the past, I’m just 30% more nervous the day before I fly.
You know, you know, if, if something goes slightly wrong, will they actually, you know, take care of me? Will they bother? Because to them I could be just some random backpacker, you know, I’m not a frequent flyer.
Phil: Yes.
Rory: I’m just some random Joe. And consequently, you know, if there’s a massive snowfall affected and there’s only one seat left on the flight out, it ain’t gonna get a me.
Phil: Well, I think that’s the idea of loyalty going, being reciprocal and, and… you’ve built trust in the airline that you’re most loyal to.
Rory: Yes.
Phil: You trust that they have your back, and it’s that sort of risk mitigation confidence that you get. And it’s, I mean, to bar look at, you know, an iconic Ogilvy client, American Express, their, you know, their whole campaign around powerful backing almost explicitly gets to that.
Rory: If, if you had to ask me for the most beautiful loyalty campaign of all time, which was invented by someone at Ogilvy in fact, I think… it’s the idea of member sense on the American Express card because there is no explicit benefit, there is a small security benefit to, uh, a member sense, which is that if you, if you are obviously a 27-year-old and you turn up with a card that says, member since 85.
Uh, the, the merchant has a reasonable suspicion that you may have stolen the card. Okay.
Phil: Or fabricated it on your own.
Rory: Yeah, exactly. Or fabricated. Exactly. But aside from that, okay. What is interesting is I spoke to someone at a American Express, and every now and then they make a mistake and they will issue people with new replacement cards.
And instead of saying, I think I’m member since 95, instead of saying member since 95, it will say, member since 23. Something like half or in some cases, more than half of those people will contact American Express and demand that the original date is reinstated on their card.
Phil: It’s recognition.
Rory: It simply is. It… absolutely. Now that idea and possibly actually young marketers are less acutely aware of this than we are when we get to middle age, because when we get to middle age, there are significant number of businesses with whom we have done business repeatedly. And, you know, and, and hopefully without, you know, without difficulty, over a couple of decades.
And therefore, the expectation becomes all the greater. But it is, it, it is fascinating this area because the, the number of what you might, as I mentioned with friends and family, may uh, uh, 15% discount across the board would’ve been forgotten about. Particularly at a time of falling long distance prices anyway that would’ve been forgotten about within six months.
Okay. And instantly no one would’ve noticed it. Whereas friends and family allowed you to itemize a saving on the bill and make the person feel that they threw their efforts and achieved it. You know, it’s a classic case of there’s a little bit of labor illusion involved in that. Similar to just add an egg, you know, the famous marketing case where nobody wanted Betty Crocker instant cake mix until you added a degree of extra effort to its preparation.
You know, and so you know, there was that wonderful aspect of friends and family, which is that you felt this was actually an earned reward, which therefore made it perceived much more highly in terms of its value, the reward that was merely conferred.
Phil: Not to mention the opportunity cost. If you were to leave AT&T, you’re gonna spend the 15% to talk to your other friends, the people you want to talk, talk with the most, right?
Rory: Uh, no, no, actually, of course there’s, there’s a wonderful thing, which is that if you can get people to invest effort into a relationship, they tend to perceive that as a sunk cost, which is why we leave our banks so infrequently in part.
Um, uh, that that’s undoubtedly true, that, you know, uh, that if, if we see the relationship we have as the, uh, the product of lots and lots of past interactions in aggregate, and we think that if we move to someone new, it’s awful thing to say, okay, that’s, you know, I don’t. I can’t speak for everybody here, but, um, you know, one slightly tedious thing about having an extra marital affair must be that you, you have to familiarize someone else with all your quirks and peculiarities starting from scratch, which must be, you know, whatever the other, whatever the other perks must be unbelievably tiresome, you know, but, um…
Phil: Quite the oner… quite the onerous task to, uh, yeah, to do, right?
Rory: Uh, you know, and so yeah, there undoubtly is a kind of cost effect to these things, um, uh, which I think, you know, which I think can also be valuable, but there’s so much, so much concentrated psychology in loyalty programs from, as I’ve said, the simplest like friends and family and, and Amazon Prime to really elaborate programs, uh, airlines, I suppose hotels, uh, tend to lead the field there, but there’s, there’s scope, actually the scope for far more to do an Amazon Prime than currently do one fashion retailer, probably better not name them actually, but one prominent fashion retailer in the UK found that when they introduced a kind of equivalent of Amazon Prime for 15 pounds a month for unlimited next day delivery, the average number of purchases per customer per year went from one to five. Now that’s a really big deal, and that’s, that’s share price stuff.
Phil: Absolutely. So that, that, that brings me to a couple of things that are sort of current in within loyalty, which is one, moving it to be less transactional. You know, loyalty is viewed in these hyper transactional terms, in part because there’s so much homogeneity among programs, right?
Rory: Yes.
Phil: There aren’t the… and, and so how do we rekindle, and I’ll sort of borrow a phrase from, from Alchemy. How do we rekindle the magic in loyalty?
Rory: Well, I think, I think the scope for magic in the sense that you can create value out of nowhere. I mean, the American Express member since thing, um, they used to be a beautiful one, by the way which was nobody else noticed it. I seem to be the only person who noticed it, which is if you subscribe to Reader’s Digest, the January edition of Reader’s Digest had one little Pegasus on the spine. The February one had two, the March one had three. The April one had four all the way through to December, which had 12, which meant that if you had a complete collection of Reader’s Digest, they formed an attractive zigzag pattern on your shelf.
Whereas if you actually let it lapse for three months, the whole thing was destroyed. I don’t know who came up with that, but, um, I had…
Phil: That’s brilliant.
Rory: Little bit of, it’s rather, it’s rather brilliant, isn’t it?
Phil: Um, totally brilliant.
Rory: But, but, but quite a lot of this, by the way, is actually understanding genuinely what makes us human.
And I’ll give you an example of, you know, a very, very human response of mine. Um, back in the day when I used to smoke, I used to walk, um, down to the tube station, um, from my flat in London to catch the underground to work. Most days, perhaps not every day, but I’d stop into my newspaper or a package of cigarettes or a box of matches or something of the kind from this one shop, family shop.
And on day about 247, I realized I left my wallet at home and I only had 50 pounds in my pocket, which wasn’t enough for the tube. Might’ve been 90 pounds. So, I said to the person in the shop, can I just borrow 20 p uh, for the tube and then I’ll pay you back on my way home? And they said, no. Okay. Never went to that shop ever again.
It is worth noting that loyalty is a double-edged sword because it’s, in some ways it’s, it gains you disproportionate reward from people whom you treat well, but disproportionate punishment from people if you violate its basic principles. And it was considerable inconvenience to me not to go to that shop again.
But my view was you know, swivel, basically, you know, if you weren’t lending me 20, I mean, they could have given me 20 p after what I’d spent there, but they, they didn’t even lend it to me. Okay. And I was so horrified by that complete failure to recognize my past customs. Then I, I basically boycotted the place.
So, it is a double-edged sword. And consumers of course, like it because it gives them some degree of power because they’re implicitly wielding not just a single transaction, which you can afford to ignore. They’re wielding what you might call, you know, an expected lifetime value. Now, consumer’s lifetime value is a much stronger sword to wield over.
When you have asymmetry of information, asymmetry of power in all kinds of ways, that’s a much, much stronger sword to wield, uh, than a single transaction, which doesn’t amount to anything.
Phil: It’s interesting. We, you know, we’ve, we’ve talked a lot about airlines and, and the, the notion of, of tier qualification miles and, and, and the like.
And we’ve seen this with the airlines aft in, in, in light of sort of grandfathering everybody during covid when they couldn’t travel. Essentially raising the stakes, raising the qualification threshold, and a lot of people falling out, which also creates this whole side industry of status match, right? Where, where all of a sudden people and, and… with things like name, image, and likeness coming to the fore, and this higher level of consciousness about our value and the value of our data, it seems like that is… is an opportunity where consumers will be further empowered because they can better quantify their value, and if somebody doesn’t like it, they can go and get somebody else to see what their value is, which they do in the airline industry with this notion of status match. I’m top tier in BA, I’m gonna go to Amer… Americans, not the right example.
Rory: Yes. I, I got, I got offered top tier and I think Air Portugal by didn’t being top tier in BA if I remember rightly.
Yeah. Um, so, and um, I mean it doesn’t significantly impact, you know because obviously not that many of my flights of by Portugal. Um, but um, it, it, it’s undoubtedly, I mean, it is interesting because at some level, without that reassurance, would you be unwilling to transact at all? In other words, would I fly a lot less if I didn’t have the confidence of knowing that there’s someone there who has my back?
So it works in, it wor… it works in both directions. It’s rather, it’s almost a kind of mutually short destruction element of, of, of symmetry to it.
Phil: Mute. Mute, which is the opposite of the virtuous circle, right?
Rory: No. Yes. No, I mean it’s um, uh, it’s so interesting though because I think, um, there’s a very useful model for it by the way, which is from a man called David Rock, who’s a New Zealander, but I think a neuroscientist currently living in New York and his Big Five Models, big Five Model of things that humans care, care about.
That, um, e economics, and actually by, by the end of it, many businesses don’t properly understand. He calls it SCARF. And SCARF is an acronym which stands for status, certainty, autonomy, relatedness, or I would call it almost reciprocality, but you get the point and fairness. Now um, it is a very, very healthy thing for a market to evaluate the extent to which their brand delivers on or fails to deliver on those five.
I don’t, I don’t think it’s an exhausted list, by the way. I mean, there are other things I’d consider, but the question of fairness is interesting. So, one thing I find extraordinary, and I, I generally don’t, you know, well, I’ll give you an example of this, okay? Um, if you are booked on a flight, which you booked very cheaply, and for reasons beyond your control, you missed that flight.
Okay? Now you have a history. Just to be clear of this, you have a history of taking flights pretty frequently, turning up when you’re downn well supposed to. But on flight number 27, something goes wrong. There’s a massive traffic jam. Your incoming flight is delayed. Circumstances beyond your control means you missed the flight.
Is it fair that not only are you made to pay the full fare to travel on the subsequent flight, not the discounted fair, you booked in advance, but your, the payment for the the original flight is totally right. You see? Now, or for that matter, I’ll give you another example where loyalty matters. Amazon is extremely generous.
If you have an item that ref that fails to up. And I’ve had one or two items that fail in, I contacted Amazon. They either give me a refund or they send out a replacement immediately. On two of these occasions, uh, the goods have actually arrived subsequently. So, I end up with two of them. I’m a good citizen and also just not wishing to, you know, generally arouse bad karma.
I can’t down Amazon and say, I’ve now got both of these things. Can I send one one back or pay for it? Cause I can give it as a present to someone else? And they said, don’t bother. Now, just to be clear, they do that to me and they do it to you. I imagine, because we’ve also bought a hell of a lot of things, which we haven’t returned.
Okay. They can’t afford to do that to a first-time customer. Okay? You simply can’t do that because that first time customer could be trying it on. Similarly, you can’t be generous to someone who’s missed their first ever flight. But I think we do expect a level of give and take and benefit and the doubt if we miss our 27th flight.
It’s rather like there’s a very, very big difference, okay. Between being late for work on your first day at work and being late for work on day 205. Ok.
Phil: I trust.
Rory: Okay. You know, you know, and, and stuff. Okay. We basically know this guy’s reliable, but you know, and shit happens is the, is the reaction to being late today that if you’re late on your first day, that’s why anybody’s sensible, who’s got their first day at work gets up two hours early and actually arrives before the bloody office opens because it’s simply not worth the downside risk and doubt that will be created.
And so, you know, so you look at these things, I mean, one of the things I found extraordinary. Okay. And I, you know, there’s a hotel I quite like, and I quite like staying an outside CAN for the the CAN advertising festival of a policy, which is that, um, three weeks, four weeks before your stay.
If you cancel, you void the entire cost of the stay. Right. Okay. Hold on a second. Right. I mean, anybody could have circumstances, you know, relative being taken, ill da da da. I mean, God, anything can happen, which makes it impossible for me to know until two weeks beforehand that I can’t go.
Now wiping out the first night’s stay… Yeah, if you wipe out the whole stay, hold on. I now have, I, I’m terrified of booking that hotel for more than two nights. Okay, so you’ve now created a ludicrous system where, um, I would never book that hotel for six nights because the fear of basically pissing away six nights of French hotel, um, because of circumstances beyond my control.
So as a result, it’s impossible for me to book it. No, you know, that that’s the kinda thing where I, I, I genuinely look at companies that do this kind of thing and go, you know, does your finance director just run the whole show? Because no one who has the slightest ants of human empathy would come up with a ruling like that. It’s nuts.
Phil: Well, that’s just don’t, it’s…
Rory: Don’t get me wrong. I mean, yeah, yeah. It’s, it’s just, you know, this is, this is fundamentally unreasonable as a, you know, as a, as a, as a proposition.
Phil: Human reason.
Rory: And… and so SCARF I think is useful. I mean, you know, the status question is important. Um, it’s also a great thing which I was quoted the um, Mark Fox, when he was head of Starbucks in the UK said to me, he said, it’s a very important thing he said, um, and he said, of all these sort of weird marketing meetings I’ve gone to, he said, I always came away with one great sentence. It doesn’t only matter what people think of brands, it also matters what people think brands think of them.
And, and if you think about it, we always ask the question, what do you think of this brand? You know, what can it do? But actually, there’s a, there’s a completely important, uh, secondary question, which is, you know, how does it actually think of you? Does it value you? Does it want you to come back? Does it see you as a source of, you know, future revenue potential, whatever it is.
Or is it just, well, if you wanna come here and spend some money, feel free. And, you know, I, you know, I mean, I, at its simplest, um, you know, the best loyalty program in the world is actually, are those run by very small businesses with their best customers. You know, a good, it, it probably needs a little bit of margin to make it work, okay?
So butchers are probably better at it than people in, you know, in a lower margin business. But actually, you know, the, the very best, the very best small businesses, of course, do this instinctively. Because they understand, they, they have both longitudinal and, uh, and snapshot data on who their customers are.
Phil: They know them and they show loyalty to them, and those customers know that they, that they, and they know. That, that they’re getting loyalty in return. Rory, we could keep talking all day and I know, uh, there’s a, there’s so much more that you have to say and I am fortunate, like the other people that are gonna be attending The Loyalty Summit CXM in Zurich next month, that we’re gonna get to see you and hear you from you in person.
Uh, so thank you so much for taking the time to talk with me today and uh, I’ll look forward to seeing you next month in Switzerland.
Rory: See you in Switzerland. Wonderful. Can’t wait. And thank you very much indeed.
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