In Japan, companies in various industries have been promoting marketing activities that take advantage of points-based rewards programs. However, we have also seen that awarding points does not necessarily lead to loyal customers who will keep coming back and develop a real attachment to one’s brand. How should companies approach the task of enhancing customer loyalty? We asked this question to Satoshi Nakane of Brierley+Partners Japan, the first-ever company in Japan to pursue loyalty marketing as a specialized business.

The Background to the Spread of Point-Based Rewards Programs in Japan

Japan has seen a growing use of points-based rewards programs, specifically the type that uniformly give customers one point for every 100 yen, approximately 1 US dollar, they spend on purchases. I believe there are two factors behind this.

The first is a matter of cultural background. In a diverse nation like America, it’s considered natural for everybody to be different, whereas in a racially homogenous country like Japan, there’s a deep-rooted sense that everyone is to be treated the same way. That said, some department stores and well-established specialty stores have long differentiated and sought to “lock in” their regular customers, but ever since supermarkets, convenience stores, and other major chain store operators started to take the lead, there’s been a growing trend in the industry at large to treat all customers equally.

The second factor has to do with the historical background. Point-based rewards programs started to come into widespread use in Japan in the 1990s. This period overlapped with the collapse of the Japanese bubble economy. Amid the economic stagnation and the decline in consumers’ purchasing volition, points systems were introduced to promote continued patronage, by presenting the idea that points equaled discounts and creating the sense that you were getting value for your money. This approach had a certain effect, and so it came to be widely used as a standard measure for keeping customers in Japan.

The Essence of Loyalty Programs is Enhancing the Customer Experience

On the other hand, loyalty marketing means activities for cultivating and retaining loyal customers who have a certain attachment to your company and who will contribute to your profits. With loyalty programs, which are the core of these activities, points function as a tool for encouraging your customers’ self-motivation—that is, getting them inclined to keep using your services with the belief that it’ll lead to even better experiences. It’s not simply a matter of providing discounts where one point equals one yen or dollar; it’s about deepening the relationship with your customers by utilizing discounts and other methods, with a focus on enhancing the customer experience (CX). Loyalty programs are not for giving markdowns to your customers, but for giving them thanks, and they represent an approach for rewarding loyal customers with a better CX and deepening your ties with them further.

For instance, the major U.S. rental car company Hertz has a system where members who reserve their car ahead of time don’t have to wait in line at the airport counter to go through the rental process. They can simply go right to the parking lot, put their luggage in a car that’s all ready to go, and drive off immediately. Many Hertz customers use their rental cars for business purposes, so their time is particularly important to them. That’s why Hertz has opted to improve its CX by eliminating the wait time involved in the rental process, rather than focus on discounts. This means that satisfied members will continue to choose Hertz.

The Key to Successful Loyalty Programs

When you consider a program specifically, the most important thing is to have an objective viewpoint, but thinking about it from a business perspective is also vital. Regardless of what your customers may demand, if you’re offering products or services that don’t conform to your brand’s significance or recklessly providing costly benefits, your marketing ROI (return on investment) will suffer. So, it’s crucial to design a program which provides the CX that loyal customers want while also keeping costs down as much as possible, or to design it to modify the customer’s behavior into whatever you want it to be throughout the customer journey (the process leading up to a customer’s product purchase).

The incentive provided by Hertz in allowing members to use its services without waiting at the counter doesn’t involve any added costs. Hertz also makes good use of available assets like hotel room upgrades or award tickets for certain airlines, thus enhancing its CX without tacking on higher costs.

In addition, the U.S. video game retailer GameStop’s way of raising its CX is to offer specialty figurines or limited-edition goods that gaming enthusiasts love, providing benefits in the form of items that—from a gamer’s perspective—amount to added value beyond the “one point equals one yen/dollar” conversion. Moreover, what’s notable is that in order to guide customers to its used games business, which is highly profitable for the company, it incentivizes customers to trade their used games at GameStop, and so it has successfully promoted changes in customer behavior in the course of the customer journey.

Impressing Customers with the Quality of the Experience

Recently, more and more companies have been adopting a “shared points” system that lets customers use the same points at multiple businesses. Some companies are giving out shared points in addition to their own store-specific points, and price competitions have intensified. Of course, this approach does help to attract customers to some degree. However, I’m not sure that it’s causing customers to feel an attachment to a given company in any genuine sense.

What’s important here isn’t making points or discounts be the objective, but instead to gain more customers who are inclined to use your products and services because they believe they’ll get the experience they desire. Figuring out how to raise the quality of the “experience” throughout the entire customer journey is fundamentally what loyalty marketing is all about. The essential thing is therefore to come up with a clear image of what a loyal customer looks like for your company, to get a deep understanding on a psychological level of what your customers want from you, and then provide them with the appropriate experience. And here at NRI, we’re supporting those companies that are looking to shift their focus to this kind of marketing.