Just what is customer loyalty? And how are: Monetization, Socialization, Gamification and Disintermediation changing loyalty forever? Howard Schneider Metzner l Schneider Associates

2 Faithfulness or a devotion to a person, country, group, or cause Loyalty

3 Measurably incremental profit driven by customer engagement, enabled by an understanding of individual customer needs, interests and behavior Customer loyalty

4 U.S. loyalty memberships BILLION Average American household is enrolled in 18 loyalty programs Active in 8.4 US marketers spend over $2 billion a year on loyalty programs The loyalty landscape 31% of Americans find loyalty programs extremely relevant 17% of Americans say programs very influential in purchase decisions 31% of Americans find loyalty programs extremely relevant 17% of Americans say programs very influential in purchase decisions 65% view programs as very essential or quite valuable 80% commit to maintaining or further funding programs Only 13% believe their programs have been highly effective 65% view programs as very essential or quite valuable 80% commit to maintaining or further funding programs Only 13% believe their programs have been highly effective What CMOs say What consumers say

5 Ancient history The origins: Manual programs 1 st generation automated programs: Travel 2 nd generation automated programs: Retail and card programs Online programs and beyond: Omnichannel programs s – early 2000sToday One hundred years of loyalty

6 Programs have evolved Reward charts, status levels, transaction-based, limited channels Multi-channel, customer choice, experiential, real time

Loyalty and the customer lifecycle Acquisition Onboard Reactivate Retain Activate Maximize Cross/upsell Engage / update profile 7 Advocate

8 How do I feel? Recognition of my value Thanks for my business Community Reinforcement Measured by research and purchases Perception Preference Satisfaction Advocacy How do I feel? Recognition of my value Thanks for my business Community Reinforcement Measured by research and purchases Perception Preference Satisfaction Advocacy What do I get? Discounts Free or upgraded product Measured by tracking behavior Purchases Participation Share of wallet ROI Loyalty is both rational and emotional 8

Four key trends DISINTERMEDIATIONMONETIZATION SOCIALIZATIONGAMIFICATION Consumer Empowerment 9

Disintermediation: One of the biggest words I know the elimination of an intermediary in a transaction between two parties MarketerWholesalerRetailerCustomer MarketerRetailerCustomerMarketerCustomer 10

11 Loyalty programs were invented to reward marketers best customers. True or false?

Disintermediation and loyalty In 1981, 95% of all airline tickets were sold by travel agents Airlines did not know their customers by name AAdvantage was launched as a promotional tool to get customers to identify themselves…NOT as a reward program Travel, hospitality, car rental companies established direct relationships with their customers Banks and some retailers, who had transactional data, soon followed Retail, restaurant and others jumped in as technology and cost permitted 12 Loyalty programs have both driven, and been driven by, disintermediationand it is a trend that continues to accelerate.

The history of loyalty programs is the story of disintermediation Credit cards Early retailers Retailers Restaurant Entertainment Early CPG Next gen travel Travel industry More CPG OEMs Media 13

Consumer empowerment is here to stay More than ever, customers… define relationships demand real time responsiveness choose their preferred channels, content and cadence 14

Indirect distribution models Media companies, studios, manufacturers, CPG companies are turning to loyalty and engagement programs to create one-to-one customer relationships for the first time. Today, some of the fastest growing categories for loyalty programs are those with indirect distribution models 15

Indirect distribution: exhibitors, iTunes, Amazon, cable, bcast, satellite Customers not interested in studio brand Incredible diversity of product means no natural common denominator Warner Bros. solution: WB Insider Rewards A common program platform with different skins for different interests Rewards interactions and transactions Allows fans to customize their experience Tracks, incents, rewards behavior across multiple touchpoints 350M customers…and we dont know any by name. 16

Engaging entertainment fans WB Insider Rewards looks one way to action movie fanboys …and very different to classic movie afficianados 17

Four key trends DISINTERMEDIATIONMONETIZATION SOCIALIZATIONGAMIFICATION Consumer Empowerment 18

Money talks How do we make money from this great idea? How do we reward customers according to their value? In a business plan….In a loyalty program…. 19

Money talks Early loyalty programs – and many still today – use proxies for value: Proxies Miles / flights Visits / items bought Hotel nights / rental days Poor economics for marketers Rewarding past, not future, behavior Rewarding without clear value metric Unhappy customers Decreasing reward availability Blackouts and restrictions Higher cost to redeem 20

If only we could really reward customer value The first major airline program to be based directly on customer spend is Virgin Americas Elevate – a program that has changed the way frequent flier programs work. Elevate is a revenue-managed program that delivers better economics to the airline, more control and a better experience for the guest. When was the last time you tried to redeem miles on a legacy air carrier? 21

15 Days Advance 14 Days Advance Elevate is the first revenue-managed program of its kind that provides choice, value, and a dynamic approach to enhance ROI. Higher ROS Lower ROS Near Parity As easy as supply and demand 22

Elevate is the gateway through which guests engage with Virgin America All guests are encouraged to join Elevate; in fact, they have to in order to access certain benefits Elevate recognizes past behavior and preferences, and rewards future, profitable behavior. Through Elevate, Virgin has the platform to maintain and extend the relationship into a guests lifestyle, beyond specific transactions, even when not traveling. More than just a reward program. Its an experience. 23

Monetization is a major trend in loyalty Credit cards and retailers have used customer spend for years. In the travel category, hotels have used a combination of revenue and stays/nights. Southwest, JetBlue, and Virgin America all have revenue-managed loyalty programs Earning based on spend Dynamic reward pricing 24 Look for more and more companies to reward behavior based on better understanding of individual customers monetary value.

Four key trends DISINTERMEDIATIONMONETIZATION SOCIALIZATIONGAMIFICATION Consumer Empowerment 25

What are we doing in social media? - every CEO in the world Every emerging media tool or channel has a lifecycle, something like this: Novelty Skepticism Infatuation Evangelism Overuse / misuse Disenchantment Sooo last year Eventually, each finds its optimal role in an ever-evolving mix of media, strategies and tactics. 26

Why would I like a fabric softener? 27

A sleeper strategy helps Downy and Macys clean up Event marketing Demonstration-chic Customer acquisition All enabled by Facebook and Twitter 28

And the results? Voila: A CPG brand can begin building direct relationships and fostering loyalty. 29

Finding the brand fanatics and building communities , in-store promotion, social media combine for the biggest video upload sweeps ever for a retailer: 45k entries 5.7mm views This promotion built awareness of and participation in the SYWR program, and reinforced the value of points. 30

Socialization and loyalty Social strategies, while not always driving immediate sales, measurably help marketers achieve: Increased awareness of and participation in programs Invaluable WOM Identification of brand fanatics Channel for addressing customer concerns 31 Social and mobile media are not only a necessary component of effective loyalty strategies – they are becoming the leading channel in many programs.

Four key trends DISINTERMEDIATIONMONETIZATION SOCIALIZATIONGAMIFICATION Consumer Empowerment 32

Gamification: IS Reality Broken? There is an increasing need, driven by both marketplace psychographics and program economics, to reward non-transactional behavior …and you may ask yourself: You said programs should be based on revenue. Now you say programs should reward non- transactional behavior. WTF? 33

The economic challenge It IS challenging to cost-effectively reward non-transactional behavior. But that doesnt mean it is impossible to value and reward non-purchase interactions. Establish a point structure that allows for small earnings and small rewards for interactions, and more meaningful earnings and rewards for sales Use a separate earnings and rewards scale to incent and recognize non- transactional, but still valuable behavior 34

Enter, the psychology and mechanics of gaming Marketers increasingly want to reward interactions like: Posting a review Sharing something with a friend Answering a survey Posting a photo, video or comment Visiting a website, watching a trailer or demo Downloading a ringtone, trailer, link or instructional video Game constructs can reward these activities with virtual rewards: Recognition for achievement and participation Bragging rights Reinforcement Badges, stars, leader boards, graphics, enhancements 35

Of course, there are skeptics… …but there are many situations where gamification has been well-received and is brand-appropriate. 36

Games in the air…on the road…online 37

Gamification and loyalty Innovative applications are emerging, technology platforms that can add gaming elements to conventional program websites More fun, greater variety for customers More ways to engage on the customers own terms More economic leverage for marketers with more ways to reward behavior without giving away the store 38 Even conservative, established brands are adding gaming elements to their customer relationships.

Disintermediation, Monetization, Socialization and Gamification DISINTERMEDIATION Establish relationships Build loyalty Meet the challenges of indirect distribution MONETIZATION Improved program performance Greater value for customers SOCIALIZATION ID superfans Create/leverage community Drive engagement beyond simple quid pro quo GAMIFICATION Cost-effectively reward non- revenue interactions Make programs fun Deliver the psychological rewards of games YOUR program? 39

Thank you! 40 Howard Schneider Metzner | Schneider Associates