The global loyalty management market is forecast to continue growing rapidly at more than 20% CAGR to the end of the decade. Still, consumer attitudes are constantly changing, requiring ever more sophisticated approaches. Embedded loyalty, in which rewards are integrated into daily experiences and transactions, is an increasingly prevalent solution. In this Viewpoint, we look at what embedded loyalty is all about and how companies can go about introducing it.
Traditional card-based loyalty programs have been around for many decades. According to Statista, the global loyalty management market was around US $5.6 billion in 2022 and is forecast to grow at a CAGR of more than 20% to around $24 billion by the end of the decade. In increasingly competitive customer environments, building brand loyalty makes obvious sense for companies, as well as offering savings and other types of benefit to customers. Loyalty programs seek to increase customer lifetime value (CLV), a key metric that measures the profit generated by customers over their entire relationship with a company, taking into account the frequency of purchases, average transaction values, customer-acquisition cost, and customer-retention rate. Through CLV, companies can identify their most valuable customers and target marketing efforts, while using data analytics to reduce churn, provide customer insights, and identify upsell and cross-sell opportunities. The net benefit of a loyalty program can be assessed by comparing all these incremental benefits with the incremental running costs.
There are also some strong technological drivers for growth of loyalty programs. Digitalization has greatly enhanced customer convenience and experience, while providing richer customer data for companies. In the coming years, we can expect to see further advances through technologies such as blockchain, augmented reality/virtual reality, omnichannel integration and, of course, artificial intelligence (AI) — see Figure 1.
However, at the same time, customer attitudes and buying behaviors are shifting significantly. For example, recent studies from Zendesk and Hubspot have shown that while 77% of people say they stick with brands that offer loyalty programs, 55% of US and UK consumers indicate that their brand loyalty is beginning to decline. Looking ahead, according to Statista, 60% of US Gen Z online shoppers report diminished brand loyalty.
In general, customers are increasingly looking for customization. They are vastly aware of social trends and want to be part of a group where they feel they belong. They also expect to have their opinions heard. Consequently, brands need to provide them with benefits and experiences that make them feel special and keep them interested — directly and indirectly. Customers also want to feel like they are contributing and benefiting from the success of a particular brand. Figure 2 summarizes these and other trends shaping the future of loyalty schemes.
These trends are interconnected, and many are mutually reinforcing. Collectively, they could lead to no less than a complete redefinition of what customer engagement is all about.
Embedded loyalty is a powerful concept that some believe will be the future of all loyalty schemes. It refers to seamlessly incorporating rewards and experiences into daily experiences and transactions rather than treating them separately. A bank may, for instance, reward customers using its mobile banking app, or retailers may reward customers who purchase products with specific payment methods.
The main distinction between traditional loyalty programs and embedded loyalty is that the customer data collected can enhance personalizing rewards. Traditional loyalty programs often require customers to manually track points before redeeming them, whereas with embedded loyalty, this process becomes streamlined and effortless for both companies and customers. This is in contrast to traditional loyalty programs, which are often standalone systems that require separate registration, tracking, and redemption processes. Table 1 summarizes the differences between embedded loyalty and traditional loyalty schemes.
Embedded loyalty is growing rapidly for several reasons:
Building on the third point, embedded finance (i.e., the integration of financial services into nonfinancial platforms, products, or processes) is already a popular and growing service with customers and embedders alike. Deep integration of loyalty programs with financial products — going beyond just superficial integration such as cobranded credit cards — offers major benefits, for example:
Embedded loyalty is growing across multiple sectors from coffee shops to airlines to retailers. The degree of embeddedness varies, but the direction of travel is toward increasing integration. Tables 2 and 3 provide some illustrative current examples, distinguishing between embedded and what we call “near-embedded” loyalty programs.
Building and executing an embedded loyalty program requires a strategic approach. Businesses should consider the following key building blocks:
It is true that loyalty programs on their own cannot change the fortunes of any brand in isolation, with many factors contributing to building brand strength. However, loyalty programs do have a key part to play. They are growing rapidly — and also becoming more competitive as customer trends and behaviors shift. Moving toward embedded loyalty is therefore increasingly important for businesses. To make the move, businesses need to put in place strong data analytics infrastructures and embrace the potential of partnerships with other companies such as financial services providers. In doing so, they can greatly enhance customer experience, improve engagement, build greater loyalty, and generate new revenue streams. If loyalty and reward programs are not an integral part of an organization’s customer engagement strategy, they are merely glorified discount programs.
By Arjun Vir Singh, Riadh Marrakchi, Dominic Kuriakose