CHAPTER 1

May You Live in Interesting Times

The Three Faces of Loyalty

When you think of the word loyalty in the context of business, what comes tomind? If you're like most people, the first thing that will pop into your headis a typical loyalty program, where you earn points for your purchases and canredeem them for rewards. These programs are meant to drive customer loyalty, andaccording to studies, you're probably a member of 18 of them. And yet I'mwilling to bet that you're deeply ambivalent about all of them and, if given abetter offer by another business, would gladly defect. These programs, on whichbillions of dollars are spent annually, aren't generating loyalty to a business;they're generating loyalty to the best deal and so are completely failing attheir fundamental purpose.

What is that purpose? It's to give customers a compelling reason to continue topatronize the business and to resist competitive offers. If a new store opensacross the street or a competitor slashes prices, businesses with loyalcustomers won't lose those customers because they've elevated their relationshipfrom a transactional one to something more meaningful. They have engaged thosecustomers.

Now let's switch gears to employees, arguably a company's biggest asset.Shouldn't the same thinking apply to them? Managers want their employees to beloyal so that employees perform to the best of their abilities, do what's bestfor the company, and resist competitive employment offers. Yet, while businessesacknowledge that they want loyal employees, most are not actually doing anythingabout it. They spend billions attempting to engage their customers and afraction of that, if anything, on engaging their employees.

Finally, companies today rarely accomplish anything alone. You work withpartners to source critical raw materials, enhance product offerings, andamplify your sales efforts. The efforts of these partners are critical to thesuccess of your business, so you need those partners to be engaged. You needthem to be loyal. And yet again, we find that today's businesses generally haveonly rudimentary, if any, systems in place to drive that loyalty. And whatsystems they do have in place feel remarkably like the 18 loyalty programs thatconsumers are ambivalent about.

Clearly, something needs to change. And the companies that figure it out, thatcreate true loyalty, are going to realize a sizable and sustainable competitiveadvantage and win in their markets.

The Road to Loyalty 3.0

Loyalty 3.0 is about taking back the word loyalty and making it actually meansomething. It does this by combining the latest research on human motivationwith the big data generated by your customers, partners, and employees as theyinteract with you to empower your business to motivate, engage, and create trueloyalty.

But before we can understand where we're going, we need to understand wherewe've been.

Loyalty 1.0

We all know Loyalty 1.0 programs; they're the frequent-flyer programs, cash-backcredit cards, and "buy ten get one free" punch cards from the local sandwichshop that have been around for many years. These are purely transactional,completely focused on customers, and absolute failures at generating the kind ofloyalty that businesses actually want. For customers, at best, they're mildlypleasing, and at worst, when a business isn't living up to its brand promise,they feel like a way for a business to hold them hostage. For businesses, atbest, they're table stakes in an industry where everyone else has one, and atworst, they're a giant cost center eating into the bottom line and creating ahuge liability.

Loyalty 1.0 programs also suffer from fundamental structural problems. There'san exciting part at the beginning when you sign up for the program and dreamabout how you're going to earn spectacular rewards and another at the end (ifyou get there) when you actually redeem for a (possibly spectacular but maybenot) reward. In the middle is just a very long grind with no motivation, noengagement, and no loyalty being generated. There's a gulf of lost opportunityin the middle.

Loyalty 2.0

In the early 1990s, 1- to -1 marketing emerged, focused primarily on making theloyalty experience more targeted through segmentation and personalization, witha big emphasis on direct-mail and e-mail campaigns. Data had a bigger role hereas businesses took the information they were learning about their customers andused it to "speak to their interests." While this was effective for a while,open rates on these communications plummeted as the overall level of direct mailand e-mail increased. Consumers were overwhelmed by the sheer amount of noise,and the problem has only gotten worse.

Loyalty 3.0

After Loyalty 2.0, things got stuck for a while. Sure, new technology meant thatyou could now interact with your loyalty program from your mobile phone and thatyou could build a Face-book page for your brand, but nothing fundamentallychanged. Not until now, when the pieces have finally come together to enableLoyalty 3.0. Loyalty 3.0 has three major enabling components that, whencombined, are much greater than the sum of the parts:

1. Motivation. Recent social-science research has much more clearly defined whatcompels and motivates human behavior, and what causes people to do things or notdo things in life and in the workplace. Knowing what truly motivates people—andwhat doesn't—enables us to create stronger engagement and true loyalty.

2. Big data. Technology has taken over how we communicate, socialize, work, andplay. The amount of data that people are generating as they interact with thesesystems is exploding, and new technology is enabling businesses to capture thatdata with more granularity than ever before. Smart businesses can consume thisdata and use it to understand, engage, and motivate their constituents in waysnot previously possible.

3. Gamification. Game designers have been using data-driven motivationaltechniques for years. Our new understanding of motivation, combined with theemergence of big data streams, has enabled these techniques to be...