How Retailers Can Salvage Customer Loyalty

Stores that want their shoppers to keep coming back must improve their online and in-store services now or risk losing customer loyalty, perhaps forever. A new study by Wharton’s Jay H. Baker Retailing Center and WisePlum reveals that consumers are increasingly dissatisfied with retail, especially during the COVID-19 pandemic. Sparse inventory, sticky web navigation, poor customer service, unrewarding loyalty programs and cumbersome return policies are all contributing to the rising tide of displeasure. The survey-based study, “The New Reality: Understanding the Retail Consumer Experience During a Pandemic,” finds overall loyalty has decreased as online shopping has increased, and more customers are reporting problems when they shop. Even though retailers are scrambling to adjust, customers are less forgiving than ever. Wharton marketing professor Thomas Robertson, academic director of the Baker Retailing Center and a co-author of the report, spoke to Knowledge@Wharton about what retailers can do to keep their shoppers from jumping ship. 

Knowledge@Wharton: What inspired this research, and what questions were you trying to answer?

Thomas Robertson: Loyalty programs have become more popular, and we see companies proposing new programs almost every day. Yesterday it was Kohl’s. Today it is The Gap. Tomorrow, I don’t know who it will be. We know a number of companies who are considering moving into loyalty programs or designing new loyalty programs. Yet there’s a major question, which is what led to the research, as to whether such programs work. There’s a McKinsey study from 2011 that found that loyalty programs didn’t increase sales at U.S. retailers. In fact, retailers without loyalty programs at that time had a 4% increase in sales, whereas those with loyalty programs didn’t get an increase in sales. The McKinsey study puts a suggestion in your mind that maybe it’s better not to have a loyalty program. We wanted to look at loyalty programs and see if we can understand what works and what doesn’t work.

Knowledge@Wharton: What are the key takeaways from your study that retailers should be paying attention to?

Robertson: The big takeaway is that loyalty programs will not compensate for poor service or a poor product. They will just add cost. You have to have the IT in place. Point of sales data, for example, has to be in place for you to be able to use loyalty programs. And if you’re transitioning to online, you have to be ready for it. You have to design integrated online-offline programs.

One of the biggest takeaways of all was that customers have been less forgiving during the pandemic. We actually expected the opposite. At Wharton, we went from the beginning of the spring semester, which was all offline and students were in class, to going online for the second half of the semester, and we thought maybe that would cause some problems. It caused some challenges, but if we were to look at student ratings of courses and compare the spring semester of 2020 to 2019, student ratings actually went up. Despite all the problems, students seem to be forgiving, or they seem to think that online is really OK. We thought in the retail domain that if there were problems, consumers also would be forgiving. This turns out not really to be the case.

“Loyalty programs will not compensate for poor service or a poor product. They will just add cost.”

Knowledge@Wharton: You started this research with a survey in February, before the pandemic really began. By May, the pandemic was in full effect and most nonessential retail was closed. At that point, you decided to do a second round of surveys. Over that time, the number of dissatisfied shoppers increased by nearly 10 percentage points. Why?

Robertson: Yes, it’s about a 10% increase in problems from before the pandemic to the middle of May, with some decrease in loyalty. And there is a difference. Before, when consumers had problems, the focus was in-store. They would have problems not being able to find things, or they would complain about the messiness of stores or that the salespeople were not helpful. As we got to May, all of this had changed, and what people were now sensitive about was having to pay for shipping to return things, that you needed a receipt to return things, and that the website was difficult to navigate. This seemed to suggest that as the percentage of online sales was going up, many retailers weren’t quite ready for the onslaught and had some trouble coping with it.

Things changed, and a lot of it was due to online. We’re tempted to do a third wave of surveys where we would do a post-pandemic study, but we haven’t quite figured out when the post-pandemic is. We think if we jumped back into the field right now, we’re not sure what we would say. It’s a little bit difficult to pin that down. If we do a third wave, we’re going to wait until we can clearly say the pandemic has passed, and now we want to see what’s going on with loyalty programs.

Knowledge@Wharton: You spoke earlier about shopper loyalty programs. Tell us what you found about that in your research.

Robertson: We find that consumers are less forgiving, but loyalty members actually had more problems. According to our analysis, it is because of the complexity of loyalty programs, and points are a big issue. Consumers are always trying to figure out how many points they have and what they can cash in with these points, so they have to contact retailers a lot more. They also had higher expectations. If you’re in a loyalty program, you think that the retailer is going to treat you in a special way, and you don’t expect problems. And if you do have problems, you expect them to be resolved quickly, which wasn’t always the case. In fact, their problems are more complex if they have to call and get more information about points and what they’re due and what they’re not due. The customers in loyalty programs had more problems and a higher level of disappointment than people who were not in loyalty programs.

Knowledge@Wharton: In your surveys, a sizable number of Gen Z shoppers reported problems with their last purchase. Is there something specific about that age demographic that can explain such a high rate of dissatisfaction?

Robertson: That’s what everyone would like to know. Who are these Gen Zers? For a while, there was this fascination with millennials. There still is a fascination with millennials, but Gen Z is coming up right behind. I’m teaching a course with undergraduates right now where the average age is 20. They are firmly in the category, so trying to understand them is just a wonderful challenge. It’s possible that they are more demanding. They are more sophisticated about online, because they’re digitally native and therefore expect more. They expect it to go right.

I think they’re a sophisticated group when it comes to online. If it’s in-store, one of the things that I’m curious about is whether they get less attention than more mature shoppers. I had an assignment last year with my students where they were evaluating a shopping experience, and a number of them found that security was following them around the store. If you’re 20 years old, does the store value you? Or do they think you’re just there to steal something? I think they have some issues with retail that have to be worked out, and that stores should be thinking about.

Knowledge@Wharton: As Gen Zers age and make more money in their careers, they’ll also be spending more, so it is an important segment for stores to pay attention to, correct?

Robertson: Absolutely. Again, we’ve been so fascinated with millennials because they’re at the sweet spot for retailing at the moment, but Gen Z is right behind them and with every expectation that they will have equivalent income to spare. We have to learn who they are and what motivates them, what turns them on. There’s a lot of popular literature out there on that, and you sort of wonder, is it true and will it hold up? They’re more interested in authenticity. Well, whatever that means. They’re more interested in sustainability. Well, hopefully they are and will continue to be. They have more of a social conscience. They’re more attuned to startups that are very often pursuing a social initiative, such as Warby Parker, which gives away glasses, or such as Harry’s, where 1% of sales goes to nonprofits. They seem to be oriented that way, at least at the moment, and maybe they always will be. So, they’re really an interesting segment that we want to learn more about.

Knowledge@Wharton: What should retailers be doing right now to change this downward trajectory of customer loyalty? Give us some action items.

Robertson: The first one, which is obvious and yet sometimes hard to do, is to get the store experience right and to get the online experience right. That’s your starting point.

The second point is, if you’re going to have a loyalty program, you have to have the systems that will deliver the information for that program. For example, in terms of returns, loyalty program members would say, “They wanted my receipt, but they shouldn’t need my receipt. They have all of my information because I bought with a credit card or I used their loyalty card, and they should know what I bought and when I bought it.” That’s an expectation. The store has to have information systems that align with the loyalty program and take care of their customers.

You need to have an integrated omnichannel view of life. In this pandemic, what we’ve realized is that consumers will return to stores. Will they return 100%? Probably not. Online has increased significantly, and some of that will remain. My view of life at the moment is it’s a 70/30 phenomenon no matter what you talk about, whether it’s people going back to office buildings or consumers going back into stores or people going back into restaurants. At least for the next five years or so, 70% of them will do it, and 30% will be comfortable just staying online. People have adjusted to this new environment.

Service recovery is key. There are going to be problems, there is going to be friction in the purchase experience. There always has been, there always will be. It would be great if we could eliminate it, but it’s not going to happen. Service recovery is absolutely critical, and not all retailers are good at that. Sometimes it takes too long to get the problem resolved, or sometimes it doesn’t get completely resolved, or sometimes a customer has to talk to more than one person to get it resolved, or sometimes the customer has to do it all through chatbots of various sorts.

Finally, if we build expectations, especially for loyalty programs, we have to deliver or we’re going to be punished. This is really the boomerang effect: You promise things and then you don’t quite deliver, and consumers come back to bite you.