A Report on the Results of the 2013 LoyaltyOne Social Media Transaction Impact Study

THE POSITIVE POWER OF NEGATIVE WORD!OF!MOUTH

Turning the Danger of Negative Social Media Into Positive Results

JULY 2013

Neil EverettSVP and CMO, LoyaltyOne

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IntroductionNext to financial results, customer feedback about a product/service or shopping experience isusually foremost on the minds of marketers and executive management. Much like the “numbers,”the voices and buying behaviors of consumers deliver the surest way to measure the impact of anorganization’s products and services on the marketplace. And these days, the customers’ voices havereach like never before.

Of course, the voice of the customer is sometimes favorable and sometimes negative. In thisdocument we reveal insights from the 2013 LoyaltyOne Social Media Transaction Impact Studyregarding the business and behavioral impact of Negative Word-of-Mouth (WOM).

Word-of-Mouth is the oldest and in some waysthe most engaging form of advertising. Socialmedia has fed its impact, creating soapboxes forinfluencers who can both help and hurt a brandwith the speed of a finger tap. Conventional andproven thinking is that Negative Word-of-Mouthcan hurt a brand. The classic example is the“United Breaks Guitars” video – a musicianexpressing frustration with an airline over adamaged guitar with more than 13 million viewson YouTube.

These days, brands learn from and react instantlyto consumer Word-of-Mouth. One example is thewise move by distillery Maker’s Mark, whichswiftly reversed its decision to reduce the alcoholcontent of its product (as a way to increaseproduction and meet exploding demand) inresponse to vehement social media reaction.

Will Maker’s Mark’s reversal return sales to where they were prior to this misstep? Likely, yes, but here’s another possible impact: The 2013 LoyaltyOne Social Media Transaction Impact Studysuggests that the brand’s swift response, promptly communicated to the general public and to

The 2013 LoyaltyOne Social Media Transaction Impact Study highlights twomajor points:

1. Loyalty program members who spreadNegative Word-of-Mouth

are often your best cus-tomers. Their passioncan be leveraged as the

core of a well-designedrecovery program.

2. Taking the “temperature” of the Negative WOM guides appropriate action in response.

its best customers, might lead to increased sales. Why? A combination of “arousing” the customer base and therefore indirectly reminding them of their passion for the brand, followed quickly by re-establishing what customers love.

This isn’t to suggest that you want to incite your customers with bad news in order to fuel Word-of-Mouth and subsequent engagement. Yes, it’s an interesting twist on “Surprise and Delight” – theconcept of giving program members, particularly best customers, an unexpected perk to refreshtheir appreciation of the program, remind them of the benefits and bring the program top of mind.

The goal of Surprise and Delight, of course, is to spur future activity. Butas one of my colleagues noted, “If you’re going to wake anybody up,wake them up with a kiss instead of a kick.”

Also, this isn’t a matter of the dusty public relations axiom of “We don’tcare what you say about us – just spell our name right.” It’s a matter ofknowing who your most engaged, valuable and vocal customers are,and leveraging their passion to your benefit – and, of course, to theirs.And that’s the important point. Customers’ negative “vocal” activity is atype of engagement with the brand, engagement that reflects the

intensity of brand passion. The very instance of a “negative” engagement is both a warning and,when best practices are employed, an opportunity.

Passionate customers are often the quickest to praise you, recommend you and advocate for you.They are “Brand Champions,” as described by COLLOQUY in its 2009 and 2011 Word-of-MouthStudies. On the other hand, those same Brand Champions are also the quickest to take you to taskwhen they’re disappointed. Brand Champions who feel slighted can swiftlyconvert to what COLLOQUY calls “Madvocates,” with the passion andpower to influence a network of other consumers. But the conversion toMadvocacy can be reversed – and remediated to an overall positive –because of the Champions’ passion that fuels vocal expression andtransactional behavior.

When a company’s customers start to control the rhetoric concerning abrand’s reputation, it might seem like a good time to duck for cover. Butsuch a reaction fails to leverage the hidden power of Negative WOM.Instead, companies must determine the specific level of Negative WOMthat triggers a call-to-action, and what that action should be.

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70%That’s the increasedvalue of customers inour study who were active in social media

36%That’s the transactionlift demonstrated by customers posting neg -ative comments who redeemed for rewardsafter their posts weremade

Keyboards heat upTo demonstrate this point, we turn to the 2013 LoyaltyOne Social Media Transaction Impact Study.Specifically, recent initiatives by the AIR MILES Reward Program, Canada’s most recognized loyalty program,provide a case study that illustrates how social commentary impacts consumer purchasing behavior.

In December 2011, AIR MILES – which serves more than ten million members (known as “Collectors”) –simultaneously launched two program changes:

• A feature called AIR MILES Cash, which allows Collectors to instantly redeem reward milescollected in the program in full or partial payment when shopping at participating Sponsorlocations.

• A program change regarding the guidelines for unredeemed AIR MILES reward miles.

The resulting social media commentary gave AIR MILES an opportunity to analyze Negative WOM and todetermine how it impacted subsequent transaction and redemption behaviors of both those postingthe comments and those simply viewing them. In this case, LoyaltyOne followed the Community websitecommentary of a subset of Collectors who had previously opted in and granted permission for suchobservation.

Sensitive to the needs of its Collectors, AIR MILES had anticipated a certain level of Negative WOMfrom its customers regarding the new redemption policy. As with any established program, whenprogram rules are adjusted or changed, engaged members express their opinions. As can be expected,some customers who expressed negative opinions were only mildly upset by the changes, while otherswere much more expressive in their sentiments.

But what we couldn't forecast was the degree to which those reactions would impact customerinvolvement with the program.

The 2013 LoyaltyOne Social Media Transaction Impact Study uncovered the temperature range of Nega-tive WOM, including nuances in words that determine how concerned a brand should be when gaug-ing the sentiments that customers express. For example, consumers who were simply disappointed orconcerned typically use words like “doubt,” “surprise” and “confusion” in their commentary. Frustratedcustomers, those most at risk of leaving the program, tended to use words like “disgusted,” “angry”and “outraged.”

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DoubtfulDoubtfulDoubtful OutragedOutragedOutragedSurprisedSurprisedConfusedConfusedSurprisedConfused

DisgustedDisgustedAngryAngryDisgustedAngry

Disappointed and/or Concerned Frustrated and at Risk of Leaving

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In analyzing the impact of suchcommentary, the study first deter-mined that the people who postedcomments were generally morevaluable customers overall. Thestudy examined Collector activityby posters in the four weeks prior tothe two announcements, versusnon-posters in that period. The dia-gram on the right shows that Col-lectors who later posted weresignificantly more engaged thanthose who later only viewed theposts or those in an offline controlgroup. (In this context, “engage-ment” is associated with earningloyalty program currency, redeem-ing for rewards, and otherwise ac-tively participating in the program.)Posters were 70% more activelyengaged with the AIR MILES Re-ward Program as Collectors thannon-posters.

We can conclude that many neg-ative commentators were angryprecisely because of their emotionalconnection with the program.They were more engaged in the firstplace, and therefore were morepassionate in expressing theiropinions. Their commentary con-tained more detail, with greaterintensity of anger and a lengththree times that of the typicalpost.

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The Power of Social Media Posters On the AIR MILES Reward Program Community Page

Transaction and redemption activity shows that posters are 70% more valuable than non-posters.

Source: 2013 LoyaltyOne Social Media Transaction Impact Study• Numbers scaled to base 100• Posters: n = 76• Viewers: n = 1,094• Control Group: n = 10,000

Transaction Miles

Redemption Miles

Posters

Transaction Miles

Redemption Miles

Viewers

Transaction Miles

Redemption Miles

Control

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There was further proof that producers ofNegative WOM emerge from the program’smost engaged member base. About a third ofnegative posters made redemptions afterthey posted their commentary. The study ex-amined the downstream activity of Collec-tors who made redemptions after thenegative comments were posted. The nega-tive posters who redeemed exhibited a lift of36% in collection activity over the level be-fore the announcements. That compared to a21% increase from redeemers within theControl Group over the same time period.

The catalyst? Heightened engagement. The announcements and the resulting Negative WOM com-mentary appear to have acted as a reminder, placing the program at the forefront of the negativeposters’ minds. By redeeming, these Collectors were further reminded of the value they extracted fromthe program, leading to increased activity. The reasons members had established their relationshipwith the brand in the first place had been highlighted, and these more-valuable customers responded.

During periods of Negative WOM thetemperature of commentary will reacha threshold at which your companyfeels compelled to craft responses, asappropriate, that lead the conversationback to the brand’s core benefits. Inthis case, AIR MILES responded bymonitoring customer comments, pro-viding answers to specific questionsand addressing rumors or inaccuraciesas they were expressed. With carefulmanagement, Negative WOM canprove a positive boost for engagement,but only if mediated by a simultaneouspositive experience linked to the pro-gram’s core value proposition.

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Source: 2013 LoyaltyOne Social Media Transaction Impact Study

Control Group

LIFT21%

Negative W

OM Redeem

ersLIFT36%

Redemptions Fuel Transaction Lift

Experiencing value inspires heightened activity from the most passionate customers, as demonstrated in the AIR MILES Reward Program study.

Source: 2013 LoyaltyOne SocialMedia Transaction Impact Study

The combination of angry words and threats to leave the program inflicted thisimpact on downstreampurchase frequency in the AIR MILES Reward Programstudy:

The Impact of the“Hot-Negative” Social Media Poster

12%

MilesAccumulated

PurchaseFrequency

34%

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Taking the Temperature of WOMThe 2013 LoyaltyOne Social Media Transaction Impact Study also revealed the different “temperatures” ofNegative WOM. Some customers may say they are disappointed or confused by changes in a program (or

simply have questions), while others will express anger and possibly threaten to leave (what wecall a “Hot-Negative” response). Angry customers may create short-term storm clouds, butbrands must separate that from the potential long-term damage created by ignoring or mis-handling an angry poster. Brands should concentrate their efforts on the vocal commentators.

In the study sample, 64% of the posters expressed anger, and over half of them threatened to quit theprogram. The combination of “anger” plus “intention to exit” created a 34% decrease in such posters’subsequent reward miles accumulated, and a 12% decrease in purchase frequency, adjusted for seasonality.

Other combinations of emotions, such as “disappointment” plus “intention to exit,” and “concern/confusion/surprise” plus “intention to exit” didn’t have a statistically significant impact on behavior.Therefore, “Hot-Negative” comments, coupled with a stated intention to exit, are where marketing interventions should focus.

Keeping the passion positiveOf course, loyalty programs want and need passionate members. But with any relati onship, emotiondoesn’t always flow in a favorable direction. Programs must attentively monitor the relationship with

an eye to keeping it positive, particularly when implementing program change. Madvocacy isdamaging to the business in the short term. Negative WOM in this socially-connected age is areality no brand can afford to ignore. While the best remedy may be prevention, a strategyof service recovery is required.

Consider these recommendations.

Use the data. Analyze transactions, redemptions and social media trafficdata from both posters and viewers during and after any period provokingNegative WOM. If there is a brief impact followed by a quick return to nor-mal levels – as there might be with a small change like a price increase –

further action is likely unwarranted. While customer disappointment over a change, serviceissue or another matter may compel a company to react beyond normal customer commu-nications, that’s not always appropriate, effective or even necessary.

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Take action if the social media “buzz” and sales indicate a more negativecustomer sentiment. Prepare a targeted recovery plan for when NegativeWOM strikes. Employ communications strategies that emphasize the valuethat both parties receive from the relationship. For example, express appre-

ciation, and promote positive program incentives and features such as redemption in orderto counter negative commentary.

Be swift and sincere in your response. Recognize Negative WOM posters’opinions and remind them of the benefits they derive from being membersof your program to maximize the potential of critical posters remaining en-gaged at high levels, and increasing future transactional behavior. React in

a non-confrontational manner to reassure posters and viewers alike that the brand caresabout customer opinion.

Go public. Angry customers can become better customers downstream ifthey continue to experience the benefits provided by the brand. Yet, ex-pressions of anger and intent to exit may not only signal lower future pur-chase behavior by those posting messages, but can also precede dampened

transaction activity for the viewers of such messages. Therefore, we recommend publicly re-sponding, through the same social media channels, to ensure that the positive changes arenoticed by the same viewers of the negative posts.

Ultimately, a good starting point for your reaction plan is to focus on what makes members loyal to a program in the first place – and doing so publicly. As with personal relationships, arguing is not fun, butmaking up is.

Conclusion: Be positively engagedNobody likes to hear negative comments, but those comments don’t necessarily have a negative impacton your business. Even a company’s most outspoken critics have passion for the brand, and their activitycan actually be proof of high customer engagement. Understanding the source of criticism, focusing onthe “temperature” of the comments, and preparing a strategy for recovery can spur surprisingly positiveconsumer behaviors from even the most bitter grumblers.

To gain timely insight into this and other important loyalty topics, sign up for the LoyaltyOne INSIDER www. loyalty.com/e-newsletter

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Appendix: MethodologyLoyaltyOne worked with a team of researchers and linguistic analysts from Northwestern University’sMedill IMC Spiegel Research Initiative. The analysts examined the actual posting experience of 76 indi-viduals who posted 110 separate comments which were viewed by 1,094 other unique Collectors. Theteam categorized every post by the emotional tone and nature of its content, separating questions fromstatements and measuring emotions such as “Anger,” “Confusion,” and “Concern.” They also recordedwhether a Collector had posted, viewed posts, or both. Linking each posting and viewing event back toeach Collector’s transaction and redemption data, the analysts compared behaviors in the four weeksbefore and eleven weeks after the announcements against a control group of 10,000 offline Collectorsover the same period. This information was collected only from a sub-set of Collectors who had grantedpermission to the company to track their social media behavior there.

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ABOUTThe Author

Neil Everett is Chief Marketing Officer of LoyaltyOne. He is responsible for all aspectsof marketing the AIR MILES Reward Program, including brand management, marketingstrategy, and communications, encompassing mass and integrated marketing as wellas emerging channels such as mobile and social, rewards strategy, procurement andfulfillment. His focus as CMO is on growing and evolving consumer engagement to

ensure the continued leadership of North America’s premier coalition loyalty program. Everett also leadsSquareKnot, a full-service integrated marketing agency under the LoyaltyOne umbrella.

ABOUTLoyaltyOne

LoyaltyOne is a global leader in the design and implementation of coalition loyalty programs, customeranalytics and loyalty management solutions for Fortune 1000 clients around the world. LoyaltyOne’sunparalleled track record in the loyalty marketplace stems from its unique combination of pragmatic,hands-on experience and continuous thought leadership. LoyaltyOne has over 20 years’ history lever-aging data-driven insights to develop and operate some of the world’s most effective loyalty programsand customer-centric solutions. These include the AIR MILES Reward Program, North America’s premiercoalition loyalty program and a working partnership with Latin America’s leading coalition program,dotz. LoyaltyOne is also the owner of COLLOQUY, a group dedicated to research, publishing and educa-tion for the global loyalty industry. LoyaltyOne is an Alliance Data company.

For more information, visit www.loyalty.com.

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