Loyalty Programs: Design and Effectiveness

Abstract

Loyalty programs (LPs) are critical CRM tools used to identify, reward, and successfully retain profitable customers. This chapter gives a deeper introduction into the strategic use of this tool by presenting several industry examples. In two parts, it deals with the design and the effectiveness of LPs. Initially, this chapter details the objectives and design of various loyalty programs, along with several LP failures that highlight the elements and determinants of a successful program. By reviewing several of these LP characteristics, this chapter offers a systematic investigation of the outcomes and determinants of LP success, as well as guidelines for designing optimal programs. The key dimensions of LP design, including reward and sponsorship, also are explained in detail and illustrated with relevant case studies. Then in the second part of the chapter, the discussion of the effectiveness of loyalty programs introduces four key drivers of effectiveness and details their influence schematically. Empirical evidence about the performance of LPs across various industry segments also illustrates the success factors, leading into explanations of how firms can create competitive advantages by operating effective loyalty programs and focusing on value alignment. Finally, a seven-point checklist sums up the most important prerequisites for successful design and implementation of loyalty programs.

Appendix I. Key Studies of LPs with Notable Empirical Findings

No.	Organization details	Industry	Findings
1	Six partner companies of the FlyBuy program in Australia	General retail	LP has hardly any effect on repeat purchase patterns (behavioral loyalty) (Bolto et al., 2000)
2	Credit card firms (single firms) in three European countries	Credit cards	LP members are more likely to overlook negative experiences with the focal company
			LP members have higher usage levels and higher retention (Deighton/Shoemaker, 2000)
3	Single firm	Hospitality	20% of member stays are because of LP
			Strategy of using LP as a value alignment tool is successful
			LP is profitable (Crié et al., 2000)
4	—	Grocery industry in France	Being a LP member does not modify purchase behavior
			Events and promotions associated with LP seem to have clear effects on purchase
			The effects of LP are mostly short rather than long term. Thus, they seem to work as promotional tools rather than a means to induce loyalty (Reinartz/Kumar, 2003)
5	U.S. direct marketing firm	General merchandise	LP membership is associated with the longer duration of customer–firm relationships
			No information on cost-efficiency (Rajiv, 2001)
6	—	U.S. grocery industry	LP is operationalized as a shocker program (e.g., turkey bucks), not a traditional long-term card program, so it can better be described as a long promotion There is significant increase in spending (market basket)
			LPs seem to affect “cherry-pickers” most
			Program is profitable (Meyer-Waarden/Benavent, 2001)
7	—	Cross-sector sample of 7 LPs	LPs are classified according to their objectives and characteristics
			The two main purposes of LPs are customer heterogeneity management or creating switching costs (behavioral loyalty)
8	—	U. S. grocery	LP increases sales through “point pressure” (short-term) and “rewarded behavior” (long-term) (Taylor/Neslin, 2005)
9	—	Coffee and music on Internet	LP induces purchase acceleration through the progress toward a goal (Kivetz et al., 2006)
10	Spanish supermarket chain	Grocery	LP members are more behavioral and affectively loyal than other participants
			Few customers change purchase behavior after joining the program (García Gómez et al., 2006)
11	Convenience store chain	Retailing	Positive influence of LP on consumers’ purchase frequency and transaction size holds only for light and moderate buyers (Liu, 2007)
12	—	Airline industry	Only high-share firms experienced sales lifts from their loyalty programs
			Because high-share firms tend to possess complementary product and customer resources, they are more likely to gain from their loyalty programs than firms with a smaller market share (Liu/Yang, 2009)
13	Albert Heijn, Super de Boer, Edah, Integro, Konmar, COOP, Jan Linders	Dutch supermarket industry	Small positive, yet significant effect of loyalty program membership on share-of-wallet
			In terms of profitability, each program generates more additional revenues than additional costs in terms of saving and discount rewards (Leenheer et al., 2007)
14	—	Grocery industry	Customers satisfied with the rewards of LPs are more loyal to the store and allocate a higher proportion of their budget and patronage frequency to the store than unsatisfied customers (Demoulina/Ziddab, 2008)
15	Health and beauty provider	Retailing	LP was a significant predictor of store loyalty, in support of the contention that loyalty programs are capable of engendering loyalty (Bridson et al., 2008)