Skip to main content
SpringerLink
Log in

Understanding loyalty program effectiveness: managing target and bystander effects

  • Original Empirical Research
  • Published:
Journal of the Academy of Marketing Science Aims and scope Submit manuscript

Abstract

Loyalty programs are a ubiquitous marketing tactic, yet many of them perform poorly and the reasons for loyalty program failure remain unclear to both marketing managers and researchers. This article presents three studies—two experiments and one survey—in support of the notion that a greater understanding of loyalty program performance demands an expanded theoretical framework. Specifically, researchers and managers must account for loyalty programs’ effects on both target and bystander customers in the firm’s portfolio, the simultaneous effects of three performance-relevant mediating mechanisms (gratitude, status, unfairness), and the contingent effects of program delivery (rule clarity, reward exclusivity, reward visibility) on specific mediating linkages. The results provide insights into why and when loyalty programs fail and into the complex trade-offs managers face. Loyalty programs have opposing effects on target and bystander customers’ loyalty and sales. While rule clarity suppresses both negative bystander as well as positive target effects, reward visibility enhances both types of effects. Exclusive rewards offer a means to alleviate negative bystander effects without affecting targets. The article both conceptually and empirically establishes a comprehensive analysis framework that can help marketing managers and researchers evaluate and improve loyalty program effectiveness.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2

Similar content being viewed by others

Notes

  1. For our experimental manipulation, we chose a type of reward of a loyalty program that is visible to customers (i.e., premium customer check-in over a red carpet in the lobby) and then varied the degree of visibility (low versus high) within the range of visibility. An alternative approach would be a manipulation where the reward is invisible in some experimental groups (e.g., welcome gift in the hotel room) versus visible in the other experimental groups. With our manipulation, our aim is to provide a more conservative test of the effects of reward visibility on both target and bystander customers beyond testing the two extreme cases of visibility versus invisibility.

  2. Our assumptions are based on the 80/20 rule discussed in the literature (Brierley 2012; Koch 2005). The 80/20 rule, also referred to as the Pareto Principle (Drèze and Nunes 2009), suggests that 80% of a company’s sales are produced by 20% of customers, whereas 80% of customers produce 20% of sales. First, we assume a company rewards its top 20% of customers, resulting in a 4:1 ratio of bystanders to targets. Second, we use the rule to establish a factor of the average sales difference between target and bystander customers as follows: \( \frac{80\%}{20\%} \)/ \( \frac{20\%}{80\%} \) = 16. Thus, we assume that a typical target makes 16 times the sales of a typical bystander. With these two assumptions, we explicitly account for the fact that target customers are more valuable than bystander customers (i.e., higher customer lifetime value).

  3. We included customer goal motivation as an additional mediator in our conceptual model. Yet we found the effect of loyalty program bystander on customer goal motivation to be non-significant. Hence, bystander customers do not seem to be motivated by seeing others being rewarded in a single interaction with the other mediating mechanisms in the model (in our contexts). Due to this non-significant result, we omit the goal motivation mechanism from our model. We are aware that other studies focusing only on goal motivation have found effects (Foster 1972; Frank 1999), so future research needs to investigate when goal motivation may need to be included as an additional mediation path.

References

  • Adams, J. S. (1963). Toward an understanding of inequity. Journal of Abnormal and Social Psychology, 67(5), 422–436.

    Article  Google Scholar 

  • Adams, J. S. (1965). Inequity in social exchange. In L. Berkowitz (Ed.), Advances in experimental social psychology (Vol. 2, pp. 267–299). New York: Academic.

    Google Scholar 

  • Allison, M. (2010). Starbucks discontinues duetto visa card, another blow for some loyalists. The Seattle Times, (February 11). Retrieved January 21, 2013 from http://seattletimes.nwsource.com/html/coffeecity/2011050289_starbucks_discontinues_duetto.html.

  • Anderson, C., John, O., Keltner, D., & Kring, A. (2001). Who attains social status? Effects of personality and physical attractiveness in social groups. Journal of Personality and Social Psychology, 81(1), 116–132.

    Article  Google Scholar 

  • Barone, M. J., & Roy, T. (2010). Does exclusivity always pay off? Exclusive price promotions and consumer response. Journal of Marketing, 74(2), 121–132.

    Article  Google Scholar 

  • Berinsky, A. J., Huber, G. A., & Lenz, G. S. (2012). Evaluating online labor markets for experimental research: Amazon.com’s Mechanical Turk. Political Analysis, 20(3), 351–368.

    Article  Google Scholar 

  • Berry, J. (2013). Bulking up: The 2013 COLLOQUY loyalty census – Growth and trends in U.S. loyalty program activity. COLLOQUYtalk (Vol. June, pp. 1–13). Cincinnati: LoyaltyOne/COLLOQUY.

    Google Scholar 

  • Bolton, R. N., Kannan, R. K., & Bramlett, M. D. (2000). Implications of loyalty program membership and service experiences for customer retention and value. Journal of the Academy of Marketing Science, 28(1), 95–108.

    Article  Google Scholar 

  • Brierley, H. (2012). Why loyalty programs alienate great customers. Harvard Business Review, (July-August). Retrieved January 21, 2013 from http://hbr.org/2012/07/why-loyalty-programs-alienate-great-customers.

  • Butori, R., & De Bruyn, A. (2013). So you want to delight your customers: The perils of ignoring heterogeneity in customer evaluations of discretionary preferential treatments. International Journal of Research in Marketing, 30(4), 358–367.

    Article  Google Scholar 

  • Carrell, M. R., & Dittrich, J. E. (1978). Equity theory: The recent literature, methodological considerations, and new directions. The Academy of Management Review, 3(2), 202–210.

    Google Scholar 

  • Cialdini, R. B. (2009). Influence: Science and practice (5th ed.). Boston: Pearson.

    Google Scholar 

  • Collins, R. L. (1996). For better or worse: The impact of upward social comparison on self-evaluations. Psychological Bulletin, 119(1), 51–69.

    Article  Google Scholar 

  • Dahl, D. W., Honea, H., & Manchanda, R. V. (2005). Three Rs of interpersonal consumer guilt: Relationship, reciprocity, reparation. Journal of Consumer Psychology, 15(4), 307–315.

    Article  Google Scholar 

  • Darke, P. R., & Dahl, D. W. (2003). Fairness and discounts: The subjective value of a bargain. Journal of Consumer Psychology, 13(3), 328–338.

    Article  Google Scholar 

  • Daryanto, A., de Ruyter, K., Wetzels, M., & Patterson, P. G. (2010). Service firms and customer loyalty programs: a regulatory fit perspective of reward preferences in a health club setting. Journal of the Academy of Marketing Science, 38(5), 604–616.

    Article  Google Scholar 

  • Dawson, S. (1988). Four motivations for charitable giving: Implications for marketing strategy to attract monetary donations for medical research. Journal of Health Care Marketing, 8(June), 31–37.

    Google Scholar 

  • Diamantopoulos, A., & Winklhofer, H. M. (2001). Index construction with formative indicators: An alternative to scale development. Journal of Marketing Research, 38(May), 269–277.

    Article  Google Scholar 

  • Diener, E. (1984). Subjective well-being. Psychological Bulletin, 95(3), 542–575.

    Article  Google Scholar 

  • Drèze, X., & Nunes, J. C. (2009). Feeling superior: The impact of loyalty program structure on consumers’ perceptions of status. Journal of Consumer Research, 35(6), 890–905.

    Article  Google Scholar 

  • Drèze, X., & Nunes, J. C. (2011). Recurring goals and learning: The impact of successful reward attainment on purchase behavior. Journal of Marketing Research, 48(2), 268–281.

    Article  Google Scholar 

  • Dwyer, F. R., Schurr, P. H., & Oh, S. (1987). Developing buyer-seller relationships. Journal of Marketing, 51(2), 11–27.

    Article  Google Scholar 

  • Emmons, R. A. (2004). The psychology of gratitude: An introduction. In R. A. Emmons & M. E. McCullough (Eds.), The psychology of gratitude (pp. 3–16). Oxford: Oxford University Press.

    Chapter  Google Scholar 

  • Emmons, R. A., & McCullough, M. E. (2004). The psychology of gratitude. Oxford: Oxford University Press.

    Book  Google Scholar 

  • Feinberg, F. M., Krishna, A., & Zhang, Z. J. (2002). Do we care what others get? A behaviorist approach to targeted promotions. Journal of Marketing Research, 39(3), 277–291.

    Article  Google Scholar 

  • Festinger, L. (1954). A theory of social comparison processes. Human Relations, 7(2), 117–140.

    Article  Google Scholar 

  • Finkel, N. J. (2000). But it’s not fair! Commonsense notions of unfairness. Psychology, Public Policy, and Law, 6(4), 898–952.

    Article  Google Scholar 

  • Fitzsimons, G. J. (2008). Death to dichotomizing. Journal of Consumer Research, 35(1), 5–8.

    Article  Google Scholar 

  • Foster, G. M. (1972). The anatomy of envy: A study in symbolic behavior. Current Anthropology, 13, 165–202.

    Article  Google Scholar 

  • Frank, R. H. (1999). Luxury fever: Why money fails to satisfy in an era of excess. New York: Free Press.

    Google Scholar 

  • Garnefeld, I., Eggert, A., Helm, S. V., & Tax, S. S. (2013). Growing existing customers’ revenue streams through customer referral programs. Journal of Marketing, 77(4), 17–32.

    Article  Google Scholar 

  • Gilbert, D. T., Giesler, R. B., & Morris, K. A. (1995). When comparisons arise. Journal of Personality and Social Psychology, 69(2), 227–236.

    Article  Google Scholar 

  • Heffetz, O., & Frank, R. H. (2011). Preferences for status: Evidence and economic implications. In J. Benhabib, A. Bisin, & M. O. Jackson (Eds.), Handbook of social economics (Vol. 1A, pp. 69–91). San Diego: Elsevier.

    Google Scholar 

  • Henderson, C. M., Beck, J. T., & Palmatier, R. W. (2011). Review of the theoretical underpinnings of loyalty programs. Journal of Consumer Psychology, 21(3), 256–276.

    Article  Google Scholar 

  • Henseler, J., & Fassott, G. (2010). Testing moderating effects in PLS path models: An illustration of available procedures. In V. Esposito Vinzi, W. W. Chin, J. Henseler, & H. Wang (Eds.), Handbook of partial least squares – Concepts, methods and applications (pp. 713–735). Berlin: Springer.

    Chapter  Google Scholar 

  • Homburg, C., Droll, M., & Totzek, D. (2008). Customer prioritization: Does it pay off, and how should it be implemented? Journal of Marketing, 72(5), 110–130.

    Article  Google Scholar 

  • Jiang, L., Hoegg, J., & Dahl, D. W. (2013). Consumer reaction to unearned preferential treatment. Journal of Consumer Research, 40(3), 412–427.

    Article  Google Scholar 

  • Kivetz, R., & Simonson, I. (2003). The idiosyncratic fit heuristic: Effort advantage as a determinant of consumer response to loyalty programs. Journal of Marketing Research, 40(4), 454–467.

    Article  Google Scholar 

  • Koch, R. (2005). The breakthrough principle of 16x: Real simple innovation for 16 times better results. Dallas: Pritchett, LP.

    Google Scholar 

  • Kumar, V., & Reinartz, W. J. (2006). Customer relationship management: A databased approach. Hoboken: Wiley.

    Google Scholar 

  • Lacey, R., Suh, J., & Morgan, R. M. (2007). Differential effects of preferential treatment levels on relational outcomes. Journal of Service Research, 9(3), 241–256.

    Article  Google Scholar 

  • Leenheer, J., van Heerde, H. J., Bijmolt, T. H. A., & Smidts, A. (2007). Do loyalty programs really enhance behavioral loyalty? An empirical analysis accounting for self-selecting members. International Journal of Research in Marketing, 24(1), 31–47.

    Article  Google Scholar 

  • Liang, H., Saraf, N., Hu, Q., & Xue, Y. (2007). Assimilation of enterprise systems: The effect of institutional pressures and the mediating role of top management. MIS Quarterly, 31(1), 58–87.

    Google Scholar 

  • Mayser, S., & von Wangenheim, F. (2013). Perceived fairness of differential customer treatment: Consumers’ understanding of distributive justice really matters. Journal of Service Research, 16(1), 99–113.

    Article  Google Scholar 

  • Meyer, W.-U., Reisenzein, R., & Schützwohl, A. (1997). Toward a process analysis of emotions: The case of surprise. Motivation and Emotion, 21(3), 251–274.

    Article  Google Scholar 

  • Meyer-Waarden, L. (2007). The effects of loyalty programs on customer lifetime duration and share of wallet. Journal of Retailing, 83(2), 223–236.

    Article  Google Scholar 

  • Meyer-Waarden, L., & Benavent, C. (2009). Grocery retail loyalty program effects: self-selection or purchase behavior change? Journal of the Academy of Marketing Science, 37(3), 345–358.

  • Morales, A. C. (2005). Giving firms an “E” for effort: Consumer responses to high-effort firms. Journal of Consumer Research, 31(4), 806–812.

    Article  Google Scholar 

  • Niepel, M., Rudolph, U., Schützwohl, A., & Meyer, W.-U. (1994). Temporal characteristics of the surprise reaction induced by schema-discrepant visual and auditory events. Cognition and Emotion, 8(5), 433–52.

    Article  Google Scholar 

  • Nunes, J. C., & Drèze, X. (2006). Your loyalty program is betraying you. Harvard Business Review, 84(4), 124–131.

    Google Scholar 

  • Oliver, R. L. (1997). Satisfaction: A behavioral perspective on the consumer. New York: McGraw-Hill.

    Google Scholar 

  • Palmatier, R. W., Jarvis, C. B., Bechkoff, J. R., & Kardes, F. R. (2009). The role of customer gratitude in relationship marketing. Journal of Marketing, 73(5), 1–18.

    Article  Google Scholar 

  • Podsakoff, P. M., MacKenzie, S. B., Lee, J.-Y., & Podsakoff, N. P. (2003). Common method biases in behavioral research: A critical review of the literature and recommended remedies. Journal of Applied Psychology, 88(5), 879–903.

    Article  Google Scholar 

  • Preacher, K. J., & Hayes, A. F. (2008). Asymptotic and resampling strategies for assessing and comparing indirect effects in multiple mediator models. Behavior Research Methods, 40(3), 879–891.

    Article  Google Scholar 

  • Rust, R. T., & Oliver, R. L. (2000). Should we delight the customer? Journal of the Academy of Marketing Science, 28(1), 86–94.

    Article  Google Scholar 

  • Samaha, S. A., Palmatier, R. W., & Dant, R. P. (2011). Poisoning relationships: Perceived unfairness in channels of distribution. Journal of Marketing, 75(3), 99–117.

    Article  Google Scholar 

  • Shugan, S. M. (2005). Brand loyalty programs: Are they shams? Marketing Science, 24(2), 185–193.

    Article  Google Scholar 

  • Sirdeshmukh, D., Singh, J., & Sabol, B. (2002). Consumer trust, value, and loyalty in relational exchanges. Journal of Marketing, 66(1), 15–37.

    Article  Google Scholar 

  • Steenkamp, J.-B. E. M., & Baumgartner, H. (1998). Assessing measurement invariance in cross–national consumer research. Journal of Consumer Research, 25(1), 78–107.

    Article  Google Scholar 

  • Tajfel, H., & Turner, J. C. (1986). The social identity theory of intergroup behavior. In S. Worchel & W. G. Austin (Eds.), Psychology of intergroup relations (pp. 7–24). Chicago: Nelson-Hall.

    Google Scholar 

  • Utne, M. K., & Kidd, R. F. (1980). Equity and attribution. In G. Mikula (Ed.), Justice and social interaction (pp. 63–93). New York: Springer.

    Google Scholar 

  • Van de Ven, N., Zeelenberg, M., & Pieters, R. (2009). Leveling up and down: The experiences of benign and malicious envy. Emotion, 9(3), 419–429.

    Article  Google Scholar 

  • Van Prooijen, J., Van den Bos, K., & Wilke, H. (2002). Procedural justice and status: Status salience as antecedent of procedural fairness effects. Journal of Personality and Social Psychology, 83(6), 1353–1361.

    Article  Google Scholar 

  • Wagner, T., Hennig-Thurau, T., & Rudolph, T. (2009). Does customer demotion jeopardize loyalty? Journal of Marketing, 73(3), 69–85.

    Article  Google Scholar 

  • Walster, E., Walster, G. W., & Berscheid, E. (1978). Equity: Theory and research. Boston: Allyn & Bacon, Inc.

    Google Scholar 

  • Weiner, B. (1985). An attributional theory of achievement motivation and emotion. Psychological Review, 92(4), 548–573.

    Article  Google Scholar 

  • Woodruff, R. B. (1997). Customer value: The next source for competitive advantage. Journal of the Academy of Marketing Science, 25(2), 139–153.

    Article  Google Scholar 

Download references

Acknowledgment

The authors thank the Marketing Science Institute (MSI) for their support of this research.

Author information

Authors and Affiliations

  1. Marketing Department, University of Paderborn, Warburger Strasse 100, 33098, Paderborn, Germany

    Lena Steinhoff

  2. John C. Narver Endowed Chair in Business Administration, Michael G. Foster School of Business, University of Washington, 418 PACCAR Hall, Box 353226, Seattle, WA, 98195-3200, USA

    Robert W. Palmatier

Authors
  1. Lena Steinhoff
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Robert W. Palmatier
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Lena Steinhoff.

Appendix

Appendix

Scenario descriptions

Scenario 1: Retail

Target Customer/Low Rule Clarity

You are a customer of the international coffee shop chain CrownCoffee. You have regularly patronized CrownCoffee in the past and have always been satisfied. Today, on your way to work, you go to CrownCoffee to buy your coffee.

While you wait in line, you notice that some customers in front of you receive a free pastry with their drink. When you walk up to the counter to order your drink, you are also offered a free pastry. You have no idea of why you were selected. You buy your favorite coffee and choose a free pastry. As usual, other customers are able to buy pastries with their drinks for an additional charge.

After you paid, you get back in your car to go to work.

Target Customer/High Rule Clarity

You are a customer of the international coffee shop chain CrownCoffee. You have regularly patronized CrownCoffee in the past and have always been satisfied. Today, on your way to work, you go to CrownCoffee to buy your coffee.

While you wait in line, you notice that some customers in front of you receive a free pastry with their drink. When you walk up to the counter to order your drink, you are also offered a free pastry. You know you were selected because your past purchase history meets CrownCoffee’s reward guidelines, which are published on the company’s website. You buy your favorite coffee and choose a free pastry. As usual, other customers are able to buy pastries with their drinks for an additional charge.

After you paid, you get back in your car to go to work.

Bystander Customer/Low Rule Clarity

You are a customer of the international coffee shop chain CrownCoffee. You have regularly patronized CrownCoffee in the past and have always been satisfied. Today, on your way to work, you go to CrownCoffee to buy your coffee.

While you wait in line, you notice that some customers in front of you receive a free pastry with their drink. However, when you walk up to the counter to order your drink, you are not offered a free pastry. You have no idea of why you were not selected. You buy your favorite coffee. As usual, you are able to buy pastries with your drink for an additional charge.

After you paid, you get back in your car to go to work.

Bystander Customer/High Rule Clarity

You are a customer of the international coffee shop chain CrownCoffee. You have regularly patronized CrownCoffee in the past and have always been satisfied. Today, on your way to work, you go to CrownCoffee to buy your coffee.

While you wait in line, you notice that some customers in front of you receive a free pastry with their drink. However, when you walk up to the counter to order your drink, you are not offered a free pastry. You know you were not selected because your past purchase history does not meet CrownCoffee’s reward guidelines, which are published on the company’s website. You buy your favorite coffee. As usual, you are able to buy pastries with your drink for an additional charge.

After you paid, you get back in your car to go to work.

No Loyalty Program (Control Group)

You are a customer of the international coffee shop chain CrownCoffee. You have regularly patronized CrownCoffee in the past and have always been satisfied. Today, on your way to work, you go to CrownCoffee to buy your coffee.

While you wait in line, you do not notice any special promotional discounts or reward program offerings. You walk up to the counter to order your drink. You buy your favorite coffee. As usual, you are able to buy pastries with your drink for an additional charge.

After you paid, you get back in your car to go to work.

Scenario 2: Hotels

Target Customer/Low Reward Visibility

You are a customer of the international hotel chain BestResidence. You have regularly patronized BestResidence in the past and have always been satisfied. Today, you arrive at a BestResidence hotel for another overnight stay.

When you enter the lobby, there are two check-in counters: a normal customer check-in counter where customers need to wait in line and a premium customer check-in counter where customers walk over a red carpet and check in without any waiting time. You check in at the premium customer check-in counter. While you walk over the red carpet and check in quickly, the lobby is empty; no customers are waiting at the normal customer check-in counter.

You receive your key from the friendly receptionist and go to your room, which meets your expectations.

You are a customer of the international hotel chain BestResidence. You have regularly patronized BestResidence in the past and have always been satisfied. Today, you arrive at a BestResidence hotel for another overnight stay.

When you enter the lobby, there are two check-in counters: a normal customer check-in counter where customers need to wait in line and a premium customer check-in counter where customers walk over a red carpet and check in without any waiting time. You check in at the premium customer check-in counter. While you walk over the red carpet and check in quickly, the lobby is crowded; a lot of customers are waiting at the normal customer check-in counter, watching as you check in.

You receive your key from the friendly receptionist and go to your room, which meets your expectations.

Bystander Customer/Low Reward Visibility

You are a customer of the international hotel chain BestResidence. You have regularly patronized BestResidence in the past and have always been satisfied. Today, you arrive at a BestResidence hotel for another overnight stay.

When you enter the lobby, there are two check-in counters: a normal customer check-in counter where customers need to wait in line and a premium customer check-in counter where customers walk over a red carpet and check in without any waiting time. You check in at the normal customer check-in counter. As usual, you wait in line. While you wait, you do not see a premium customer walk over the red carpet and check in quickly.

You receive your key from the friendly receptionist and go to your room, which meets your expectations.

Bystander Customer/High Reward Visibility

You are a customer of the international hotel chain BestResidence. You have regularly patronized BestResidence in the past and have always been satisfied. Today, you arrive at a BestResidence hotel for another overnight stay.

When you enter the lobby, there are two check-in counters: a normal customer check-in counter where customers need to wait in line and a premium customer check-in counter where customers walk over a red carpet and check in without any waiting time. You check in at the normal customer check-in counter. As usual, you wait in line. While you wait, you see several premium customers walk over the red carpet and check in quickly.

You receive your key from the friendly receptionist and go to your room, which meets your expectations.

No Loyalty Program (Control Group)

You are a customer of the international hotel chain BestResidence. You have regularly patronized BestResidence in the past and have always been satisfied. Today, you arrive at a BestResidence hotel for another overnight stay.

When you enter the lobby, there are several check-in counters. You go over to one of the check-in counters. As usual, you wait in line.

You receive your key from the friendly receptionist and go to your room, which meets your expectations.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Steinhoff, L., Palmatier, R.W. Understanding loyalty program effectiveness: managing target and bystander effects. J. of the Acad. Mark. Sci. 44, 88–107 (2016). https://doi.org/10.1007/s11747-014-0405-6

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11747-014-0405-6

Keywords

Search

Navigation