Understanding loyalty program effectiveness: managing target and bystander effects

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.

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Notes

  1. 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. 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. 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.

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Acknowledgment

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

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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.

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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

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Keywords

  • Loyalty program
  • Bystander effect
  • Reward programs
  • Reward elements
  • Relationship marketing