Understanding Customer Loyalty Programs

Abstract

In retailing, loyalty programs (LPs) have been the subject of exploding levels of attention since the late 1990s. Building mainly on the premise that it is less expensive to market to existing customers than to acquire new ones, firms across a multitude of industries have raced to implement one loyalty scheme or another. For example, Internet service provider AOL and American Airlines recently created the world’s biggest loyalty program with, respectively, 1.5 million and 38 million members and more than 2000 partners. In Europe, an estimated 350 million loyalty cards were distributed in 1999 for the retailing sector alone.

An LP can be defined as a marketing process that generates rewards for customers on the basis of their repeat purchases. The term “loyalty program” is used here to encompass the many different forms of frequency reward programs. There is not one single definition of an LP because of its considerable overlap with promotional tools. The key characteristics of the term, as it is used herein, are the notions that it pertains to longer-term activity and focuses on supporting or generating repeated customer interactions with a product, store, or brand. Consumers who enter an LP are expected to transact more with the focal company, and in that sense, they voluntarily give up the free choice they would possess otherwise. In exchange for concentrating their purchases with the focal firm, they accumulate assets (e.g., points) that they can exchange for products and services, typically but not necessarily those associated with the focal firm. Therefore, LPs have become an important customer relationship management (CRM) tool used by marketers to identify, reward, and retain their customers