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 1: Key Studies of LPs with Notable Empirical Findings

Year	Authors	Data source	Industry	Findings
2016	Steinhoff & Palmatier	–	Cross-sector	LP can have negative effects on bystander customers, observing other’s preferential treatment.
				LP effectiveness is influenced by reward delivery (rule clarity, reward exclusivity, reward visibility).
2016	Wang et al.	Major hotel chain	Service industry	LP goal attainment positively impacts post-promotion purchases, whereas goal failure significantly reduces post-purchases.
2014	Dorotic et al.	–	–	Redemption of LP rewards positively impacts LP members’ behavior before and after redeeming a reward.
2012	Kopalle et al.	Major hotel chain	Service industry	LP design characteristics (frequency of rewards and customer tier component) generate incremental sales without cannibalizing each other.
2009	Liu & Yang	–	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.
2008	Demoulin & Zidda	–	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.
2008	Bridson et al.	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.
2007	Meyer-Waarden	Supermarkets and hypermarkets	Retailing	LP have a positive effect on customer lifetime and share of customer expenditures at the store level.
2007	Hennig-Thurau & Paul	— Experimental setting	Restaurant	LP can lead to counter-productive results by decreasing customer retention.
2007	Liu	Convenience store chain	Retailing	Positive influence of LP on consumers’ purchase frequency and transaction size holds only for light and moderate buyers.
2007	Leenheer et al.	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.
2006	Kivetz et al.	–	Coffee and music on internet	LP induces purchase acceleration through the progress toward a goal.
2006	Gómez et al.	Spanish supermarket chain	Grocery	LP members are more behavioral and affectively loyal than other participants. Few customers change purchase behavior after joining the program.
2005	Taylor & Neslin	–	U. S. grocery	LP increases sales through «point pressure» (short-term) and «rewarded behaviors» (long-term).
2004	Lewis	Online vendor	Grocery and drugstore items	LP are successful in increasing repeat-purchase rates.
2003	Reinartz & Kumar	–	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 behavior (e.g., purchase acceleration).
				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.
2003	Verhoef	Dutch financial services company	Financial services	LP that provide economic benefit have a positive effect on customer retention and customer share development.
2003	Mägi	35 grocery stores (four chains and a few independent stores)	Retailing	Loyalty cards have mixed effects on consumer behavior (share of purchase and share of visits).
2001	Rajiv	U.S. direct marketing firm	General merchandise	LP membership is associated with the longer duration of customer–firm relationships.
				No information on cost-efficiency.
2001	Meyer-Waarden & Benavent	–	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.
2000	Bolton et al.	Six partner companies of the FlyBuy program in Australia	General retail	LP has hardly any effect on repeat purchase patterns (behavioral loyalty).
2000	Deighton & Shoemaker	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.
2000	Crié et al.	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.