Although we see loyalty programs everywhere, there is limited evidence on the long-term effects of such programs, and their effectiveness is not well established. In my paper to be published by the Journal of Marketing, I examined the long-term impact of a loyalty program on consumers’ usage levels and their exclusive loyalty to the firm. Using longitudinal data from a convenience store franchise, the study shows that consumers who were heavy buyers at the beginning of a loyalty program were most likely to claim their qualified rewards and thus benefited the most from the program, but their spending levels did not increase over time. In contrast, consumers whose initial patronage levels were low or moderate gradually purchased more and became more loyal to the firm. The most visible change for these two segments occurred within three months of joining the program, and the growth continued at a steady but slower pace in the following months. At the end of the analysis period, these consumers’ average purchase frequencies were not statistically different from that of an adjacent tier. This supports the argument that loyalty programs can accelerate consumers’ loyalty lifecycle and make them more profitable customers.
The diverse responses across consumers suggest a need to consider consumer idiosyncrasies when assessing the impact of loyalty programs. Loyalty programs by nature are one-to-one programs. How much a consumer can benefit from such a program depends on his or her “investment” in the relationship with the firm. One surprising finding from this research is that consumers who started with low usage levels changed their behavior as much as or more than moderate and heavy buyers. This contradicts the commonly held belief that light buyers are less than ideal targets for loyalty programs and that they will not perceive much value in the program. In the current case, the loyalty program did not initially appear very attractive to light buyers. But these consumers diversified their purchases and branched into the firm’s other service areas. Over the course of two years, light and moderate customers enrolled in the loyalty program increased their value contribution and accelerated their relationship lifecycle with the firm, turning the program into much more than a passive loss-prevention instrument. These findings challenge the traditional wisdom of loyalty program as primarily a defense mechanism used to keep a core group of best customers from defecting, and suggest a need for managers to expand their mentality toward loyalty programs beyond mere reactive tactics.
This paper will be published by the October 2007 issue of Journal of Marketing. To download a preview copy of this paper, please visit my publications page.