Category: Loyalty Programs

Loyalty Program Saturation (or Not)

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With the current downturn in US economy, many companies are adding loyalty programs to their marketing toolbox, both as a customer relationship management tool and to demonstrate better value to existing and potential customers.  In some industries such as travel and financial services, numerous rival loyalty programs are offered, creating intense competition among these programs. This pervasiveness of loyalty programs has led some to conclude that such programs may be a necessary cost of doing business or argue that memberships in multiple loyalty programs may eventually cancel out the effects of each individual program, creating a zero-sum game. With a large number of competing loyalty programs, are firms merely giving away profits in a desperate struggle to win business, much like the airline price war in the early 1990’s?  Or are loyalty programs a viable strategy that can increase revenue potentials, even with competitive offerings in the same market?

These are the questions my co-author and I intended to answer with our forthcoming article in the Journal of Marketing entitled “Competing Loyalty Programs: Impact of Market Saturation, Market Share, and Category Expandability“.  Using 30 years of historical data from the airline industry supplemented by consumer survey data, we found that an airline’s frequent flyer program does not always lead to beneficial outcomes for the offering firm and that only high-share airlines experience sales lifts from their loyalty programs. As 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.

Our research also reveals that crowding the marketplace with loyalty programs can diminish the return of an individual program. However, this saturation effect is contingent on the expandability of the product category. When the products from one industry can be extended to meet the demands in related industries, the competitive landscape shifts to include not only competitors within an industry (i.e., other airlines) but also firms in those related industries (i.e., other modes of transportation). Looking from this broader perspective, the imitation of loyalty programs among direct competitors can still derive competitive advantage within the broader market if competitors in alternative categories do not yet possess such resources. Under this situation, saturation becomes less of a threat to the success of each individual program in the focal industry. For the airline industry, due to its relatively high category expandability, the overall effect of market saturation becomes insignificant.

The findings from this research caution against an urge to launch a loyalty program simply because every other competitor is doing so. Rather, a firm who is pondering the launch of such a program in an already saturated market should carefully take into consideration the flexibility of market demand and whether importance resources (e.g., products, customers, data analytic capabilities) exist to complement such a program.

For further readings, you are encouraged to download a preview copy of the loyalty program competition paper from my website, or from the Journal of Marketing website.

Loyalty Program Long-Term Effects

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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.