Do Customer Loyalty Programs Really Work?

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A company that initiates a customer loyalty program usually wants to retain existing customers, maintain sales levels and profits, increase the potential value of existing customers, and encourage customers to buy its other products as well. But, based on a review of behavioral loyalty research, Dowling and Uncles posit that the schemes do not fundamentally alter market structure and, instead, increase market expenditures without really creating any extra brand loyalty. Research shows that only about 10 percent of buyers for many types of frequently purchased consumer goods are 100 percent loyal to a particular brand over a one-year period. And consumers do not buy only one brand; for example, surveys of European business airline travelers show that more than 80 percent are members of more than one frequent flyer program.

For any loyalty program to be effective, say the authors, it must leverage the value of the product to the customer. Therefore, the program must have: (1) a direct or indirect effect, such as the General Motors rebate scheme that builds up savings toward a new car, or gasoline companies' incentives of free air travel; (2) a perception of value, such as cash, a range of choice, aspirations of exotic free travel, or the likely achievement of rewards; and (3) timing -- when rewards are available. The more delayed the reward, the less powerful.

Does it cost less to serve loyal customers? Are they less price sensitive? Do they recommend products to others? Not really, say the authors. The contention that loyal customers are always more profitable is a gross simplification. Dowling and Uncles suggest ways to design an effective program, such as (1) ensuring that it enhances the value proposition of the product or service; (2) fully costing the program; (3) maximizing the buyer's motivation to purchase again; and (4) considering the market conditions when planning.

Grahame R. Dowling is an associate professor, Australian Graduate School of Management, University of New South Wales. Mark Uncles is a professor, School of Marketing, University of New South Wales.

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