Do Customer Loyalty Programs Really Work?
Given the popularity of loyalty programs, they are surprisingly ineffective. To stand the best chance of success in tough market conditions, programs must enhance the overall value of the product or service and motivate loyal buyers to make their next purchase.
Customer loyalty schemes have attracted considerable interest as companies practice one of marketing’s most familiar strategies — “If you see a good idea, copy it.” Some banks have offered regular customers credit cards with a range of valuable benefits. In business-to-business markets, loyal customers have traditionally been treated better than those who buy on the spot market. Other well-known customer loyalty schemes are the frequent-flyer programs of the major airlines. These and other well-patronized programs were originally hailed as imaginative ways to instill and maintain loyalty, but, over the years, more and more doubt has been cast on them. Both the academic and trade press have criticized the programs with headlines such as: “A Failure in Competitive Strategy,” “War in the Air: The Scramble for Points Hits Turbulence,” “Frequent Flyer Offers Fail to Boost Loyalty.”1
Loyalty programs that seek to bond customers to a company or its products and services by offering an additional incentive pose an interesting dilemma. Although these schemes often attract widespread customer interest, they are difficult to support, using our current knowledge of competition and buyer behavior. This research suggests that most schemes do not fundamentally alter market structure. They might help to protect incumbents and might be regarded as a legitimate part of the marketer’s armory, but at the cost of increasing marketing expenditures.
Many senior managers now ask their marketing departments to measure the potential contribution of any program developed to implement loyalty marketing. Do these programs really create extra loyalty beyond that which is derived from the relative value of the product or service? Do they encourage customers to spend more? Or do they merely bribe a customer to buy again? In a competitive market, is it really feasible for every organization to increase customer loyalty by implementing a loyalty marketing program?
Underlying the increasing interest in these programs are some marketing managers’ widely held beliefs about customer loyalty:
- Many customers want an involving relationship with the brands they buy.
- A proportion of these buyers are loyal to the core and buy only one brand.
- The hard-core, loyal buyers are a profitable group because there are many of them and they are heavy or frequent buyers.
- It should be possible to reinforce these buyers’ loyalty and encourage them to be even more loyal.
- With database technology, marketers can establish personalized dialogues with customers, resulting in more loyalty.
1. T.J. Kearney, “Frequent Flyer Programs: A Failure in Competitive Strategy, with Lessons for Management,” Journal of Consumer Marketing, volume 7, Winter 1990, pp. 31–40;
D. Churchill, “War in the Air: The Scramble for Points Hits Turbulence,” The Sunday Times (London), 21 November 1993;
P. Meller, “Frequent Flyer Offers Fail to Boost Loyalty,” Marketing, 4 November 1993.
2. D. Peppers and M. Rogers, The One to One Future: Building Relationships One Customer at a Time (New York: Currency/Doubleday, 1993);
S. Pearson, Building Brands Directly (Basingstoke, England: Macmillan Press, 1996);
R.C. Blattberg and J. Deighton, “Manage Marketing by the Customer Equity Test,” Harvard Business Review, volume 74, July–August 1996, pp. 136–144.
3. H. Hakansson, ed., International Marketing and Purchasing of Industrial Goods (Chichester, England: John Wiley, 1982).
4. F.F. Reichheld and W.E. Sasser, “Zero Defections: Quality Comes to Services,” Harvard Business Review, volume 68, September–October 1990, pp. 105–111;
F.F. Reichheld with T. Teal, The Loyalty Effect (Boston: Harvard Business School Press, 1996);
F.F. Reichheld, “Learning from Customer Defections,” Harvard Business Review, volume 74, March–April 1996, pp. 56–69;
R.T. Rust and A.J. Zahorik, “Customer Satisfaction, Customer Retention, and Market Share,” Journal of Retailing, volume 69, Summer 1993, pp. 193–215.
5. Quote by V. Jenkins, chairman of the direct marketing agency, Clemenger Direct Response, in:
A. Biziorek, “Desperately Seeking Loyalty,” Australian Professional Marketing, September 1994, pp. 15–18; and
Reichheld and Sasser (1990).
6. Blattberg and Deighton (1996).
7. A.S.C. Ehrenberg and G.J. Goodhardt, Understanding Buyer Behavior (New York: J. Walter Thompson and the Market Research Corporation of America, 1977).
8. For a discussion of behavioral loyalty, see:
A.S. Dick and K. Basu, “Customer Loyalty: Toward an Integrated Conceptual Framework,” Journal of the Academy of Marketing Science, volume 22, 1994, pp. 99–113.
9. W. Gordon, “Retailer Brands — The Value Equation for Success in the 90s,” Journal of the Market Research Society, volume 36, number 3, 1994, pp. 165–181; and
W. Gordon, “Taking Brand Repertoires Seriously,” Journal of Brand Management, volume 2, number 1, 1994, pp. 25–30.
10. A.S.C. Ehrenberg, Repeat-Buying: Facts, Theory, and Applications, 2nd. ed. (London: Charles Griffin and Co.; New York: Oxford University Press, 1988).
M. Uncles, A.S.C. Ehrenberg, and K. Hammond, “Patterns of Buyer Behavior: Regularities, Models, and Extensions,” Marketing Science, volume 14, number 3, 1995, pp. G71–G78; and
A.S.C. Ehrenberg and M. Uncles, “Dirichlet-Type Markets: A Review” (Sydney, Australia: University of New South Wales; London: South Bank Business School, working paper, 1996).
13. OAG Business Traveller Lifestyle Survey 1993 (Dunstable, Bedfordshire, England: Official Airline Guides, 1993).
14. M. Uncles, “Do You or Your Customers Need a Loyalty Scheme?,” Journal of Targeting, Measurement, and Analysis for Marketing, volume 2, number 4, 1994, pp. 335–350;
M. Uncles, “The Seven Perils of Loyalty Programmes,” The Marketing Society Review, Autumn 1994, pp. 18–20;
P. Hawkes, “The Customer Loyalty Challenge,” Admap, January 1996, pp. 47–48; and
S. Rayner, Customer Loyalty Schemes: Effective Implementation and Management (London: FT Retail and Consumer Publishing, FT Management Report, 1996).
15. A.S.C. Ehrenberg, “If You’re So Strong, Why Aren’t You Bigger?,” Admap, October 1993, pp. 13–14, 20;
A.S.C. Ehrenberg, “New Brands and the Existing Market,” Journal of the Market Research Society, volume 33, number 4, 1991, pp. 285–299;
B. Kahn, M.U. Kalwani, and D. Morrison, “Niching versus Change-of-Pace Brands: Using Purchase Frequencies and Penetration Rates to Infer Brand Positionings,” Journal of Marketing Research, volume 25, November 1988, pp. 384–390.
16. A.S.C. Ehrenberg, G.J. Goodhardt, and P. Barwise, “Double Jeopardy Revisited,” Journal of Marketing, volume 54, July 1990, pp. 82–91.
17. As the length of the observation period gets longer (e.g., from a month to a year), more people will buy a brand, their average purchase frequency will rise, the percent who are repeat buyers will increase, and rates of 100 percent loyalty will fall. Loyalty, therefore, has to be defined with reference to the observation period.
18. P.S. Fader and D.C. Schmittlein, “Excess Behavioral Loyalty for High-Share Brands: Deviations from the Dirichlet Model for Repeat Purchasing,” Journal of Marketing Research, volume 30, November 1993, pp. 478–493.
N.R. Barnard, A.S.C. Ehrenberg, K. Hammond, and M. Uncles, “Dirichlet Discrepancies: Some Empirical Results” (London: South Bank Business School, working paper, 1995).
19. M.L. Rothschild and W.C. Gaidis, “Behavioral Learning Theory: Its Relevance to Marketing and Promotions,” Journal of Marketing, volume 45, Spring 1981, pp. 70–78.
20. L. O’Brien and C. Jones, “Do Rewards Really Create Loyalty?,” Harvard Business Review, volume 73, May–June 1995, pp. 75–82.
21. R.R. Bootzin, G.H. Bower, J. Crocker, and E. Hall, Psychology Today (New York: McGraw-Hill, 1991).
22. Fly Buys Escape: The Magazine for Members, August 1995, p. 3.
23. “Fly Buys,” Ad News, 16 December 1994, p. 24.
24. B. Sharp and A. Sharp, “Loyalty Programs and Their Impact on Behavioural Loyalty Patterns” (Adelaide, Australia: University of South Australia, MSC Technical Report Number 4025, 1996).
25. Reichheld with Teal (1996).
26. Brand loyalty is one of the components in many definitions of brand equity. See, for example:
D.A. Aaker, Managing Brand Equity (New York: Free Press, 1991).
27. Ehrenberg (1988);
Uncles et al. (1995); and
Ehrenberg and Uncles (1996).
28. G.S. Carpenter, R. Glazer, and K. Nakamoto, “Meaningful Brands from Meaningless Differentiation: The Dependence on Irrelevant Attributes,” Journal of Marketing Research, volume 31, August 1994, pp. 339–350.
29. A.S.C. Ehrenberg, K. Hammond, and G. Goodhardt, “The After-Effects of Price-Related Consumer Promotions,” Journal of Advertising Research, volume 34, July–August 1994, pp. 11–21.
30. “Extra Lift for Airlines,” Asian Business, August 1993, pp. 44–46.
31. F. Hilmer and L. Donaldson, Management Redeemed (New York: Simon & Schuster, 1996).