Definition

Loyalty programs are structured marketing efforts that offer financial and relationship rewards to customers, to encourage loyal buying behaviour. That is, buy more and devote a larger share of their category purchases to the program brand.

Primary objectives of loyalty programs typically include to: increase single-brand loyalty, decrease price sensitivity, induce greater consumer resistance to counter offers or counter arguments (from advertising or sales-people), dampen the desire to consider alternative brands, encourage word-of-mouth support and endorsement, attract a larger pool of customers, and/or increase the amount of product bought.

A secondary aim is more defensive; to maintain the current customer base by building a closer bond to the brand.

Peripheral aims include: furthering cross-selling, creating databases, aiding trade relations, assisting brand PR, establishing alliances.

Key Findings

• Loyalty programs are expensive to set up and maintain and there is little or no evidence that any changes in behaviour justify the expenditure.
• Loyalty programs produce only very slight loyalty effects, and do practically nothing to drive growth. Because of the large costs needed to set up and run such programs, the consequent effect on profits is presumably negative.
• Examination of a large-scale and widely publicised Australasian loyalty program, FlyBuys, designed to re-engineer patterns of repeat purchase revealed not very encouraging results: program brands did not show higher levels of average purchase frequency given their levels of penetration. Of the six loyalty program brands, only two showed substantial repeat-purchase loyalty deviations and both of these showed this deviation for non-members of the loyalty program as well as members.
• Loyalty programs skew more than other marketing interventions towards heavier, already more loyal buyers of the brand. Consumers who rarely buy the brand don’t see the loyalty program, and if they do they can’t see the point in joining.
• Loyalty programs skew to heavier buyers because it is easier for loyal buyers to notice the program and to join; particularly so when joining up is in store.
• Loyalty programs skew to heavier buyers because they have a stronger economic incentive to join, in being rewarded for what they do already.
• A purported benefit of loyalty programs is that they provide vast amounts of data that allow both a better insight into customer behaviour and greater efficiency in targeted marketing. In practice this is expensive and rather too much of this information is acquired than can be usefully analysed or used for targeting purposes.
• Loyalty programs tend to not collect data about the complete customer experience or the portfolio of brands bought i.e. little information on customers’ decision-making or total category expenditure. Nor do they have much to say about the total market and competitor marketing activity as non-customers are ignored.
• Established patterns of repeat-purchase behaviour appear to be robust to the attempts of even large, well-financed programs to change them e.g. major retail schemes or the airline frequent-flier programs

Best Practice

• Loyalty programs are not good at affecting loyalty. They are more suited to being used to build a database of consumers, creating a new channel to talk to consumers and a way of monitoring their in-store, on-brand purchasing. This is a very expensive and difficult endeavour, and will have more value to some marketers than others.
• Most loyalty programs will need to build the capacity and execute on collecting, analysing and utilising customer information if they are to recoup their investment.