Loyalty Programs
Popularity of loyalty programs is increasing, both in terms of the number of programs offered by merchants and in participation by customers. Yet, it seems that both groups remain ill informed of how the programs actually work and the true benefits and costs. This paper explores the reality of loyalty programs and concludes that they can be beneficial for all parties provided that they fully understand what the programs accomplish.
Do Loyalty Programs Work?
Research suggests that the demand-side success of loyalty programs is less than promised. It is difficult to change established patterns of repeat-purchase behavior and competition quickly develops counter responses that mitigate the impact of the program. However, it is possible to reap advantages from loyalty programs such as maintaining customer loyalty and brand share, improving accessibility and brand awareness, and offering incentives expected by customers.
Customers are apt to join the programs of the brands they buy if they desire rewards for their loyalty. However, the program must reinforce the value proposition of the brand instead of just building loyalty-program equity. Improved accessibility and brand awareness can result from obtaining more shelf space and promotions from retailers, taking advantage of opportunities to converse with customers and selling brand extensions to customers. Further, there is a huge me-too pressure to offer programs to consumers and, once a company introduces them, customers may react negatively if the programs are discontinued.
3.0 Benefits to Merchants and Consumers
Despite popular percption, increased sales from loyalty programs is unlikely. In October, 1999, the consulting firm McKinsey and Company conducted a study of consumers in sixteen product categories and found most loyalty programs did not increase sales. And, McKinsey and Company discovered that customers who enjoy benefits without increasing spending typically constitute up to fifty percent of all loyalty program membership. So, one may wonder if...
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