Do loyalty programmes work?

Customers are hard to attract and even harder to keep. As increasing numbers of companies pack themselves into already crowded markets, consumers are spoilt for choice and are becoming ever more willing to switch from one brand to another.

by Knowledge@Wharton
Last Updated: 23 Jul 2013

Companies often try to secure their customers' loyalty through reward programmes. At American Airlines' AAdvantage e-shopping site, for example, more than 200 vendors, including Bergdorf Goodman, Home Depot and Petco, offer bonus miles to shoppers. At the Apple Store, a dollar spent earns a mile, while Hallmark offers ten miles per dollar spent. Continental's OnePass programme allows members to earn two miles for every dollar of electricity purchased from Gexa Energy of Houston.

But according to a report on Knowledge@Wharton, while such programmes are increasing in number and size, their effectiveness in securing customer loyalty is dubious. "The programmes are growing but they are not necessarily successful," says Wharton University marketing professor Xavier Dreze. He adds that setting them up "is now just an added cost of doing business, not a true loyalty programme. The retailer does not have loyalty from the customer; the airline has it."

According to Stephen Hoch, another Wharton marketing professor, very few retailers have successfully built their own loyalty programmes. The hotel and airline industries are much better placed to profit from these programmes because they offer rooms and seats that, in most cases, cost little or nothing to provide - as opposed to hard inventory. There is also a big spread between light and heavy users in the travel industry, making it easy to identify and cultivate the big spenders.

By contrast, there is little spread in the amount of money spent between heavy and light food shoppers, making it hard for grocery stores to profit from loyalty programmes. While most stores have such programmes, their competitors usually match the discounts, giving customers little incentive to be loyal to one store over another. "Many people have two, three, four of those cards in their wallet," says Hoch. "Anybody who is smart has one just to get the discount."

Hoch also dismisses the notion that retailers can use information gathered from loyalty programmes to target customers more effectively. A lot of retailers don't have the ability to "use the information to their advantage. After 15 or 20 years, there are just not many examples of [a retailer] who is doing a great job with its loyalty programme."

According to Eric K Clemons, Wharton professor of operations and information management, it is not always clear why some customers are loyal to certain brands. "I think loyalty is more complicated today," he says. "How much of it is about touchy-feely, silly things? How much of it is that it just works for you?"

Source: Knowledge@Wharton
Review by: Nick Loney

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