Not Just Another Loyalty Program

Sharp and Sharp (1997) characterize loyalty programs as campaigns that are initiated by marketers in an effort to reward returning customers with incentives to return again thereby strengthening the relationship with customers and creating a long-term competitive position of the store. There have been a lot of conflicting views and debates in the academic (and business) world about the effectiveness of these programs; but before we delve deeper into that, there are three components of any loyalty program that are crucial –

  1. Magnitude
    This refers to the size of the reward/incentive that is offered to the customers in lieu of the reward points collected.
  2. Reward Distance
    This refers to the number of points required to redeem the reward.
  3. Step size
    The number of points earned per pound/dollar.

Many reward programs are ambiguous when it comes to the step size. A study that is still hot from the oven, suggests that when step size ambiguity is high, consumers will ignore the step sizes and focus more on the reward distance, since this is the only cue available to them (Bagchi and Li, 2011). As humans we are cognitive misers. We do not like to calculate too much. So we take a guess from the information available to us, to figure out if the reward program is actually worth it or if it involves taking too many efforts for very few returns.

Effectiveness of Loyalty Card Programs

A study by Bridson, Evans and Hickman (2008) found evidence to support effectiveness of loyalty card programs. According to them, their study “…empirically verified the relationship between loyalty program, store satisfaction and store loyalty, legitimizing the growth of loyalty programs within the retail sector (pg.371).” This study was conducted in a Health and Beauty retailer’s store in the Australian retail environment. Although the authors believe otherwise, in my opinion, the environmental context in which the study was conducted is not the best fit to generalize the results. A supermarket setting would have been much more apt for this study.

Ineffectiveness of Loyalty Card Programs

A similar study was conducted in the same year using similar attributes but in the French mobile phone market by Pez (2008), found results conflicting with the Australian study. The study relied on quantitative and qualitative (projective) data collection technique. It suggested that, loyalty programs could actually evoke negative emotions about the product or store within the consumer. The negativity is not just restricted to the program, but can also transfer to the store. However there are two aspects about this study I don’t agree with – The context in which it was conducted is too narrow for generalization, and the data collected using the projective test is too subjective in nature.

Issues in measuring loyalty

Does becoming a member of a loyalty program of a store, mean that you are loyal to that store? What about consumers like me who are being ‘loyal’ to whoever gives a free membership card? If from the dataset of all the members of a loyalty card program, if we subtract the set of consumers who are inactive (have not shopped in the last 12 months), can we consider the remaining as loyal customers?

Bowen and Chen (2001) admit that customer loyalty is difficult to define. They outline three approaches to measure loyalty –

Behavioral Measurements: Repetitious purchase behavior indicates loyalty.

Attitudinal Measurements: Measures the emotional and psychological attachment.

Composite Measurements: measure loyalty by customers’ product preferences, propensity of brand switching, frequency of purchase, recency of purchase and total amount of purchase. This approach combines the first two dimensions.

Thus considering only the number of cardholders as a method of measuring loyalty, will not give a true picture or profile of loyal customers.

Case Study – Tesco Clubcard

In 2005, Jennifer Rowley from the School of Business and Regional Development here at Bangor University, published a case study on the Tesco Clubcard scheme. This scheme has been highly successful with over 15 million members worldwide. One of the strengths of this scheme is its multi-dimensional approach allowing members to earn points from diverse activities such as shopping at Tesco stores, to using the Tesco credit card and even through recycling old phones! The company sends out personalized Clubcards to every member that signs up. Rowley observes that there has been a shift in focus from attempting to change customer behavior to trying to change customer attitudes. The new loyalty programs are concerned with developing value offered to the customer through the scheme’s rewards.

Benefits
Customers earn two points for every £1 spent. The points are stored and four times a year; members receive a statement of points with vouchers worth the value of points they have saved. Tesco has also launched a mobile-phone version of its plastic card that may help increase its popularity and functionality.

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Reference:

Bagchi, R. and Li, X. (2011) Illusionary Progress in Loyalty Programs: Magnitudes, Reward Distances, and Step-Size Ambiguity. Journal Of Consumer Research, 37, 888-901.

Bowen, J. and Chen, S. (2001) The relationship between customer loyalty and customer satisfaction. International Journal of Contemporary Hospitality Management, 13(5), 213 – 217.

Bridson, K., Evans, J. and Hickman, M. (2008) Assessing the relationship between loyalty program attributes, store satisfaction and store loyalty. Journal of Retailing and Consumer Services, 15, 364–374.

Pez, V. (2008) Negative effects of loyalty programs: An empirical investigation on the French Mobile Phone sector. IAREP / SABE World Meeting.

Rowley, J. (2005) Customer relationship management through the Tesco Clubcard loyalty scheme. International Journal of Retail & Distribution Management, 33(3), 194 – 206.

Sharp, B. and Sharp, A. (1997) Loyalty Programs and Their Impact on Repeat-Purchase Loyalty Patterns. International Journal of Research in Marketing, 14 (5), 473-86.