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To answer these questions, this research draws on the resource-based view of the firm and identifies competitive factors that affect the success of loyalty programs. The authors argue that as a competitive firm resource, a loyalty program needs other complementary resources to realize its value fully and to create competitive advantage. Using firm- and individual-level data from the airline industry, the authors find that an airline’s frequent-flyer program does not always lead to beneficial outcomes for the offering firm and that only high-share airlines experience sales lifts from their loyalty programs. Because high-share firms tend to possess complementary product and customer resources, they are more likely to gain from their loyalty programs than firms with a smaller market share.

The research also reveals that crowding the marketplace with loyalty programs can diminish the return of an individual program. Although this finding may not be surprising, the authors also find that this saturation effect is contingent on the expandability of the product category. Market saturation has a negative effect under low category expandability, but its effect disappears under high category expandability. When the products from one industry can be extended to meet the demands in related industries, the competitive landscape shifts to include not only competitors within an industry but also firms in those related industries. From this broader perspective, although the imitation of loyalty programs among competitors makes it a common resource within the focal industry, such resources can still derive competitive advantage within the broader market if competitors in alternative categories do not yet possess such resources. Under this situation, saturation becomes less of a threat to the success of each individual program in the focal industry. For the airline industry, because of its relatively high category expandability, the overall effect of market saturation becomes insignificant.

The findings from this research caution against an urge to launch a loyalty program simply because every other competitor is doing so. Rather, a firm that is pondering the launch of such a program in an already-saturated market should carefully consider the flexibility of market demand and whether importance resources exist to complement such a program.

Biography
Yuping Liu is Associate Professor of Marketing in the College of Business and Public Administration at Old Dominion University. She received her MBA and PhD in Management (Marketing Concentration) from Rutgers University in 2002. Dr. Liu’s research focuses on the intersection among marketing, technology, and consumer psychology. Her main research areas include Internet marketing, loyalty programs, and customer relationship management. Dr. Liu’s publications have appeared in Journal of Marketing, Journal of Advertising, Journal of Advertising Research, and Business Horizons, among others. More information about Dr. Liu’s research can be found on her website at http://www.yupingliu.com.

Rong Yang is Assistant Professor of Accounting at the State University of New York at Brockport. She received her PhD from Rutgers University in 2004. Her research interests include the use of accounting information in capital markets, analysts’ forecast performance, executive compensation, corporate restructuring events and loyalty programs. In addition to publishing in Journal of Marketing, her work has appeared in Journal of Accounting and Public Policy, Review of Quantitative Finance and Accounting, and Research in Accounting Regulation, among other outlets.

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