Yuping Liu
Executive Summary
Despite the prevalent use of loyalty programs as a customer relationship management tool, their effectiveness is not yet well understood. Because such programs are often costly to initiate and maintain and require a firm’s long-term commitment, it is vital for managers to have better knowledge of whether and how these programs work. Using consumer purchase data from a convenience store chain, this research examines the impact of a loyalty program on consumer purchase behavior over a two-year period. The basic premise of the research is that depending on consumers’ initial usage levels, a loyalty program can have different effects on their behavior. The results show that consumers who were heavy buyers at the beginning of the program were most likely to claim the rewards they earned and thus benefited the most from the program. However, their spending levels and exclusive loyalty to the store did not increase over time. In contrast, the loyalty program had positive effects on both light and moderate buyers’ purchase frequencies and transaction sizes, and it made these consumers more loyal to the store. The most visible change for these two segments occurred within three months of joining the program, and the growth continued at a steady but slower pace in the following months. At the end of the analysis period, these consumers’ average purchase frequencies were not statistically different from that of an adjacent tier. This supports the argument that loyalty programs can accelerate consumers’ loyalty life cycles and make them more profitable customers.
The diverse responses across consumers suggest a need to consider consumer idiosyncrasies when assessing the impact of loyalty programs. By nature, loyalty programs are one-to-one programs. How much a consumer can benefit from such a program depends on his or her “investment” in the relationship with the firm. However, this one-to-one nature of loyalty programs has not been thoroughly examined in existing research. A surprising finding from the current research is that consumers who started with low usage levels changed their behavior as much as or more than moderate and heavy buyers. This contradicts the commonly held belief that light buyers are less-than-ideal targets for loyalty programs and that they will not perceive much value in the program. In the current case, the loyalty program did not initially appear very attractive to light buyers. However, these consumers diversified their purchases and branched into the firm’s other service areas. Over the course of two years, light and moderate customers enrolled in the loyalty program increased their value contribution and accelerated their relationship life cycle with the firm, turning the program into much more than a passive loss-prevention instrument. These findings challenge the traditional wisdom of loyalty program as primarily a defense mechanism used to keep a core group of best customers from defecting and suggest a need for managers to expand their mentality toward loyalty programs beyond mere reactive tactics.
Biography
Yuping Liu is Assistant Professor of Marketing in the College of Business and Public Administration at Old Dominion University. She received her MBA and PhD in Management (with a Marketing concentration) from Rutgers University in 2002. Yuping’s research expertise includes Internet marketing, loyalty programs, and customer relationship management. In addition to Journal of Marketing, her publications have appeared in Journal of Advertising and Journal of Advertising Research.
Journal of Marketing, Vol. 71, No. 4, October 2007
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