Academic Observations about Customer Loyalty and Reward Programs

Despite all the many differences of opinion among academics, there are a number of observations regarding customer loyalty and reward programs that most experts agree on.  The following is a list of major assumptions and observations that are either explicitly stated, alluded to, or consistent with the arguments made in the majority of academic literature:

The Loyalty Effect (2001 Revised Edition)

Customer loyalty is a rare commodity:  As Frederick Reichheld from Bain & Company points out in The Loyalty Effect (1996), “In a typical company today, customers are defecting at the rate of 10 to 30 percent per year; employee turnover rates of 15 to 25 percent are common; and average annual investor churn now exceeds 50 percent per year.”  Experts from Ipsos Loyalty agree, adding that “in what seems like only yesterday … customers could be depended upon to repeat-buy if they were at least minimally satisfied.  Competitors were present, but they succeeded in luring only the occasional customer away. …  Customers rarely drifted from their preferred brands.  Today … all of this has changed” (Keiningham et al., Loyalty Myths, 2005).

Past customer profitability does not guarantee future profitability:  People move and their incomes, needs and lifestyles change; they like change and variety, and they are susceptible to promotions from the competition.  For all these reasons, some experts are justifiably critical of measures of loyalty like RFM (Recency, Frequency and Monetary Value).  RFM is a good measurement tool for customer loyalty, but it’s far from perfect.

Tracking customer value is important, challenging and achievable: It is important to track customer value and make marketing decisions accordingly, but it is not easy to coordinate data gathering effectively.  Modern CRM systems and information technology, however, if implemented well are capable of managing this task.  Affordable, effective technology does exist today.

IT and CRM tools help businesses know their customers:  Compared with small owner-operated businesses, modern corporations are at a disadvantage when it comes to personally knowing their customers.  Information technology and customer relationship management tools, enhanced and enabled by customer loyalty programs, help even modern larger small businesses address their weakness of not knowing customers on a personal level.

Loyalty programs are everywhere and may appear identical: Customer loyalty programs are ubiquitous and many appear almost the same to the average consumer.  Keiningham et al. (2005) argue that “the proliferation of loyalty programs tends to homogenize otherwise indistinguishable operations even more by minimizing opportunities for meaningful differentiation.”  With the average Canadian household participating in over nine reward programs, the challenge now, for businesses, is to create programs that are unique and distinguishable.

Loyalty program differentiation is challenging:  It can be difficult to design a loyalty program that is differentiated from the competition and based on a sustainable competitive advantage that cannot be copied.  This is where professional advice can be critical.

In part because of reward programs, customers today expect special offers: Because frequency programs and loyalty rewards are so prevalent today, modern customers have come to expect discounts, rewards and special promotions. “Customers are so inured to offers promising everything … that they either yawn when they see a new one or become experts at getting something for nothing. …  The strategy [of businesses offering generous upfront rewards] has brought to light, perhaps even created, a segment of chronic switchers, who routinely shop for the lowest price”  (O’Brien & Jones, 1995).  Customers have been trained to be “deal” or “reward” focused, yet reward is often not the most important motivator in long-term loyalty” (Stone & Field, 2001).

Coupons and discounting do not enhance loyalty: Coupons and direct discounting are not generally effective tools for enhancing customer loyalty and improving profits.  Coupons and special promotions under certain circumstances can be effective tools, like at enticing new customers to try a product or service for the first time, or enticing consumers to first come in the door.  Special promotions do not necessarily enhance customer loyalty, except perhaps in the case of low-cost producers and transaction buyers (which isn’t everyone’s target market); rather, they can bring consumers to the starting line of the process of loyalty building.  Coupons alone will not build loyalty, and in many cases they can destroy it.  (Click here for more).

Pareto’s 80-20 Rule applies to customer profitability:  A small percentage of a business’s total customers make up a large percent of its overall sales and profits.  Another portion of a typical company’s customer base is either only marginally profitable or unprofitable to serve.  (Click here for more).

Businesses should not retain all customers: Companies should never invest resources to keep every one of its clientele; it is not an efficient use of marketing resources to target all customers equally.  O’Brien and Jones in their 1995 Harvard Business Review article “Do Rewards Really Create Loyalty” suggest that “a company that offers average-value products and services to everyone wastes resources in oversatisfying less profitable customers while undersatisfying the more valuable loyal customers.”  Echoing this idea, Keiningham et al. recommend in their 2005 book Loyalty Myths that a firm should not only want to retain their best clientele and turn their break-even customers into better ones, but they should just as importantly try to get rid of their worst customers: “striving to retain them all is suicidal.”

Few customers are completely loyal: Only a very small percentage of consumers in any industry are 100% loyal.  Even as far back as 1977, in a 20-year study of purchase data in the U.S., U.K., Europe and Japan, researchers Goodhardt and Ehrenberg discovered that for highly purchased goods only about 10% of consumers were 100% brand loyal (Understanding Buyer Behavior).

Some customers will never be loyal: In virtually every industry there will always be a significant segment of consumers who will never become loyal, or at least highly loyal.  Attempting to make them loyal will rarely produce an adequate return on investment.  It is also generally agreed that certain categories of consumers have greater potential to be loyal and so should be targeted.

Loyalty programs can be effective and profitable marketing tools, but many fail for a variety of reasons:  When designed right and implemented well, reward programs can be powerful (and profitable) marketing tools.  The problem, though, is that all too often reward programs are poorly designed or not properly integrated into sound overall business strategies (which results in some cases where they actually create disloyalty).

Loyalty comes from a variety of sources: Consumers can display loyalty toward a brand or business for a large number of reasons.  Points and rewards are just one part of an effective customer loyalty strategy, and they aren’t for every business.

(Copyright PR Loyalty Solutions, 2011)

(Source: “Customer Loyalty Programs: What Makes an Effective (Community-based) Program?”, Peter Roundhill, MBA Thesis, University of Victoria, 2007).

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