Review of “Do Rewards Really Create Loyalty?” (O’Brien & Jones)

O’Brien & Jones (1995)

“Do Rewards Really Create Loyalty?”

(Harvard Business Review, May 1995)

O’Brien and Jones argue that despite the critics, reward programs can indeed enhance loyalty, when designed and implemented correctly.  It is critical, however, that program value be in proportion to the economic value of customers’ loyalty to the organization.  With references to such companies as General Motors, Neiman Marcus, AIR MILES and American Express, O’Brien and Jones’ most noted contribution to loyalty program literature is their outline of five key elements critical to a program’s success.  “Customers prefer rewards programs with cash value, relevance, choice, aspirational value, and convenience” (p.80).

Although their article discusses much more than just these five factors, it is the following sentences that the authors are most famous for, plus their subsequent elaboration.

  1. Cash value of redemption rewards.  Customers must perceive the value of offered rewards to be worth at least the effort to obtain them.
  1. Range of choice of rewards.  The better the choice and selection of rewards, the more likely the reward options will appeal to all consumers.
  1. Aspirational value of rewards.  “Rewards that motivate a customer to change his or her behavior have as much to do with psychology as with economics.  A discount on a telephone bill does not have the same aspirational impact as exotic free travel or a hot new car” (p.80).  Aspirational rewards make for great incentives.
  1. Relevance (or perceived likelihood of achieving rewards).  If it takes too long or too much effort, customers will not see the relevance of a program offer.  If the likelihood of reaching the goal is slim, people will not put in the effort.
  1. Convenience (or ease of use of the scheme).  Programs should be simple to understand and convenient for the consumer.  Carrying around multiple membership cards in one’s wallet, for example, is not convenient.  Credit cards offering loyalty benefits, on the other hand, by consolidating rewards from a range of purchase sources, are convenient.  In this case, rewards accumulate with little or no additional effort, for either the cardholder or the merchant.  “One of the reasons rewards programs work so well for card issuers is that they motivate customers to consolidate all their spending onto a single card rather than use two or three cards” (p.80).

With the above five characteristics, O’Brien and Jones argue that reward programs can be highly effective marketing tools that can significantly enhance customer loyalty.  The problem is that programs fail because they are often misunderstood, incompetently designed and poorly implemented.

Too often, incentives are used simply as “short term promotional giveaways or specials of the month.”  A good program, however, “can accelerate the loyalty life cycle, encouraging first- or second-year customers to behave like a company’s most profitable tenth-year customers – but only if it is planned and implemented as part of a larger loyalty-management strategy” (p.75).  Rewards must not be viewed solely by themselves, but in the context of, and in conjunction with, a company’s overall strategy.  Only then will these programs be profitable and effectively encourage customers in the long run to pay more, buy more and tell their friends more, as predicted by Reichheld (1996).

Also in their article, O’Brien and Jones offer other insights into the theories and history of loyalty programs.  They point out that, unlike small owner-operated businesses more common in the past, modern corporations are at a disadvantage when it comes to knowing their customers on a personal basis.  To compensate, in order to identify and appropriately interact with valuable customers, large companies must track customer behavior through sophisticated database technology and marketing research.  “For those investments to pay off, however, companies” must recognize that “all customers are not created equal. …  In order to maximize loyalty and profitability, a company must give its best value to its best customers” (p.76).

As the authors also point out, “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.”  The result can be devastating.  “Highly profitable customers with higher expectations and more attractive choices defect, and less desirable customers stay around, diluting the company’s profits” (p.76).

Another major argument in the article is that “onetime promotions can cost a great deal of money and do not, as a rule, generate loyalty.  They indeed change customer behavior but often in ways that are undesirable in the long run.  Any positive impact is washed away as soon as competing companies launch their next promotions” (p.77).  To illustrate their point, the authors draw attention to the ineffectiveness of credit card companies offering sign-up incentives.  Everyone seems to be offering $10 gift certificates or free gifts when a person signs up for their credit card.  Here, the incentives are immediate and have nothing to do with loyalty.  They are effective at getting people to sign up initially, but people who sign up simply to get the gift may then sign up just as easily to claim a similar reward from the competition.  As O’Brien and Jones point out, “in the short run, the organization hits its numbers, but, in the long run, it is no better off” (p.77).  Illustrating this dilemma, the authors state:

“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.  No business should want those customers: The economics of loyalty ensure that no business can make money on them” (p.77).

In addition to identifying the five key components of successful loyalty programs, O’Brien and Jones offer a number of recommendations and advice.  One in particular stands out:  A loyalty program is a competitive strategy.  It is critical that a program address key questions, such as “Does the program align with company capabilities?  Will customers value the program?  Can competitors offer a more desirable alternative?  Would partnering make the program more competitive?” (p.79).  A loyalty program is of little value on its own – it must simply be no more than a core element of a solid, overarching business strategy.

When they wrote their article, “Do Rewards Really Create Loyalty?,” O’Brien and Jones were vice-presidents of Bain & Company, the same consulting firm as Reichheld, author of the 1996 book, The Loyalty Effect.

To see the full article, click Harvard Business Review.

(Review Source: Customer Loyalty Programs: What Makes an Effective (Community-based) Program, MBA Thesis, 2007).

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