Customer Loyalty Programs

Customer loyalty programs are structured systems designed by businesses to encourage repeat purchases by offering rewards such as points, discounts, or free merchandise. These programs aim to foster long-term relationships with customers, ultimately increasing company profits by enhancing customer retention and driving additional revenue. The concept has evolved since its inception in the early 20th century, with notable historical examples including General Mills’ Betty Crocker points and the S&H Green Stamps program. Today, loyalty programs extend across various industries, including airlines with frequent-flier programs and retail stores implementing loyalty cards.

Effective customer loyalty programs require careful planning, including a clear alignment with a company’s business goals and a thorough understanding of customer preferences and market competition. Companies must also consider the emotional aspects of customer loyalty, as strong emotional connections can significantly enhance customer engagement. However, challenges persist, such as rising costs and the need for continuous evaluation of program effectiveness. As consumer expectations change, businesses must remain adaptable to ensure that their loyalty programs deliver meaningful benefits that resonate with customers.

Published in: 2021

By: Erbschloe, Michael

Subject Terms

Customer Loyalty Programs

Abstract

This article examines the emergence of customer loyalty programs during the 1900s as well as current perspectives on what companies should consider when launching such a program. The processes of analyzing a company's business goals, customer preferences and habits, and the competitive environment prior to designing a customer loyalty program are reviewed. The importance of aligning a customer loyalty program with business goals, corporate philosophy, and corporate culture is examined. The option of exploiting social context or economic conditions to attract and reward customers is also reviewed. The process of evaluating and reframing analytical models used to evaluate less-than-effective customer loyalty programs is explained.

Overview

Customer loyalty programs are generally viewed as long-term endeavors in which consumers can accumulate some type of points that can later be redeemed for free merchandise, services, or discounts applied to future purchases. The more value that earned merchandise or services has for customers, the more attractive the program and the more likely customers will participate (Liu & Yang, 2009). The corporate goal of a customer loyalty program is to retain customers and derive more revenue from them in the future, ultimately increasing the profit of the firm (Noone & Mount, 2008). Many loyalty programs have shown some success in raising attitudinal loyalty as well as behavioral loyalty (Daams, Gelderman & Schijns, 2008).

Familiar Point Programs. Loyalty programs have been around for a long time. It was in the 1920s that General Mills first started a program known as Betty Crocker points. Purchasers received points when buying various General Mills products such as cereal and flour. Betty Crocker points could be redeemed for kitchen utensils or other domestic products. In the 1950s, American tobacco companies launched loyalty programs, which involved placing coupons on the back of cigarette packs that could be redeemed for catalog items (Thomaselli, 2005).

S&H Green Stamps. The S&H Green Stamps program was established by Sperry & Hutchinson Inc. in 1896. Over the next sixty-five years, the trading stamp became immensely popular and helped draw customers to Sperry & Hutchinson. In 1964, there were more S&H Green Stamps printed than postage stamps printed by the United States Post Office. The green stamps could be taken to a redemption center and exchanged for merchandise.

At their peak, S&H Green Stamps were issued by more than eighty thousand retail outlets (Edwards & Keane, 1966). In 1957, it is estimated that one of several competing trading stamps were issued with about 12 percent of all retails sales in the United States (Beem, 1957). However, the popularity of S&H Green Stamps also brought some burdens to the retail outlets that used them as a customer loyalty mechanism. Stamps were popular and therefore valuable and needed to be managed and controlled the same way as cash. The stamps also needed to be manually dispensed at the point of sale (Beem, 1958).

In 1968, the United States Federal Trade Commission (FTC) ruled that Sperry & Hutchinson, by then the largest company in the trading stamp industry, was guilty of unfair trade practices. The United States Supreme Court upheld the FTC's power to make the ruling in 1972. The FTC contended that Sperry & Hutchinson had improperly controlled the maximum rate at which retail businesses could dispense trading stamps and that the company had combined with others in the trading stamp industry to regulate the rate of stamp dispensing. In addition, Sperry & Hutchinson had attempted to suppress the operation of trading stamp exchanges that redeemed stamps in gray market operations. The FTC ordered Sperry & Hutchinson to cease and desist from these practices (Werner & Griffiths, 1972).

As times changed, S&H Green Stamps became less popular and grocery stores started phasing out trading stamp programs, turning their attention to price-based promotions. Gasoline stations started phasing out the stamps during the 1973 petroleum crisis. In 1981, the founding family sold Sperry & Hutchinson (Barker, 2004).

Frequent-Flier Programs. American Airlines launched its customer loyalty program in 1981 called AAdvantage, the airline industry’s first frequent-flier program. The benefit to customers was that they would gain points for miles flown and those points could be applied to free air travel tickets in the future. What was new and different about this loyalty program was that information technology was at the heart of the program. The technology allowed the airline to easily track award points and for fliers to redeem their points (Hederstierna & Sallberg, 2009). Frequent-flier programs were established worldwide, with all major airlines implementing some type of rewards program. The frequent-flier programs, like many customer loyalty programs, have been revamped over the years as economic conditions have changed (Fickenscher, 1999; Field, 2009; Lederman, 2007).

Once the airline programs gained popularity, the concept of points and reward programs spread to most industries and is now common in travel, lodging, and dining (Noone & Mount, 2008; Russell, 2008). Loyalty programs are catching on across the board in consumer products and services firms and even in toy stores ("Loyalty in Toyland," 2008) and at the gas station (Belanger, 2008). Many leading brand companies have their own reward systems with loyalty cards, and Starbucks has been an innovator in developing new approaches on how reward cards can be used (Dollarhide, 2008).

Technology Helps. Information technology such as point-of-sale systems in retail outlets, customer databases with purchasing history and contact information, and company websites that provide sales or service support have all expanded options to implement and maintain customer loyalty programs. Information technology also allows merchants as well as financial service companies to develop customized offerings to entice a wider variety of customers (Angrisani, 2008; Gallagher, 2008; Gillen, 2008).

These technologies have even helped to revive the once dying trading stamp, as S&H evolved from lick and stick stamps to a point system. S&H is now partnering with more than one hundred online retailers to provide an independent loyalty points exchange. Under the agreement, Points.com members can exchange miles or points from airlines, hotels, and other retailers into Greenpoints that can be used to obtain items from the S&H rewards catalog including home goods, jewelry, and electronics. The S&H Greenpoints can also be redeemed at participating grocery stores ("Green Stamps Stick," 2004).

Although customer loyalty programs seem to be offered by businesses everywhere, building an effective program requires considerable effort and can be expensive. In addition, not all loyalty programs have been successful or cost effective. To determine if a company is achieving a good return on investment from a customer loyalty program requires continuous monitoring and analysis. When results are not adequate it is time to review what types of programs are attractive to customers and to revamp a program to meet changing customer expectations and desires.

Applications

Building a Customer Loyalty Program. Companies can increase sales volume by getting existing customers to buy more often and to buy greater quantities or by attracting new customers (Adams, 2008). Several factors can affect both sales strategies, including the type of product, economic conditions, and the perceived or actual need for a product (Pringle & Field, 2009). A well-designed customer loyalty program can contribute to repeat purchases by existing customers, help attract new customers, and influence the perceived need for and value of product.

However, designing an effective customer loyalty program requires a realistic and accurate definition of what a company wants to gain from the program. Without clear business goals it is difficult, if not impossible, to design an effective customer loyalty program and develop appropriate business systems to support the program. The business systems need to be capable of aiding in analyses to determine whether the program is effective and if it provides a favorable return on investment (Nunes & Dreze, 2006).

A loyalty program is not a replacement for good service, ongoing positive customer relations, or failure to deliver upon promises or warranties (Wilson, 2006). In many ways management perspectives need to be seriously retooled. The principle that a business is customer-satisfaction oriented as opposed to goods-production oriented is one that all managers must grasp. In other words, a business is its customers not its products (Levitt, 2004).

It is also important to have a real-world understanding of a company's customers as well as a company's competitors. The design of an effective customer loyalty program will largely depend on how easy a product or service can be replicated by a competitor and how important price and customer service are to the buyer. In addition, company reputation and the status that customers gain from being a buyer or user of services offered can have a significant impact on creating emotional loyalty. An emotional attachment to a company or brand can drive behavioral loyalty and the higher the level of emotional loyalty the more likely a customer will be retained and repeat buying will continue (Hallberg, 2004).

Marketers debate how a loyalty program should benefit a customer. Many, however, do not spend enough time on the emotional side of the loyalty equation. Hallmark observed this and, as a marketer of emotion-focused products, has stepped in to fill the emotional gap in many loyalty programs. The Hallmark Loyalty division has more than fifty large corporate customers that purchase printed as well as electronic loyalty program elements. Hallmark e-cards are easy for corporate sales or communications staff to send and provide a large profit margin for Hallmark (Applebaum, 2004).

When a loyalty program's success depends on the frequency of repeat purchases, then customers need to be motivated beyond a single purchase. Programs with such structures need to also have a consistent and frequent message that convinces the customer to view their relationship with the seller as a long-term relationship and that reinforces the point that a long series of purchases will reap a worthwhile reward (Lewis, 2004). But relationship building cannot be left up solely to the customer. Company staff should also be trained into the perspective that every transaction with a customer can build loyalty.

Getting a Loyalty Program off the Ground. When loyalty programs have a strong technology element it is also possible to collect data on customers and design individualized marketing efforts. Such a closed-loop loyalty system enables a seller or service provider to access a database of customers in the loyalty program in order to implement targeted marketing programs. Vendor supported loyalty programs, of course, come with joining fees starting at about $300 and monthly fees at about $600 (Woodward, 2009).

Many large companies also offer co-branded credit cards through various banks. These programs usually provide some sort of point accumulation that can be redeemed for a product or service. United Airlines, for example, offers a credit card that provides one point for every dollar spent using the card and the points can be redeemed for airline tickets. Amazon also introduced a co-branded credit card that provides points for dollars spent with the card and the points can be used towards purchases from Amazon.com. The co-branded card comes with considerable expense to implement and to promote for a business. If the potential volume is not readily apparent, then the approach may not meet an organization's needs.

If a company decides to build its own loyalty program, or even if it chooses to contract with a loyalty program vendor, there are several principles to keep in mind during the process. Above all, a customer loyalty program should be built on the same business values, management beliefs and attitudes, and the basic business benefits that a company provides its customers (Fowler, 2003). It is also beneficial if a loyalty program is simple and straightforward so customers can understand and relate to the reward benefits as well as be able to reap those rewards without excessive time and effort (Cebrzynski, 2006).

Social Aspects of Loyalty Programs. The social context of loyalty programs is a key factor to success. The business flyers who managed to keep the points they earned from business trips are able to translate these rewards into family vacations or trips to destinations of their choice. The program benefits are both obvious and easy to understand. Other programs that are more complex may be moderately successful but draw a relatively small number of participants.

Corporate Social Responsibility. Since the environmental awareness movement was revitalized, energy efficiency, pollution, and environmental sustainability are increasingly important factors on the consumer radar. The green movement has also been incorporated into loyalty programs. A number of companies have added green rewards to their loyalty programs. A few of the pioneers in this approach were already marketing environmentally friendly products. However, it did not take long for a wide variety of companies (including airlines and banks) to start rewarding customers with some type of environmental points.

Typically a company using environmental points will support environmental programs through their corporate social responsibility (CSR) programs (Cummings, 2008). CSR activities have been used to address consumers' social concerns, create a favorable corporate image, and develop a positive relationship with consumers and other stakeholders (Yoon, Gurhan-Canli, & Schwarz, 2006).

Gift Cards. The use of gift cards as premiums or rewards has caught on rather significantly. American Express markets gift cards for all occasions and corporate bulk buyers can choose from a variety of themes for their gift cards (Hochstein, 2007). Gift cards are often given to customers, employees, or suppliers to help build loyalty.

As gasoline prices surged upward during the early years of the 2000s, several travel and lodging firms started a contextual marketing program involving free or discounted gasoline. Hotel chains with roadside locations that were convenient for the automobile traveler were using gasoline gift cards as premiums. After three separate stays, guests would receive a fifty-dollar gasoline gift card from name-brand oil companies.

Issues

When Customer Loyalty Programs Wane. According to research company COLLOQUY, in 2017, US consumers had 3.8 billion memberships in customer loyalty programs ("U.S. customer loyalty program," 2017). Several retailers offer their own program making it easy for consumers to participate in loyalty or rewards programs at virtually every turn, especially if they use a credit card for purchases. There are many potentially overlapping loyalty programs when credit cards that have point programs are used in retail outlets that also have point programs (Fredericks, Hurd & Salter, 2001).

Many customers are beginning to feel that many reward programs take too long to reap any real benefit (Mazur, 2007). There is also pressure on the companies that offer reward-oriented loyalty programs to provide more flexibility in programs and to increase the value of the reward provided to customers (Quittner, 2003).

Corporate executives are on the spot to demonstrate that there is in fact a real dollar return on investment for customer loyalty programs (Dowling & Uncles, 1997). The basic methods of examining the results of a loyalty program are not always straightforward and many self-studies of the programs result in a rather shallow and self-serving analysis (Cigliano, Georgiadis, Pleasance & Whalley, 2000).

However, when results from a customer loyalty program are less than expected, it is important to refine measures of activity and success and to reexamine analytical models being used to measure program results. Misleading information from internal as well as external sources can lead to faulty planning and execution. In addition, weak measures and measurement gaps will result in inadequate data and ultimately inappropriate analyses (Crosby & Lunde, 2008).

The most typical problem that corporate executives face with customer loyalty programs is costs, which includes annual maintenance costs as well as the impact of discounts that may be provided to customers through the program. The second challenge that executives face is what to do with a loyalty program when they confirm that its costs are out of control and there is not a good return on investment or possibly a loss for the program. Many customers will view the curtailment of a loyalty program as a betrayal, resulting in negative publicity (Cigliano, Georgiadis, Pleasance & Whalley, 2000).

In addition, digging for answers about the effectiveness of a customer loyalty program is an expensive and time-consuming endeavor. Many companies conduct surveys of loyalty program members, while others conduct focus groups to answer basic questions and gain new insights (Wansink, 2003). These methods can provide important information about how customers view the loyalty program and what drives their participation. This type of feedback can be useful in designing promotional material or in deciding how to expand or modify an existing program.

Customer loyalty programs may very well be profitable in the short run. If they are not, then the cost-effectiveness of the program should be examined and gains to the company reevaluated (Wansink, 2003). If one of the key factors to motivating participation is getting customers to view their participation as a long-term relationship, then the analysis of the return on investment of a loyalty program should also be framed in long-term concepts and based on longitudinal analysis (Lewis, 2004).

Regardless of how company executives view their customer loyalty program, the behavioral and emotional responses of the customer are likely to be the most important measures of a program's success. Awards, accolades, and fame for launching a program that industry observers or marketing gurus' feel is creative, novel, or unique have their appeal. They do not, however, make a customer loyalty program successful.

Conclusion

Customer loyalty programs provide consumers with a way to reap benefits from their buying behavior while simultaneously allowing retailers and service organizations to build a long-term relationship the customer. On the surface this seems to be a win-win situation. However, not all customers will repeat their buying behavior frequently enough to gain a reward and thus the seller may not recover the cost of gaining the new customer if discounts for programs participation were granted.

In addition to start-up costs, companies that offer customer loyalty programs also face annual maintenance costs as well as any fees from vendors that are contracted to support the program. If sales volume is low for a particular year, a company could end up finding that the customer loyalty program may cost more money than the gain in revenue that it helped to generate.

Once corporate management determines that a customer loyalty program is not a profitable endeavor, they then need to figure out what to do about the problem. Once a loyalty program is established it may be difficult to terminate because of possible negative publicity such action may generate. It is also often difficult to analyze why a loyalty program is not working, especially if there is insufficient funds to conduct surveys or focus groups of participants.

As the market for customer loyalty program remains relatively saturated, experts have cautioned that businesses need to make sure that their programs balance ease of use with unique features that will make their program stand out from others in their industry. Additionally, promotion of the programs through platforms such as social media continues to be important as generations spend more and more time online (Del Conte, 2017).

Terms & Concepts

Attitudinal Loyalty: Customer or buyer loyalty that results in repeat buying as well as ongoing endorsements and recommendations of the product or service to others.

Behavioral Loyalty: Customer or buyer loyalty that results in repeat buying but does not generate ongoing endorsements of and recommendations of the product or service to others.

Frequent-Flier Programs: Airline customer loyalty programs that reward customers with points for miles flown. When enough points are accumulated the customer can trade those points for free travel, upgrades in class of seating, or other items or services offered by the airline or business partners.

Loyalty Cards: A card issued by a retailer that allows the customer to keep tally of the points gained in the loyalty program. Cards can be in paper form and can be punched at the time of purchase or in magnet/plastic form like a credit card, which can be swiped at the time of purchase to update the database of customer records of points accumulated.

Points: In a customer loyalty program, customers are rewarded for specific behaviors and those rewards are measured with a point system. In frequent- flier programs, customers are generally given one point for every mile flown. In purchasing-oriented programs, customers are generally given one point for every dollar spent.

Price-based Promotions: These promotions the form of advertised discounts on selected items or store coupons that provide discounts on specific items. These promotions can be store- or chain-specific or can be supported in part by manufacturers or distributors of products.

Trading Stamps: A form of customer loyalty program in which the points accumulated took form of a postage-like stamp that were collected by customers and placed in a trading stamp book. When the trading stamp books were full, the customer could take them to a redemption center and trade the stamps for merchandise.

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Customer Loyalty Programs

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Subject Terms

Customer Loyalty Programs

Abstract

Overview

Applications

Issues

Conclusion

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