Customer Loyalty Prog

I initiated a loyalty card program for my previous company and found this article interesting. Of course the question is - do they really work in keeping customers loyal in the long term? Or are they just a means to keep your customers with you temporarily... till a better loyalty offer comes along.

Published June 8, 2010

How effective are loyalty reward programmes?

By JOCHEN WIRTZ

MANY markets, especially as competition stiffens, are a battleground for a share of the customer's wallet. Marketers, in the hope of retaining customer loyalty, have embarked on loyalty reward programmes.

There are variations of reward programmes but most essentially focus on patronage. The more a customer uses the brand, the more s/he will be rewarded once past a minimum level of patronage. Watsons recently introduced card membership where points are earned for every $5 spent for redemption of cash rebates. Banks also have reward programmes for the credit cards they issue to persuade their card holders to use their bank's card more than their competitors'.

The assumption behind focusing on not only loyal customers but loyal customers who have achieved a minimum level of patronage is that this set of customers is profitable to the firm. Their continued loyalty suggests that they are satisfied with the brand, will continue buying the brand and even more so in the future. Hence, their lifetime value with the firm is likely to be enhanced.

Additionally, being satisfied customers, they are more predisposed to communicate favourable word of mouth to their friends regarding the brand.

All in, firms want to protect the revenues from their high spending customers and hence, embarking on a customer loyalty reward programme helps to enhance relationship between the firm and its customers.

If consumers are already more psychologically committed to the brand, switching costs become less relevant in driving purchases.

Reward programmes are also effective in increasing customer perceptions of switching costs. If customers switch to a competing brand, especially just before they accumulate the necessary credits for a reward, they forego all that they have accumulated. Hence, reward programmes motivate customers to carry on with the firm till at least a reward is redeemed.

Particularly for service firms where their offerings are generally undifferentiated from one to another, reward programmes are a means to tie customers to them and build a relationship.

However, customers can be a member of several competing loyalty reward programmes. What would make a consumer spend a larger share of his/her wallet on Brand A and less on Brands B and C, when s/he is a member of all three?

At the NUS Business School, we engaged in a study to address these questions. First, the attractiveness of a reward programme is paramount.

An attractive reward programme gets a larger share of the customer wallet than a less attractive programme regardless of how loyal the customer is to the brand.

More interestingly, when the reward programme is attractive, Singaporeans who are not too psychologically attached to a brand will still spend a larger portion of their wallet on that brand if they perceive the switching costs to be high. That is, perceived switching costs are highly effective in driving share of wallet in this instance.

However, if consumers are already more psychologically committed to the brand, switching costs become less relevant in driving purchases. Perhaps this is because with such customers, they are unlikely to switch in the first place.

What do these findings suggest for marketers embarking or contemplating embarking on loyalty programmes? If a firm is in an industry where the offerings are largely undifferentiated (say, credit cards), then it is easy for customers to switch from one card to another at the point of usage.

Under these circumstances, firms should consider implementing reward programmes to differentiate themselves and/or raise switching costs at the point of usage.

Also, offering an attractive reward programme is likely to boost repeat purchase. We suggest offering a mix of soft rewards (for example, sense of belonging, special treatment and appreciation) and hard rewards (for example, point accruals and discounts) and higher tier service levels and customisation to increase their reward programme's attractiveness.

These same tactics can potentially raise switching costs at the point of purchase, thus enhancing brand loyalty.

Finally, with the myriad of reward programmes available, it may do well for a firm to let customers choose among several reward options to account for idiosyncratic preferences and tie customers to the brand.

The writer is an associate professor in Marketing, NUS Business School. He specialises in Services Marketing. Michael Ehret collaborated in this research project

taken from The Business Times (Singapore), 8 June 2010