Do Customer Loyalty Programs Really Work?

This is an MIT Sloan Management Review article. A company that initiates a customer loyalty program usually wants to retain existing customers, maintain sales levels and profits, increase the potential value of existing customers, and encourage customers to buy its other products as well. But, based on a review of behavioral loyalty research, the authors posit that the schemes do not fundamentally alter market structure and, instead, increase market expenditures without really creating any extra brand loyalty. Research shows that only about 10% of buyers for many types of frequently purchased consumer goods are 100% loyal to a particular brand over a one-year period. Consumers do not buy only one brand. For any loyalty program to be effective, say the authors, it must leverage the value of the product to the customer. Therefore, the program must have: (1) a direct or indirect effect, such as the General Motors rebate scheme that builds up savings toward a new car; (2) a perception of value, such as cash; and (3) timing--when rewards are available. The more delayed the reward, the less powerful. The authors suggest ways to design an effective program: ensure that it enhances the value proposition of the product or service, fully cost the program, maximize the buyer's motivation to purchase again, and consider the market conditions when planning.

• Brand management
• Customer retention
• Customer relationship management
• Marketing strategy
• Consumer behavior