Designing competitive loyalty programs: How types of program affect customer equity

Abstract

Loyalty programs are one of the most popular marketing strategies developed by fi rms across a broad range of industries. Despite the prevalence of these programs, there is only a limited amount of research that focuses on the stage before program implementation. The main purpose of this study is to formulate a theory of designing ex ante competitive loyalty programs, and subsequently to provide supporting empirical evidence. The author argues that loyalty programs could be classifi ed into two types: monetary-based rewards and special treatment-based rewards. The author proposes a theory that posits that customer perceptions of the utility of loyalty programs differ between the two types of reward, and are contingent upon the relationship between the customer and the fi rm. Programs that are perceived favorably by customers will in turn create stronger attitudinal loyalty and higher customer profi tability. Using settings of airline passengers and bank customers, the results of the research produce fi ndings that monetary rewards are perceived to provide higher utility perceptions of customers in contractual relationships as compared to non-contractual relationships. However, this research failed to provide empirical support that special treatment rewards are perceived to provide higher utility perceptions of customers in non-contractual relationships compared to contractual ones. The research also models consumer switching using the Markov Chain, and reveals that higher program utility perception is associated with higher attitudinal loyalty, thereby increasing customer equity. Firms are encouraged to incorporate affective elements into their loyalty programs, in addition to monetary elements.

Loyalty Programs: Generalizations on Their Adoption, Effectiveness and Design

“…Members of LPs likely perceive multiple advantages, including utilitarian (e.g., economic savings, convenience, gifts), hedonic (e.g., personalized treatment, exploration of new products, entertainment), and symbolic (e.g., recognition by firm, social status, belonging) benefits. Most consumers attach more importance to the utilitarian benefits of LP participation (Bridson et al, 2008;Furinto et al, 2009;Gable et al, 2008;Mimouni-Chaabane and Volle, 2010;Steyn et al, 2010;Wright and Sparks, 1999), possibly because utilitarian benefits are tangible and easier to evaluate than hedonic and symbolic benefits. The preference for utilitarian benefits reflects the tendency of customers with an economic shopping orientation to enroll in LPs (Demoulin and Zidda, 2009;Leenheer et al, 2007;Magi, 2003).…”

“…This may increase psychological barriers due to increased motivation and perceived selfefficacy. Overall, LP effects on customer retention and relationship duration will increase with members' intrinsic motivation (attitudinal commitment) and the LP's perceived value (Dholakia, 2006;Furinto et al, 2009;Hennig-Thurau and Paul, 2007;Kivetz and Simonson, 2003;Verhoef, 2003;Wirtz et al, 2007).…”

“…These mechanisms explain the antecedents and consequences of attitudinal loyalty. Attitudinal loyalty (through commitment, satisfaction, and positive word of mouth) is an important driver of the behavioral loyalty of LP members (Daams et al, 2008;Furinto et al, 2009;Hallberg, 2004;Hansen et al, 2010;Lacey, 2009;Lacey et al, 2007;Steyn et al, 2010;Wirtz et al, 2007). Without attitudinal loyalty, an LP might spuriously retain customers who lack other alternatives, are inert, or merely value convenience (Hansen et al, 2010;Phillips Melancon et al, 2010).…”

“…In contrast, if customers are prone to relationship building, LP participation may boost their emotional benefits, giving them a sense of gratitude, belonging, elevated status, prestige, or recognition (Daams et al, 2008;Dholakia, 2006;Drèze and Nunes, 2009;Evanschitzky and Wunderlich, 2006;Gruen, 1994;Lacey et al, 2007;Kim et al, 2009;Mimouni-Chaabane and Volle, 2010;Palmatier et al, 2009;Rosenbaum et al, 2005). A firm can increase attitudinal loyalty by enhancing the perceived attractiveness of the LP and its rewards (Demoulin and Zidda, 2008;Furinto et al, 2009;Keh and Lee, 2006;Steyn et al, 2010;Wirtz et al, 2007). Attitudinally loyal members will likely forgive minor service failures (Bolton et al, 2000), but are inclined to give feedback and be more critical in their evaluation or more sensitive to big service failures (Lacey, 2009;Smith et al, 2003;von Wangenheim and Bayón, 2007).…”

Shopping Motivation on Purchase Intention: Can Loyalty Program and Corporate Image Enhance Such Relationship?

“…membership fees, switching costs, repeat purchase obligations) (Meyer-Waarden., 2008). The rewards could be in the forms of real cash, bonus points, vouchers and so on, but despite the various forms, customers are usually able to perform conversion of the rewards value into the equivalent cash value (Furinto., 2009). …”