Do loyalty programs really enhance behavioral loyalty? An empirical analysis accounting for self-selecting members

Abstract

One of the pressing issues in marketing is whether loyalty programs really enhance behavioral loyalty. Loyalty program members may have a much higher share-of-wallet at the firm with the loyalty program than non-members have, but this does not necessarily imply that loyalty programs are effective. Loyal customers may select themselves to become members in order to benefit from the program. Since this implies that program membership is endogenous, we estimate models for both the membership decision (using instrumental variables) and for the effect of membership on share-of-wallet, our measure of behavioral loyalty. We use panel data enhance share-of-wallet, and we provide guidelines how to achieve this.

Customer–company identification and the effectiveness of loyalty programs

“…A loyalty program is an integrated system of marketing actions that aims to reward and encourage customers' loyal behavior through incentives (Leenheer et al, 2007;Sharp & Sharp, 1997). These programs typically allow customers to accumulate and redeem free rewards by purchasing repeatedly from a company (Liu, 2007).…”

“…Companies expect loyalty programs to increase their share of customers' wallets (Evanschitzky et al, 2012;Meyer-Waarden, 2007), that is, the share of consumer spending (measured as purchases or volume) allocated to a specific brand, store (Mägi, 2003), or chain (Leenheer et al, 2007). Mägi (2003) finds mixed effects of loyalty cards on shares of purchases and visits, and only at the chain level or when customers hold only the focal chain's loyalty card.…”

“…Economic and psychological mechanisms, such as financial value, switching costs, feelings of superiority, and brand association, suggest that loyalty programs can enhance habit-and status-based customer loyalty (Drèze & Nunes, 2009;Kim, Shi, & Srinivasan, 2001;Roehm, Pullins, & Roehm, 2002). Research also points to CCID as an effective sociological mechanism through which loyalty programs can build and maintain relationship-based customer loyalty (Leenheer et al, 2007).…”

“…With greater interactions, customers recognize their membership, which is a favorable condition for CCID formation (Bhattacharya & Sen, 2003;Bhattacharya et al, 1995). As an underlying sociological mechanism, CCID thus might encourage customers to stay close to a focal company, in the belief that such behavior also supports self-identities, which should result in higher company loyalty (Ahearne, Bhattacharya, & Gruen, 2005;Leenheer et al, 2007). That is, CCID should facilitate the transition from program loyalty to company loyalty.…”

“…In Canada, 92% of consumers enroll in at least one loyalty program, with an average of 6.4 cards each (Maritz, 2012) and in Brazil, 33% of upper-and middle-income consumers (approximately 20 million) maintain loyalty program memberships (Hlavinka & Sullivan, 2012). Despite the popularity of loyalty programs, their effectiveness may be questionable in terms of profitability (e.g., see Gandomi & Zolfaghari, 2013;Shugan, 2005) and enhancing customer loyalty (e.g., Leenheer, van Heerde, Bijmolt, & Smidts, 2007;O'Brien & Jones, 1995;Wagner, Hennig-Thurau, & Rudolph, 2009). …”