Loyalty programs have become a cornerstone of modern marketing strategies, prompting businesses to invest heavily in these initiatives. However, a critical question remains: Do loyalty programs work? This comprehensive review delves into the scientific evidence surrounding reward programs, examining their effectiveness in driving customer engagement, retention, and lifetime value.
The analysis explores various aspects of loyalty programs, including research methodologies, short-term versus long-term effects, and industry-specific findings. It also investigates the impact on consumer psychology and the financial benefits observed. By scrutinising academic studies and market research, this review aims to provide insights into the true value of loyalty marketing for businesses seeking to enhance customer relationships and gain a competitive advantage in today’s dynamic marketplace.
Methodologies of loyalty program research aimed at determining ‘do loyalty programs work?’
The study of loyalty programs has employed various research methodologies to assess their effectiveness and impact on customer behaviour in order be able to answer ‘Do loyalty programs work?’. These approaches range from experimental designs to observational studies and econometric modelling, each offering unique insights into the workings of reward programs.
Experimental designs
Experimental designs have proven to be a powerful tool in evaluating the impact of loyalty programs. One notable approach is the before-and-after experimental design, which allows researchers to measure the direct impact of a loyalty program on customer attitudes and buying behaviour. This method involves collecting data before and after the launch of a loyalty program from both participants and non-participants 1.
In a study conducted on business customers of an office product supplier, researchers used a before-and-after experimental design to assess the loyalty effect and selection effect of a newly introduced loyalty program. The first measurement took place three months before the program’s launch, with a second measurement six months after its introduction 1. This approach enables researchers to compare changes in loyalty, both behavioural and attitudinal, between program members and non-members.
Observational studies
Observational studies have also played a crucial role in loyalty program research. These studies often involve analysing customer behaviour and preferences through surveys, focus groups, and interviews. For instance, a cross-sectional research design was employed to investigate the effects of loyalty programs on customer engagement, satisfaction, trust, and loyalty in the Albanian market 2.
The study utilised a structured questionnaire survey to gather insights into various aspects of consumer behaviour and perceptions regarding loyalty card programs. Data collection spanned from March to May 2023, with the survey distributed electronically via Google Forms through emails and social media channels 2. Such observational studies provide valuable insights into customer attitudes and behaviours across different retail sectors.
Econometric modelling approaches
Econometric modelling has emerged as a sophisticated method for analysing loyalty programs. This approach uses statistical analysis to discover how changes in activities are likely to affect sales and turnover, enabling businesses to predict future impact and make informed decisions 3.
Marketing mix modelling, a type of econometric model, uses aggregated data to analyse all marketing inputs over time to arrive at an optimal allocation of resources. This method has gained renewed importance due to changes in legislation, such as Google’s privacy sandbox and the diminishing of third-party cookies, which have reduced the ability for businesses to use individual tracking 3.
To ensure the effectiveness of econometric models, it is recommended to have at least three years’ worth of data. This extensive dataset allows the model to identify trends and patterns, providing more accurate insights than models based on limited time frames 3.
Game-theoretic models have also been employed to analyse the implications of specific loyalty program features, such as reward expiry. These models help identify optimal strategies for competing firms, considering factors like pricing and reward expiry durations 4.
In summary, the methodologies used in loyalty program research are diverse and sophisticated, ranging from experimental designs to complex econometric models. Each approach offers unique insights into the effectiveness of loyalty programs, helping businesses make data-driven decisions to enhance customer relationships and gain a competitive advantage in the marketplace.
Observed short-term vs long-term effects
To determine an answer to the question ‘Do loyalty programs work?’, it is crucial to examine the observed short-term and long-term effects of these programs on customer behaviour and business performance.
Immediate behavioural changes
Research has shown that loyalty programs can have a significant impact on customer behaviour in the short term. A study examining 322 publicly-traded firms that introduced loyalty programs between 2000 and 2015 demonstrated that these initiatives can increase sales and gross profits within the first year of implementation 1. This immediate effect is often attributed to the psychological principles underlying loyalty programs, such as the goal gradient effect and the endowed progress effect. Refer to the loyalty psychology section below for more details of these effects
Sustained loyalty over time
While short-term effects are important, the true value of loyalty programs lies in their ability to foster sustained loyalty over time. The same study mentioned earlier found that the positive effects of loyalty programs on sales and gross profits were sustained for at least three years after implementation 1. This suggests that well-designed loyalty programs have the potential to create long-term value for businesses.
However, it is worth noting that the effects on gross profits did not become significant until the second quarter after loyalty program introduction, and their overall impact on performance lagged substantially behind sales 1. This highlights the importance of patience and long-term commitment when implementing loyalty strategies.
Lifetime value impact
One of the key objectives of loyalty programs is to increase customer lifetime value (CLV). Research indicates that loyalty programs can have a positive effect on CLV by increasing and enriching the interaction between a brand and its customers, boosting spending amounts, and inducing repeat purchases 2.
A study found that loyal customers spend 31% more, on average, compared to new customers 2. Additionally, customers who have an emotional relationship with a brand have been shown to have a 306% higher CLV, with 71% of them recommending the brand to others 2. These findings underscore the potential of loyalty programs to significantly impact CLV when implemented effectively.
Attitudinal commitment
While behavioural loyalty is important, attitudinal commitment plays a crucial role in fostering true, long-lasting loyalty. Attitudinal commitment refers to a customer’s emotional or psychological attachment to a brand, which goes beyond mere repeat purchases.
Research has shown that affective commitment influences both behavioural loyalty and attitudinal loyalty 3. Customers with strong attitudinal commitment are more resistant to competitors’ discounts and promotions, making them valuable assets for businesses in the long term 4.
To cultivate attitudinal commitment, loyalty programs should focus on creating emotional bonds between customers and brands. This can be achieved through personalised experiences, exclusive benefits, and alignment with customers’ values and self-identity 4.
In summary, the observed short-term and long-term effects of loyalty programs demonstrate their potential to drive customer engagement, increase sales, and foster sustained loyalty. However, to maximise their effectiveness, businesses must carefully design and implement these programs with a focus on both immediate behavioural changes and long-term attitudinal commitment.
Industry-specific findings related to ‘do loyalty programs work?’
Retail
Loyalty programs have become a cornerstone of the retail industry, offering significant potential for companies to enhance profitability and foster customer relationships. Despite the initial costs associated with implementing these programs, they have demonstrated their ability to contribute to a company’s development and increase its profitability 1. The retail sector faces unique challenges, such as higher purchase frequency and intense competition for market share, often dictated by location and convenience 1.
To address these challenges, retail loyalty programs tend to focus on transactions and savings. However, there is room for more creative approaches, as exemplified by programs like IKEA Family or Nike Membership 1. These innovative programs go beyond traditional point-based systems to offer exclusive experiences and perks that resonate with customers.
Research has shown that loyalty programs have a substantial impact on store loyalty, even more so than store satisfaction 5. This indicates that the presence of a loyalty program significantly influences customers’ decisions to remain loyal to a particular retailer. Furthermore, the study found that the amount of organisational rewards had a positive effect on both inner and extrinsic motivation, leading to greater customer retention 5.
Hospitality and travel
The travel industry has long been associated with loyalty programs, with airlines and hotel chains pioneering the concept of redeemable ‘miles’ and ‘points’ in the early 1980s 2. These programs have evolved to become major profit centres for travel companies, with some generating billions in revenue. For instance, in 2022, American Airlines’ loyalty program brought in £2.44 billion in revenue, while Marriott’s program generated £2.12 billion 2.
However, the post-pandemic resurgence of travel demand has put pressure on companies to maintain the viability of their loyalty programs. This has led to some devaluation of members’ points and miles, as well as rule changes that have caused customer frustration 2. As a result, travel loyalty program members have become increasingly disloyal, with younger generations more likely to consider and transact with multiple travel brands 2.
Recent research has revealed a significant decline in the likelihood that customers would recommend airline, hotel, and cruise line loyalty programs to others, even though the likelihood of recommending the brands themselves remained relatively steady 2. This suggests a growing disconnect between loyalty programs and customer satisfaction in the travel industry.
Financial services
In the financial sector, loyalty programs have become crucial for businesses looking to encourage repeat business, attract new customers, and enhance user engagement 3. These programs offer several benefits, including increased customer retention, engagement, competitive advantage, and valuable data insights 3.
Common types of loyalty programs in financial services include points-based, tier-based, cashback, partner, referral, and gamification programs 3. To create successful loyalty programs, financial institutions should focus on aligning with customer needs, designing engaging experiences, choosing the right rewards, and measuring performance 3.
A study by KPMG reported that 61% of customers found it ‘extremely important or very important’ for banks to focus on developing more innovative ways of rewarding loyal customers 3. This highlights the growing importance of creative and personalised approaches to loyalty programs in the financial services sector.
As the financial services landscape continues to evolve, loyalty programs must adapt to changing customer expectations and technological advancements. By offering personalised, accessible, and socially responsible loyalty programs, financial services businesses can foster customer loyalty and achieve sustained growth in an increasingly competitive market 3.
For more case studies, Loyalty & Reward Co have detailed an extensive study of additional loyalty programs around the world which helps to answer the question ‘Do Loyalty Programs Work?’
Consumer psychological impacts observed in loyalty programs
Loyalty programs incorporate significant amounts of consumer psychology, influencing behaviour and fostering long-term relationships between brands and customers. Research has shown that these programs tap into various psychological principles, driving engagement and retention.
Motivation and goal pursuit
One of the key psychological impacts of loyalty programs is their ability to motivate customers towards specific goals. As mentioned earlier, the goal gradient effect suggests that as individuals approach a reward, they become increasingly motivated to complete the task 1. This phenomenon is particularly relevant in tiered loyalty programs, where customers accelerate their efforts as they near the next reward level or VIP status.
Furthermore, the endowed progress effect plays a crucial role in maintaining customer engagement. When customers perceive they have already made progress towards a goal, even if artificially created, they are more likely to continue participating in the program 5. This effect underscores the importance of providing customers with a sense of advancement from the outset, encouraging them to remain active within the loyalty scheme.
Habit formation
Loyalty programs have the potential to shape customer habits, creating a cycle of repeated engagement with a brand. The Hook Model, developed by Nir Eyal, outlines four key phases in habit formation: trigger, action, reward, and investment 2. Successful loyalty programs leverage these phases to establish habitual behaviour, encouraging customers to interact with the brand regularly.
Evidence suggests that the more effort a customer invests in using a product or service, the higher they perceive its value 2. This principle can be applied to loyalty programs, where increased engagement often leads to a stronger perceived value of the program and, by extension, the brand itself.
Emotional attachment
Emotional loyalty is a crucial aspect of customer retention, going beyond transactional relationships. Research indicates that emotionally connected customers spend twice as much as those who are merely satisfied with a brand 3. Loyalty programs that focus on creating emotional bonds through personalised experiences and alignment with customer values are more likely to foster long-term loyalty.
Reciprocity
The principle of reciprocity is fundamental to the success of loyalty programs. When brands offer valuable rewards or exclusive benefits, customers naturally feel inclined to reciprocate by increasing their engagement and purchases 4. This psychological tendency to return favours creates a positive cycle of mutual benefit between the brand and its customers.
Brand perception
Loyalty programs significantly influence how customers perceive a brand. By offering rewards and recognition, these programs can enhance a brand’s image and create a sense of exclusivity. Research shows that 62% of consumers strongly agree that tiered systems make them feel appreciated for consistent purchases 6. This positive reinforcement not only strengthens brand perception but also encourages continued loyalty.
In conclusion, loyalty programs work by leveraging various psychological principles to influence consumer behaviour. By understanding and applying these concepts, brands can create more effective loyalty strategies that resonate with customers on a deeper level, ultimately driving long-term engagement and business success.
Financial benefits observed
Loyalty programs have demonstrated significant financial benefits for businesses across various industries. These programs have been shown to have a positive impact on repeat purchase behaviour, revenue growth, average order value, share of wallet, and market share, helping to answer ‘Do Loyalty Programs Work?’
Repeat purchase behaviour
One of the primary objectives of loyalty programs is to encourage customers to make repeat purchases. Research has shown that loyalty program members generate 12-18% more incremental revenue growth per year than non-members 1. This increase in repeat purchases can be attributed to the incentives and rewards offered by these programs, which motivate customers to continue engaging with the brand.
Revenue growth
The implementation of loyalty programs has been linked to substantial revenue growth for businesses. Studies have found that the top-performing loyalty programs boost revenue from customers who use them by 15-25% annually 1. This growth is often a result of increased customer retention and higher spending among program members.
Average order value increases
Loyalty programs have demonstrated their ability to increase the average order value (AOV) of customers. After implementing a retail loyalty program, businesses have observed an average increase in order quantity of 319% 5. This significant rise in AOV can be attributed to the incentives provided by loyalty programs, which encourage customers to spend more to earn additional rewards or reach higher tiers within the program.
Improvements in share of wallet vs competitors
Loyalty programs have proven effective in increasing a company’s share of wallet compared to competitors. Research has shown that customers engaged in a brand’s loyalty program spend 12-18% more each year 2. This increased spending often comes at the expense of competitors, as customers are more likely to choose the brand offering rewards and benefits over those that do not.
Market share improvements
The implementation of loyalty programs has been associated with improvements in market share for businesses. Loyalty leaders have been found to grow revenues roughly 2.5 times as fast as other companies in their industries 3. This growth in market share can be attributed to the increased customer retention and acquisition facilitated by well-designed loyalty programs.
Lower marketing costs
Loyalty programs can lead to lower marketing costs for businesses. Studies have shown that it is 5-25 times more expensive to acquire a new customer than to retain an existing one 4. By focusing on customer retention through loyalty programs, businesses can reduce their customer acquisition costs and allocate resources more efficiently.
In summary, loyalty programs have demonstrated their ability to deliver significant financial benefits to businesses. From increasing repeat purchase behaviour and revenue growth to improving average order value and market share, these programs have proven to be valuable tools for enhancing customer relationships and driving business success. However, it is important to note that the effectiveness of loyalty programs can vary depending on factors such as program design, industry, and target audience. Therefore, businesses should carefully consider their specific needs and objectives when implementing or optimising their loyalty strategies.
Conclusion from review of scientific evidence on ‘do loyalty programs work?’
The comprehensive review of scientific evidence on loyalty programs reveals their significant impact on customer behaviour and business performance. These programs have a substantial influence on repeat purchase behaviour, revenue growth, and market share improvements across various industries. The psychological principles underlying loyalty programs, such as the goal gradient effect and reciprocity, play a crucial role in shaping consumer attitudes and fostering long-term relationships between brands and customers.
To sum up, loyalty programs have proven to be valuable tools for enhancing customer relationships and driving business success. However, their effectiveness can vary depending on factors such as program design, industry, and target audience. As the marketplace continues to evolve, businesses must adapt their loyalty strategies to meet changing customer expectations and leverage technological advancements to create more personalised and engaging experiences.
Do loyalty programs work? The scientific evidence suggests that they do work very effectively across many industries when designed, implemented and operated using best-practice principles. It is recommended to engage expert loyalty consultants to support the program’s design and evolution.
References
[1] – https://www.researchgate.net/publication/353914348_40_years_of_loyalty_programs_how_effective_are_they_Generalizations_from_a_meta-analysis
[2] – https://www.sciencedirect.com/science/article/abs/pii/S0148296320308080
[3] – https://www.tremendous.com/blog/do-loyalty-programs-really-work-what-the-research-says/
[4] – https://sloanreview.mit.edu/article/do-customer-loyalty-programs-really-work/
[5] – https://journals.sagepub.com/doi/10.1177/22786821211000182
[6] – https://hbr.org/1995/05/do-rewards-really-create-loyalty
