Is a Loyalty Program the Way to Go?

 

 

It may be hard to recall, some 20-plus years after the introduction of the most recognizable loyalty programs, frequent flyer cards, just why we marketers engage in these evergreen promotional schemes. Loyalty programs in many industries have become a customer expectation, a cost of doing business, and although they generate rich consumer data, if the data is not analyzed for customer knowledge and loyal buying behavior, can a program be called effective?

In a paper recently published by the Marketing Science Institute, Jorna Leenheer, assistant professor of marketing at Vrije Universiteit Amsterdam, the Netherlands, and Tammo Bijmolt, professor of marketing research at Tilburg University, the Netherlands, the authors define loyalty program effectiveness as a gain in customer insight and an enhancement of loyal buying behavior. Success, therefore, cannot be achieved without data diving.

The intensity of data analysis, they propose, is strongly related to effectiveness. For those marketers, then, who use their loyalty program chiefly as an in-house list acquisition, scattershot direct mailings to names in the database produce no compelling results. Maybe as loyalty programs have become commodities and as vendors of all different core competencies have hung up shingles offering loyalty program consulting and execution, marketers have lost their way in determining why rewards-and-recognition structures make good business sense and should be expected to yield strong outcomes. Leenheer and Bijmolt want to remind them.

Overall, the pair found that retailers are not exploiting fully the potential of loyalty programs to enhance customer knowledge and loyalty. Few retailers currently conduct the data analysis needed to segment member customers by value and exhibited loyalty or differentiate promotions and actions based on customer knowledge. Instead, most remain stuck on Level One of relationship marketing, relying on pricing incentives to secure customers' future business.

So the researchers, determined to examine the organizational conditions under which a loyalty program is a suitable marketing investment, assessed the drivers of retailers' loyalty program adoption and the retailer-perceived success of programs. The adoption of loyalty programs, for example, is often stimulated by competitive examples. Companies concerned about the future benefits and costs of a program may use competitors with established customer rewards structures as models upon which to base their decisions. This leads to market homogeneity and decreased risk in program execution, therefore an increased attractiveness in a loyalty program investment. There's no expectation of or objective for effectiveness, as the authors define it, in this reasoning for program introduction.

Leenheer and Bijmolt crafted a questionnaire, mailed to the 418 retail chains in the Netherlands that have at least seven locations and/or 100 employees, and received 180 completed forms. Sixty-seven of the respondents sponsored loyalty programs. Among the results, the team learned that customer buying frequency had no significant relation to loyalty program adoption, nor did existing technology that could analyze newly collected data. Still, the perceived effectiveness of a program depended heavily on the extent to which information was embraced, understood, and manipulated. Additionally, the research showed no positive tie between the prevalence of loyalty initiatives in a category and the effectiveness of them.

Let's review: Market players copy competitors such that industries either are saturated with loyalty programs or completely uncommitted to them. Saturation does not breed program effectiveness. Also, the ability to delve for new customer insights or enhance exhibited customer loyalty trends does not enter significantly into the decision to introduce a loyalty program but rules in determining program effectiveness.

There is a disconnect, then, between the justification for loyalty program adoption and a program's effectiveness, and this paper makes that clear. Read it, spend some time understanding more than we can explain here, and you'll want to bring your loyalty program objectives into line. You may even look at your other marketing efforts from this new vantage point. Adoption vs. effectiveness is what building marketing's accountability is all about.

You can find the complete paper, "Adoption and Effectiveness of Loyalty Programs: The Retailer's Perspective" by Jorna Leenheer and Tammo H.A. Bijmolt, the Marketing Science Institute's 2003 Working Paper Series, at www.msi.org.