oyalty programs are offered by both retailers and manufacturers to stimulate continued patronage among consumers through discounts, cash, free goods, or special services (such as free magazines on specialized topics of interest to loyalty program members). While retail cooperatives pioneered loyalty programs through giving members allowances based on their annual purchases, the more modern use of loyalty programs began with Raleigh cigarette coupons and with stamp-based programs such as the S&H Green Stamp Company (which offered consumers points based on purchases; these points were redeemable for a broad selection of merchandise). The most current form of customer loyalty programs started in the 1980s with the introduction of frequent ﬂier programs by airlines. After the Airline Deregulation Act of 1978, many airlines struggled to obtain a competitive advantage. In 1981, American Airlines introduced the ﬁrst frequent ﬂier airline program—AAdvantage, which sought to reward loyal customers through utilizing the airline’s excess capacity. Despite the large number of ﬁrms offering loyalty programs and their high levels of consumer membership, many loyalty programs have not been successful. This article differentiates among the different types of loyalty programs and offers a series of steps to develop, implement, and control an effective loyalty program. Several potential pitfalls that need to be avoided also are discussed.
The Size of the Loyalty Program Market
Loyalty programs have become quite popular in the United States, particularly among airlines, hotels, car rental ﬁrms, credit card providers, ﬁnancial
CALIFORNIA MANAGEMENT REVIEW
VOL. 49, NO. 1
Developing an Effective Customer Loyalty Program
services ﬁrms, book retailers, and supermarkets. In the United Kingdom, loyalty programs are popular among gasoline stations, supermarkets, and bookstores. More than 130 airlines currently have a customer loyalty program and 163 million people throughout the world collect loyalty-based miles.1 The U.S. loyalty marketing industry has been estimated as a $6 billion industry with 2,250 separate loyalty programs.2 A recent study found that almost 90 percent of Americans actively participate in some type of loyalty program (including credit card, retail store, and airlines rewards programs) and that most consumers are enrolled in multiple loyalty programs.3 Loyalty program usage is similar in the United States, UK, and Canada. One source estimates that 92 percent of UK consumers participate in a loyalty program, with 78 percent being members of two or more programs.4 Similarly, an ACNielsen study found that 95 percent of Canadians belonged to loyalty programs of department stores, mass retailers, general merchandisers, or warehouse clubs in 2005.5 Many individuals and households are enrolled in multiple loyalty programs. A recent Forrester Research study found that 54 percent of primary U.S. grocery shoppers belong to two or more loyalty programs, 15 percent of consumers are enrolled in at least three programs, and 4 percent are members of either four or ﬁve loyalty programs.6 One explanation for the lack of success of many loyalty programs is the extent to which consumers are members of multiple loyalty programs. When consumers have the option of collecting points in loyalty programs where the ease of making qualifying purchases, the rewards, and the redemption requirements are similar, it is very difﬁcult for one loyalty program to maintain a signiﬁcant competitive advantage over others.
Types of Loyalty Programs
There are four broad categories of loyalty programs (see Figure 1). In the most basic format, Type 1, any customer receives a discount on selected items on the basis of swiping his/her membership card at a point-of-sale terminal. In many instances, store clerks are trained to swipe a card kept at the register if...