Developing an Effective Customer Loyalty Program
Developing an Effective Customer Loyalty Program
Barry Berman
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.
L
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
FALL 2006
123
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
Barry Berman
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.
L
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
FALL 2006
123
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