The Impact of Loyalty Programs on Customer Retention

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Loyalty Programs play a significant role in a company’s customer retention plan. They help motivate consumers in choosing a company over their competitors by offering monetary rewards or special treatment rewards to loyal consumers. Loyalty Programs were first introduced to Canadians in 1958 when A.J. Billes decided to boost gas bar business by giving away Canadian Tire 'Money'. (Canadian Tire Corporation, 2010). Canadian Tire ‘Money’ is still a very successful loyalty program that millions of Canadians utilize on a daily basis, but what makes a loyalty program successful? What do consumers look for in a loyalty program? These questions and others will be discussed in the following paper based on research done on loyalty programs and the role they play in customer retention. There are two main categories of loyalty programs that retailers can offer to their consumers; monetary rewards programs such as Canadian Tire ‘Money’ and Shopper’s Optimum Points, and special treatment rewards such as you would see in a hotel chain or with airlines. Monetary rewards programs are utilized more frequently by consumers when compared to special treatment rewards because consumers will select the program that maximizes their utility over an extended period of time. (Lewis, 2004). The collection of Canadian Tire ‘Money’ is an excellent example of this; consumers will continue to shop at Canadian Tire just to save up their coupons they earn with each purchase. Hierarchical programs are an option that can be added to the standard monetary or special treatment rewards to help steer consumers to a business psychologically, by implying a perceived sense of status. Status is the relative rank in a hierarchy of prestige. (Status, n.d.). According to research done by Dreze & Nunes (2009) “Consumers will be more loyal to a brand to achieve an elite status ranking.” I believe status is important to people because we always feel the need to compare our achievements to others, whether we see them as above us in ranking or beneath us. Adding a hierarchical aspect to your loyalty program can increase customer retention because the customer will always be striving to reach that next elite level. When developing a hierarchical program, determining the right number of tiers is vital to the program. “A loyalty program with two elite tiers is generally preferred by all consumers involved. (A three-tier program (e.g., gold, silver, and no status) is more satisfying to all involved than a two-tier program (gold and no status), even to those who do not qualify for elite status.)” (Dreze et al, 2009). Having more than one elite tier motivates your program members to spend more in order to reach that higher level of achievement in comparison to only having one elite tier because once the member reaches that level they have nothing else to achieve in your program and will spend less, unless there is a risk of demotion to the lower tier if their spending decreases. On the other hand though, can the possibility of demotion lead to a decrease in loyalty rather than encouraging the consumer to spend more? In research done by Wagner, Hennig-Thurau & Rudolph, (2009), a demotion in a member’s status can result in a lack of loyalty from that member, but a simple apology from the company can reduce the negative impact more than a monetary compensation and keep the customer loyal to the company. The proper design of a loyalty program is crucial to the success of the program in the long run, the program can be altered as time passes but once a program is implemented it cannot be revoked as you will lose a large percentage of your customers and decreasing your overall market share. Recently there have been rumours going around that Canadian Tire is considering stopping their ‘Money’ program, could you imagine the backlash against the corporation if they discontinued a 52 year tradition? The company keeps decreasing the denominations they distribute to customers and...
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