Loyalty programs are popular, yet their impact can be notoriously difficult to assess. Many businesses are uncertain how much these programs truly contribute to their bottom line, despite US consumers being quite fond of loyalty programs and being active in an average of 6.7 such programs.
Two large-scale academic studies published in top marketing journals may offer some answers to these concerns. Together, the two studies analyzed the financial impact of 567 loyalty programs across five industry sectors in multiple countries. This article looks at what the studies found.
Overview of the Studies
Cross-Sector Loyalty Program Study
In the first study published in the Journal of the Academy of Marketing Science, Professor Chaudhuri from University of Dayton and her co-authors looked at 1,816 publicly traded companies in retail, entertainment, hospitality, telecommunication and information, and food and beverages sectors. Here is a breakdown of the companies by sector and by loyalty program status.
The study looked at the sales and gross profit impact of introducing a loyalty program, both in the short-term and in the long run (yearly impact up to three years). The researchers also considered the role of program design factors in program impact differences.
Multi-Country Grocery Retail Loyalty Program Study
The second study came from International Journal of Research in Marketing. Professor Bombaij from Tilburg University and his coauthor analyzed 358 retail brands across 27 different countries. 68% (245) of these retail brands had a loyalty program. The two researchers analyzed the impact of several program design and cultural factors on the retail brands’ sales per square meter.
Do Loyalty Programs Work?
Impact Over Time
The cross-sectional study analyzed all programs together, after controlling for industry and other business-level differences. It found a significant positive impact from introducing a loyalty program across all three post-launch years:
“Specifically, firms that introduced an LP (loyalty program) in our sample experienced an average increase of 7% in total sales and 6% in gross profits in the first year following the introduction compared to a matched set of control firms. Three years after the introduction of the LP, firms experienced an 11% increase in total sales and 6% increase in gross profits relative to the same set of control firms.”
The patterns in sales vs. profit lifts were somewhat different when looked at from a quarterly perspective. Sales lift was seen immediately in the first quarter after program launch, but profit lift did not become significant until the second post-launch quarter.
Less Rosy Picture Among Grocery Retail Programs
The grocery retail program study showed more nuance in program impact. Out of the 245 programs, 115 or 47% had a positive impact on sales. 127 did not show any impact, and 3 showed surprising negative effect on sales.
When the researchers extrapolated their findings to eight other countries not in their sample, they found that, with moderate competition, supermarkets and hypermarkets in the grocery industry had a half-and-half chance of succeeding/failing with their loyalty programs.
By now, you may ask: how do we know the differences found were not simply because companies with vs. without loyalty programs were fundamentally different from each other? This “self-selection” issue is an important one when studying loyalty program effects. Fortunately, both studies did take extra steps to tackle the issue, making the results more trustworthy.
What Loyalty Program Design Factors Help?
Design Factors Studied
An important takeaway from the big-picture analyses above is that loyalty programs can work, but performance varies. How does program design play a role? Together, the two studies looked at 7 design factors:
- Membership fee: do consumers have to pay a fee to join the program?
- Reward timing: does the program offer immediate rewards (e.g., cash discounts at the time of purchase) or delayed rewards (e.g., point-based rewards)?
- Earning Mechanism: do consumers explicitly earn some form of points/credits for each additional transaction or spending?
- Reward type: are the rewards offered directly related to the business (e.g., a free ham for a grocery store) or not directly related to the business (e.g., a movie ticket for a grocery store)?
- Tier structure: does the program offer multiple tiers or a single no-tier structure?
- Reward structure: does the program offer a constant reward structure where consumers are rewarded the same way no matter their spending (e.g., buy 10 coffees and get the 11th one for free)? Or does the program offer a progressive reward structure favoring high-spending, high-tier consumers?
- Single vs. multi-vendor program: is the program run by a single main retail brand, or is it a coalition program that includes multiple brands?
What Design Factors Helped?
Out of the list above, the design factors that improved loyalty program impact included: charging a membership fee, having an explicit earning mechanism, using a multi-tier structure, using constant instead of progressive reward ratio, and being a single-brand program.
What Contextual Factors Matter?
Does Retailer Strategy Matter?
The grocery retailer study found that loyalty programs were equally effective for supermarkets (similar to Kroger) versus hypermarkets (similar to Wal-Mart). But they were less effective for discounters with lower price and more limited product assortment and service (similar to Aldi).
How big the retail brand is or whether the brand follows a high-low pricing strategy vs. an everyday-low-price strategy did not make a difference on loyalty program success.
Do Countries/Cultures Matter?
The same grocery retail study found that loyalty programs tend to be more effective in individualistic cultures such as the United States. These cultures value individual uniqueness. They believe in success by one’s own efforts. No surprise that individual rewards based loyalty programs work better in these cultures.
How long-term oriented a culture is mattered too. Since loyalty programs typically involve long-term commitments, they work better in more long-term oriented cultures.
Does Market Competition Matter?
At a market level, how competitive a country’s retail market is did not make loyalty programs less successful. But if a lot of competing grocery stores all offered loyalty programs, the effectiveness of the programs tended to suffer. These results echoed previous analyses of airline loyalty programs. However, that research also found that category flexibility (i.e., how much the industry can attract demand from other related categories) can make program saturation less of a problem.
Putting It All Together
One important lesson from these two studies is that loyalty program effectiveness is contingent on program design and operational settings. Often there is no single rule that will work across the board, but the two studies show some emerging patterns.
Simulation analyses in the grocery retail study showed what would happen if the programs were more optimally design. That is, what if the programs all switched to a constant reward structure offered by a single dominant brand. In that case, 160 or 65% of the programs would have become effective instead of the original 115 or 47%.
So oftentimes the more important question to ask is not whether or not to have a loyalty program, but how best to design the loyalty program.
If you’d like to read the two studies in more detail, here are the references:
- Malika Chaudhuri, Clay M. Voorhees, and Jonathan M. Beck (2019), “The Effects of Loyalty Program Introduction and Design on Short- and Long-Term Sales and Gross Profits,” Journal of the Academy of Marketing Science, Vol. 47, p.640–658.
- Nick J.F. Bombaij and Marnik G. Dekimpe (2020), “When Do Loyalty Programs Work? The Moderating Role of Design, Retailer-Strategy, and Country Characteristics,” International Journal of Research in Marketing, 37 (1), 175–195