Loyalty Program Design Fundamentals Part II
Posted on March 31st, 2010
Last week, I wrote about the key loyalty program design factors that a loyalty manager should consider. In the second part of this series, I’d like to review what we know about effective loyalty program design from published academic research. I should start by saying that this area is still pretty new. So we don’t know a whole lot at this point. I’m hoping that by putting together here what we know will also help academic researchers identify the holes that still need to be filled in this area.
I. Program Requirements
Key References: Kivetz and Simonson (2003); Demoulin and Zidda (2009)
- Although increasing program requirements may make a loyalty program less relevant to some consumers, it can also make the program more appealing to frequent customers. So if the goal of a loyalty program is to selectively attract heavy buyers, a relatively high program bar should be set.
- Make sure the program is straightforward. Too much complexity in a program, whether it’s the point earning action required or the redemption of rewards, can turn consumers away right at the beginning.
II. Program Points/Currency
Key References: van Osselaer et al. (2004); Drèze and Nunes (2004); Kivetz et al. (2006)
- Don’t treat points purely as a translation mechanism. They can have influence on consumers independent of their actual worth.
- Offering more points per dollar spent can make the program seem more appealing to consumers, even though the actual worth of the points may be the same by imposing more stringent reward thresholds.
- Offering bonus points at the time of joining can create a point pressure effect on consumers and motivate them to accelerate their purchases.
- Allowing consumers to use a combination of dollars and points to make purchases (such as American Express’ ShopAmex) may lower their perception of product cost.
III. Reward Type
Key References: Keh and Lee (2006); Roehm et al. (2002); Kivetz and Simonson (2002); Smith and Sparks (2009)
- Direct rewards that are more closely tied in to the main product or brand (e.g., a free coffee mug for a coffeeshop) are better than indirect rewards that are irrelevant to the product/brand (e.g., a movie ticket). But this is true only when consumers are satisfied with the main brand. For dissatisfied customers, direct or indirect does not make a difference.
- When program requirements are relatively high, luxury rewards (e.g., a spa treatment) are more preferable than utilitarian rewards (e.g., a gift card for a grocery store).
IV. Membership Tier
Key References: Drèze and Nunes (2008); Wagner et al. (2009)
- People don’t like to see their elite tier crowded. So it makes sense to make requirements high for the top elite tiers to increase the perception of exclusivity of those tiers.
- Labeling the tiers in status-signaling names (e.g., silver, gold, platinum) makes consumers more sensitive to program hierarchy.
- Having another elite tier (e.g., silver) below one’s own tier (e.g., gold) makes consumers feel more special.
- How big of a gap exists in the benefits offered to the different tiers does NOT matter much to consumers. People seem to be more concerned with the simple fact that they are in an elite group than the actual additional benefits offered to the group.
- One danger of a tiered loyalty program happens when a consumer gets demoted to a lower level due to insufficient spending. This can potentially drive an otherwise loyal customer away.
V. Loyalty Program Partnership
Key References: Lemon and Wangenheim (2009); Lederman (2007); Liu and Yang (2009)
- When choosing a loyalty program partner, select one that consumers have high usage with. Research shows that high core service usage increases the possibility of cross-buying with partners.
- Also choose partners that have a natural business fit (e.g., airline and rental car). Loyalty program partners that are not perceived as fit together from the consumers’ perspective (e.g., coffeeshop and credit card) are less likely to lead to cross-buying.
- Having more partners (in the case of airline alliances) is especially beneficial to companies who have a large market share.
There you go. 
I hope this series can help you approach a loyalty program in a more systematic fashion. I listed all the references at the end of this post, in case you are interested in reading further. Before I finish the topic, I would like to leave you with a chart from one of my publications. The chart lays out the many factors (including design but also other factors) that contribute to loyalty program success. The full figure is pretty big. You can click on the image below to see the full picture.
Source: Liu and Yang (2009)
Factors Affecting Loyalty Program Success
References:
1. Demoulin, Nathalie T. M. and Pietro Zidda (2009), “Drivers of Customers’ Adoption and Adoption Timing of a New Loyalty Card in the Grocery Retail Market,” Journal of Retailing, 85 (3), 391-405.
2. Drèze, Xavier and Joseph C. Nunes (2009), “Feeling Superior: The Impact of Loyalty Program Structure on Consumers’ Perception of Status,” Journal of Consumer Research, 35 (6), 890-905.
3. —- (2004), “Using Combined-Currency Prices to Lower Consumers’ Perceived Cost,” Journal of Marketing Research, 41 (1), 59-72.
4. Keh, Hean Tat and Yih Hwai Lee (2006), “Do reward programs build loyalty for services?: The moderating effect of satisfaction on type and timing of rewards,” Journal of Retailing, 82 (2), 127-36.
5. Kivetz, Ran and Itamar Simonson (2002), “Earning the right to indulge: Effort as a determinant of customer preferences toward frequency program rewards,” Journal of Marketing Research, 39 (2), 155-70.
6. —- (2003), “The idiosyncratic fit heuristic: Effort advantage as a determinant of consumer response to loyalty programs,” Journal of Marketing Research, 40 (4), 454-67.
7. Kivetz, Ran, Oleg Urminsky, and Yuhuang Zheng (2006), “The Goal-Gradient Hypothesis Resurrected: Purchase Acceleration, Illusionary Goal Progress, and Customer Retention,” Journal of Marketing Research, 43 (1), 39-58.
8. Lederman, M. (2007), “Do enhancements to loyalty programs affect demand? The impact of international frequent flyer partnerships on domestic airline demand,” The Rand Journal of Economics, 38 (4), 1134-58.
9. Lemon, K. and F. Wangenheim (2009), “The Reinforcing Effects of Loyalty Program Partnerships and Core Service Usage: A Longitudinal Analysis,” Journal of Service Research, 11 (4), 357-70.
10. Liu, Yuping and Rong Yang (2009), “Competing loyalty programs: Impact of market saturation, market share, and category expandability,” Journal of Marketing, 73 (1), 93-108.
11. Roehm, Michelle, Ellen Bolman Pullins, and Harper A. Roehm, Jr. (2002), “Designing loyalty-building programs for packaged goods brands,” Journal of Marketing Research, 39 (2), 202-13.
12. Smith, Andrew and Leigh Sparks (2009), “”It’s nice to get a wee treat if you’ve had a bad week”: Consumer motivations in retail loyalty scheme points redemption,” Journal of Business Research, 62 (5), 542-47.
13. van Osselaer, Stijn M. J., Joseph Alba, and Puneet Manchanda (2004), “Irrelevant information and mediated temporal choice,” Journal of Consumer Psychology, 14 (3), 257-70.
