At the INFORMS Marketing Science 2009 Conference, I presented my current research project on the effects of loyalty program expiration policy change.  For those who missed the conference, here’s a summary of what I presented. I have also included the summary of the other two research projects that were presented during the same session.

Shortening Loyalty Program Expiration Period May Not Be Bad

One of the headaches companies running loyalty programs have is the liability associated with unredeemed points in program members’ accounts. One way of reducing such liabilities is to shorten the expiration period associated with program points, as major US airlines did in 2007. However, it is possible for such a policy change to alienate existing customers. To see whether this is the case, my co-author and I analyzed data from a convenience store chain that has switched from a no-expiration policy to a monthly expiration policy. To our surprise, we found that, participation in the program has actually increased significantly since the program change. Overall in-store sales have also increased, while fuel sales remained unchanged. What we plan to do next is to see how individual consumers have adjusted their purchase behavior in reaction to the policy change. We suspect that the addition of an expiration policy imposes what we call an “expiration pressure” on consumers, as consumers are pressured into making more purchases to reach a reward threshold before the points expire. However, different consumers (e.g., those with different patronage levels) will experience the pressure differently. I’ll report more findings when we are further along with the project. For now, you can download the presentation slides. We welcome any feedback or comments you may have.

Two other researchers also presented their projects on loyalty program and customer relationship management in the same session. As these are also relevant to loyalty managers, I am summarizing them below:

Loyalty Program Increases Share of Wallet by 10%

Martin Boehm from IE Business School presented his co-authored research project on the effect of loyalty program membership on consumers’ share of wallet at an European supermarket chain. By looking at a consumer panel’s behavior before and after loyalty program enrollment, they show that the loyalty program increased share of wallet by 10%.  This lift is negatively correlated with a consumer’s original share of wallet before the program enrollment. In other words, those with a high share of wallet exprienced minimal lift, whereas those with a low share of wallet experienced the highest lift. These results echo my earlier research findings showing a similar pattern. However, their research better controls for self-selection bias (i.e., better customers are more likely to enroll in loyalty programs) and therefore provides an even stronger argument for loyalty program impact.

Email and Mail Are More Effective Customer Contact Channels…

At least in the context of auto dealership’s services. Using data from an auto dealership, Andrea Godfrey at University of California at Riverside and her co-authors compared the effectiveness of phone, mail, and email customer contact in increasing sales (in this case, service revenue).  They found that mails and emails were similarly effective in increasing sales, while phone contact was the least effective. The effects of mails and emails were both curvilinear, meaning that the effects of those contacts reach maximum after a few times and then drop after the threshold. Not surprisingly, the exact effectiveness of each contact channel on individual consumers also depends on the consumers’ channel preference.  I hope these findings will help eliminate a few annoying dinner disruptions and result in less waste of papers. But I am not so sure I like the prospect of receiving more emails either. Hmm…

Questions or comments?  If you have any questions regarding any of these research projects that I have summarized here, please feel free to let me know, and I’d be happy to answer your question or forward your question to the right author.

With the current downturn in US economy, many companies are adding loyalty programs to their marketing toolbox, both as a customer relationship management tool and to demonstrate better value to existing and potential customers.  In some industries such as travel and financial services, numerous rival loyalty programs are offered, creating intense competition among these programs. This pervasiveness of loyalty programs has led some to conclude that such programs may be a necessary cost of doing business or argue that memberships in multiple loyalty programs may eventually cancel out the effects of each individual program, creating a zero-sum game. With a large number of competing loyalty programs, are firms merely giving away profits in a desperate struggle to win business, much like the airline price war in the early 1990’s?  Or are loyalty programs a viable strategy that can increase revenue potentials, even with competitive offerings in the same market?

These are the questions my co-author and I intended to answer with our forthcoming article in the Journal of Marketing entitled “Competing Loyalty Programs: Impact of Market Saturation, Market Share, and Category Expandability“.  Using 30 years of historical data from the airline industry supplemented by consumer survey data, we found that an airline’s frequent flyer program does not always lead to beneficial outcomes for the offering firm and that only high-share airlines experience sales lifts from their loyalty programs. As high-share firms tend to possess complementary product and customer resources, they are more likely to gain from their loyalty programs than firms with a smaller market share.

Our research also reveals that crowding the marketplace with loyalty programs can diminish the return of an individual program. However, this saturation effect is contingent on the expandability of the product category. When the products from one industry can be extended to meet the demands in related industries, the competitive landscape shifts to include not only competitors within an industry (i.e., other airlines) but also firms in those related industries (i.e., other modes of transportation). Looking from this broader perspective, the imitation of loyalty programs among direct competitors can still derive competitive advantage within the broader market if competitors in alternative categories do not yet possess such resources. Under this situation, saturation becomes less of a threat to the success of each individual program in the focal industry. For the airline industry, due to its relatively high category expandability, the overall effect of market saturation becomes insignificant.

The findings from this research caution against an urge to launch a loyalty program simply because every other competitor is doing so. Rather, a firm who is pondering the launch of such a program in an already saturated market should carefully take into consideration the flexibility of market demand and whether importance resources (e.g., products, customers, data analytic capabilities) exist to complement such a program.

For further readings, you are encouraged to download a preview copy of the loyalty program competition paper from my website, or from the Journal of Marketing website.

This is a true business tale that I heard a while back.  A Japanese firm did not do very well one year and could not afford to give employees bonuses at the end of the year.  The management thought of a clever way to reduce dissatisfaction among employees.  First, news leaked out that there would be no end-of-the-year bonuses, and everyone started complaining.  Soon it became known that the situation was worse and that not only there would be no yearly bonuses but there would be no regular yearly salary raises for next year.  Later, another rumor broke out that the situation was even worse and that some people might have to be laid off to reduce cost.  Can you imagine the employees’ reactions when the management finally announced that there simply would be no bonuses but yearly salary increases would still happen next year?  Everyone was very relieved and happy!  Why?  Because after the three rounds of “rumors”, the employees were expecting much worse and were relieved to find that not only were they not going to lose their job but they would actually get a raise next year.

While I would not encourage manipulating employees’ mind like this, the story does demonstrate the power of expectations.  In other words, as human beings, we do not perceive things in absolute terms.  Rather, we interpret them in a relative light according to our expectations.  Thus, when our expectations vary, how we feel about a situation can be interpreted and accepted under completely different lights. If we expect a full glass, we see half a glass as half-empty. But if we expect an empty glass, we see half a glass as half-full.

This aspect of human psychology has important implications for customer relationship management.  When dealing with customers, firms need to be aware that not only is it necessary to provide superior service but it is also important to manage what customers expect to receive from the firm.  For example, while it may be temporarily beneficial for a firm to pamper its best customers, such a tactic may also increase the expectation of these customers such that they can become easily disappointed.

To use a more concrete case to illustrate this point, consider airlines’ frequent flyer programs.  Most of these programs are structured in tiers, such that consumers who fly over a certain number of miles per year are granted higher status and receive special treatments and privileges.  This special treatment aspect is considered an important feature of a loyalty program (see this Colloquy article on the soft side of loyalty). While I acknowledge the usefulness of this tiered structure, firms do need to carefully balance the potential gain in loyalty via such a structure and the potential loss that can happen in setting up consumers’ expectations too high and subsequently disappoint them and lose their hard-earned loyalty.

I would like to conclude this discussion with another true story that actually happened to me personally.  In my recent trip to Seattle, I flew for the first time as a Silver Medallion member of Delta Airline’s SkyMiles Program.  Below is a log of my experiences and how I reacted to them in my mind.  From these, you can see how an elevated expectation can set up a higher possibility of disappointment.

1. Prior to departure: I was successfully upgraded to first class for the longer leg of my flight.  It made me feel very happy to receive the upgrade, especially for a four-hour flight. Prognosis: no prior expectation, high satisfaction.

2. Checking in for my flight: I waited in the Medallion member special line. But the agents were all dealing with other customers who were not Medallion members.  Despite being the first person in line at the special check-in line, I did not receive immediate service.  Normally I would have just patiently waited in line, but this time it created some irritation.  Prognosis: some prior expectation, some dissatisfaction.

3. Flight from Norfolk –> Seattle: Being my first time flying first class, I was happy with the treatment that I received on board the airplane.  I had a very decent dinner with real china and silverware rather than no meal or paid meal with plastic plates one would expect in coach.  Prognosis: low/no expectation, high satisfaction.

4. Flight from Seattle –> Norfolk: Due to bad traffic to the airport, I arrived at the airport just past the 30-minute threshold and had to miss my flight.  I was told that I had to either pay a substantial amount of several hundred dollars to be rebooked to another flight, or wait till three hours before the next available flight for the same-day call rule that would cost me only $50 for the change.  Yes, I was the one responsible for the flight.  But airlines miss my flights all the time, and they never pay me a few hundred dollars for my lost time.  Well, normally I would have just blamed myself for missing the flight and creating the subsequent situation.  But now that I am a Medallion member who actually flew first class once, I was expecting a much better response, something along the line of “I am sorry you missed your flight.  We value your business as a Medallion member.  Since this is your first offense, we will ignore that it is your responsibility, and we will book you onto the next flight right away so that you can be on your way” (of course costing me little to no money for doing that). The ending of the story was that I was not able to get onto the immediate following flight and had to wait for the next one.  I ended up paying close to $250 extra (or about half of the price of the original ticket), and my return date was delayed till the next day.  Prognosis: high expectation, high dissatisfaction.

In sum, managing customer loyalty is a science, and this science can be crystallized by a better understanding of consumer psychology.  Understanding what consumers expect and properly managing that expectation should be part of every firm’s loyalty marketing strategy.  For readers who would like to learn more about the effects of having tiered structures in a loyalty program, you may want to check out this MSI Working Paper entitled “Feeling Superior: The Importance of Loyalty Program Structure on Customers’ Perception of Status” by Nunes and Dreze.