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.

A little while ago, I wrote a two-part post on Microsoft’s irrational obsession with Google. Over the weekend, I watched a Science Channel program that detailed the background of Netscape and how it lost its battle against Microsoft. It was very interesting to observe the same kind of obsession and vengeance that Microsoft showed in that battle as it does today toward Google. That made me think: why was Microsoft able to defeat Netscape but not Google? Although Google does have plenty of Ph.D.’s as employees, it seems implausible that Microsoft simply doesn’t have employees smart enough to catch up.

There may be many reasons to explain this historical difference. For example, one may argue that Microsoft was distracted by its anti-trust case when Google was quietly gaining its strength. In my mind, however, one crucial reason was the fundamental difference between Google’s business model and that of Netscape.

As a traditional software business, Netscape relied on making money off its software. Therefore, when Microsoft offered its Internet Explorer for free, it immediately crushed Netscape’s fundamental business model. Google, on the other hand, offered its service to the average consumer for free and instead drew its revenue from businesses/advertisers. By doing so, it defeated the advantage Microsoft had: the deeper pocket. No longer can Microsoft use its free bundling and distribution power against Google. As its service is accessible over the Internet at no cost, Google was able to start on the same footing as Microsoft, and the deeper pocket Microsoft had could not help the company in this case.

The lesson learned from this is that, when businesses face a formidable rival, too often it’s easy to focus on what the competitor has that one does not have. But as Google’s luck shows, the best way to take down a larger rival is by rendering whatever advantages the larger rival has useless. Of course, this is built on the assumption that the company can still find sources of competitive advantage in an alternative area. What essentially happened in Google’s case was that they changed the rule of the game, and by doing so, it diminished Microsoft’s market power.