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.

Although we see loyalty programs everywhere, there is limited evidence on the long-term effects of such programs, and their effectiveness is not well established. In my paper to be published by the Journal of Marketing, I examined the long-term impact of a loyalty program on consumers’ usage levels and their exclusive loyalty to the firm. Using longitudinal data from a convenience store franchise, the study shows that consumers who were heavy buyers at the beginning of a loyalty program were most likely to claim their qualified rewards and thus benefited the most from the program, but their spending levels did not increase over time. In contrast, consumers whose initial patronage levels were low or moderate gradually purchased more and became more loyal to the firm. The most visible change for these two segments occurred within three months of joining the program, and the growth continued at a steady but slower pace in the following months. At the end of the analysis period, these consumers’ average purchase frequencies were not statistically different from that of an adjacent tier. This supports the argument that loyalty programs can accelerate consumers’ loyalty lifecycle and make them more profitable customers.

The diverse responses across consumers suggest a need to consider consumer idiosyncrasies when assessing the impact of loyalty programs. Loyalty programs by nature are one-to-one programs. How much a consumer can benefit from such a program depends on his or her “investment” in the relationship with the firm. One surprising finding from this research is that consumers who started with low usage levels changed their behavior as much as or more than moderate and heavy buyers. This contradicts the commonly held belief that light buyers are less than ideal targets for loyalty programs and that they will not perceive much value in the program. In the current case, the loyalty program did not initially appear very attractive to light buyers. But these consumers diversified their purchases and branched into the firm’s other service areas. Over the course of two years, light and moderate customers enrolled in the loyalty program increased their value contribution and accelerated their relationship lifecycle with the firm, turning the program into much more than a passive loss-prevention instrument. These findings challenge the traditional wisdom of loyalty program as primarily a defense mechanism used to keep a core group of best customers from defecting, and suggest a need for managers to expand their mentality toward loyalty programs beyond mere reactive tactics.

This paper will be published by the October 2007 issue of Journal of Marketing. To download a preview copy of this paper, please visit my publications page.