Conceptual Model of Loyalty Program Effectiveness

The effectiveness of loyalty programs began to be studied consistently around the end of the last century. The first ideas to improve the quality of customer service and loyalty were appeared in literature around the 60's, mainly in the hotel and restaurant business (Cornell Hotel and Restaurant Administration Quarterly Corporation). Since then, many scholars have solved theoretical and practical issues related to customer loyalty in an attempt to find a theoretical basis for the work of the loyalty program and explain the reasons for its success or failure. In the last decade, there has been a wave of research attempting to purposefully identify the factors underlying the effectiveness of the loyalty program. Summarizing the results of the latest research, we can conclude that the main factors of the loyalty program effectiveness fall into three main groups:

1. the structure of the loyalty program,
2. the structure of the rewards, and
3. consumer fit with the loyalty program.

Group 1. The structure of the loyalty program.

We proceed from the fact that any loyalty program is a marketing strategy aimed at winning the competition. The loyalty program is created with the purpose to induce clients to continue shopping in a certain company despite other similar offers, i.e. to induce a person to act outside rational and logical schemes, in other words, to form a new pattern of behavior. Therefore, the loyalty program by its structure refers to the Nudge theory and lies at the heart of behavioral economy - a rapidly developing and relevant part of social humanities. Initially, Nudge theory was formed in the field of behavioral sciences, under the influence of social and political theory that studies the principles of social manipulation. The practices of manipulation described by nudge theory are based on the triggers of positive stimulation of the subject and the presence of indirect attractors capable of influencing the behavior and decision-making of groups or individuals. Nudging can be considered a new way to achieve a sense of individual and social conformity (traditional ways are education, legislation and law enforcement).

As a matter of fact, the structure of successful loyalty programs should form and launch a strategically advantageous project of customer behavior. From the formal point of view, this requires at least the initial investment obligations to be removed from the consumer and entrusted to the company, at least at the early stages of participation in the program. This type of nudging creates a sense of trust among consumers. Subsequently, a further customer relationship strategy is built on this foundation of trust.

Group 2. The structure of the rewardings

The next step in arranging a successful loyalty program is to determine the correct rewarding structure. In researches it is noticed that loyalty programs with illiterate rewards schemes cause undesirable effect of popularity of the company among the customers who are not in the target audience. This happens, for example, when companies offer goods with significant discounts as part of their loyalty program, thus attracting illegible customers looking for simply low prices and not paying attention to the brand. In this case, companies simply buy short-term loyalty, without the prospect of development and continuation, which is essentially a failure.  Approximately this is how coupons with a discount of 50% or more work in most cases. These measures cannot really change the consumer attitude and their future intentions. Therefore, it is crucial to create a program that has criteria for distinguishing desired and unwanted customers and a clear understanding of the specific needs of each group. Customers who are optimal for the company should be rewarded.

Group 3. Consumer fit with the loyalty program.

The most interesting thing in the work of loyalty programs is the feeling of identity, fitting or coincidence, produced by them.  Consumers should feel that they fit the program, and they have earned exactly the rewards they have always wanted. This is a very complex, structured, and subtle moment. By and large, the only right solution to this problem is to create a fantasy for the customer about the reward, that is to create an object of desire and introduce it into behavioral habits. This explains the reproaches of excessive manipulation of clients with the help of loyalty programs. It is not yet clear how the creation of phantom statuses can have an impact on actual social structures. It is known that when the reward threshold is too low, the attractiveness of this reward decreases. Instead, the perception of exclusivity or acquired status is likely to stimulate future loyalty. 

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References

The Drivers of Loyalty Program Success: An Organizing Framework and Research Agenda
Michael McCall and Clay Voorhees

Cornell Hospitality Quarterly 2010 51: 35 originally published online 7 December 2009