Pitfalls of Customer Loyalty Programs
Loyalty programs — consumers encounter them everywhere. Stay 5 nights at a hotel and get a 6th night free. Spend $150 on groceries and pick up a free turkey on the way out of the supermarket. These offers have proven to be an extremely popular marketing tool and the typical U.S. household belongs to about 12 customer loyalty programs. But they can also be costly, especially when consumers stop being so loyal. Is there any way for a business to win in this situation?
A group of university researchers recently studied this topic and published their findings in the Journal of Marketing. Researchers noted that the basic structure of these programs requires participants to maintain a specific level of spending or patronage to receive their rewards. When those levels drop, consumers are often 'demoted'. The results of this study found that a demoted customer is likely to drop his or her spending by 35%. [See Figure 2 in the study.] Researchers also discovered that consumers typically feel they have been demoted or dropped from a loyalty program too hastily and may harbor a negative attitude about the company. To prevent these negative consequences, marketers should ramp up positive communications such as apologies or encouragement to spend more to maintain a certain status level. Marketers should also consider keeping the customer in the loyalty program a year or two after he or she falls below the commitment level needed to maintain status.
Technical readers can study the regression analysis and T‑scores here. The rest of us can skim the report and remember to structure a loyalty program carefully — the goal is to sell more and encourage affiliation, not create a negative impression by demoting the most loyal shoppers.[Source: Wagner et. al. Does Customer Demotion Jeopardize Loyalty? Journal of Marketing. May 2008]