۱- Loyalty programs as competitive tools

۲- Personalized offers

۳- Rewards

۴- Beyond offers and rewards

۵- Summary

References

Abstract

For industries with low switching costs, customer loyalty programs (LPs) have potential to drive differentiation and sustain a competitive advantage. However, incentives provided through LPs also have a potential to escalate into costly price wars. In this article, we discuss how to design successful customer loyalty reward programs that bring value to participants and that cannot be emulated by competitors easily. We focus on three distinct aspects of improvement: personalization, reward types, and additional services. Through personalization, companies can leverage the knowledge they already have on their customers to tailor offers that they find relevant and appealing. For the reward structure, we argue in favor of a certain degree of opacity. We also encourage loyalty programs to consider giveaways that are unique and difficult to imitate and to use all the information they have available to provide rewards that fit with each customers’ idiosyncratic situation or preference. Finally, competitive LPs should look beyond offers and rewards. In addition to purchases, LPs can reward participants for other desirable behaviors; they can also provide additional services that impose minimal costs on firms, but bring value to customers.

Loyalty programs as competitive tools

On April 11, 2016–—the day before Starbucks launched its new loyalty program–—Dunkin’ Donuts rolled out a new app and loyalty plan. It was a highly unlikely coincidence. The two coffee shop chains, together covering more than 66% of the U.S. market, are using their loyalty plans to fend off competition (Lal & Bell, 2003) and keep their customers hooked. Loyalty programs are tools for building brand equity (Lemon, Rust, & Zeithaml, 2001; Uncles, Dowling, & Hammond, 2003). The specific mechanisms through which these programs achieve their goal can vary widely, from decreased priced sensitivity and increased share of wallet to increased resistance to service failures and increased propensity to engage in word-of-mouth on behalf of the brand. We focus on switching costs (Hartmann & Viard, 2008; Kim, Shi, & Srinivasan, 2001), a mechanism that puts loyalty programs into a competitive perspective. Once a consumer has accumulated a certain amount of points with the focal company, the approaching reward–—in the form of a gift or a status upgrade–—is likely to keep them committed to that company. Competitors need more alluring offers to sway a consumer who is very close to gaining a reward. In this way, LPs can be used as competitive tools, especially in industries with low or nonexistent switching costs (e.g., retail, hospitality, air transport).