Many markets, especially as competition stiffens during an economic slowdown, are a battleground for a share of the customer’s wallet. Marketers, in the hope of retaining customer loyalty, have embarked on loyalty reward programs.
Customer Benefits of Loyalty Programs
There are variations of reward programs around but they essentially focus on patronage. The more a customer uses the brand, the more s/he will be rewarded once past a minimum level of patronage. Gindaco, the Japanese chain selling takoyaki at Ion’s Food Opera, has a loyalty card where a stamp is rewarded for every $4.80 spent. After the 14th stamp, the loyal Gindaco customer can redeem the stamps for a food item. Watson’s recently introduced a card membership program in which points are earned for every $5 spent for redemption of cash rebates. Banks also have reward programs for credit cards to persuade their card holders to use their bank’s card more than their competitors’.
Airlines and hotels were among the first to introduce loyalty programs. Singapore Airlines has its Krisflyer to redeem not only air tickets but to give loyal customers preferential treatment. Taj Hotels, Hilton, Marriott, and Hyatt also have their respective customer loyalty programs.
In addition to the economic benefits (discounts or free gifts), loyal consumers also enjoy emotional benefits (a sense of belonging), prestige or recognition, as well as access to an exclusive treatment or service such as SIA’s special lounges for its PPS Club members.
Firm Benefits of Loyalty Programs
The assumption behind focusing not only on loyal customers but loyal customers who have achieved a minimum level of patronage is that this set of customers is profitable to the firm. Their continued loyalty suggests that they are satisfied with the brand, will continue buying the brand and even more so in the future. Hence, their lifetime value with the firm is likely to be enhanced.
Additionally, being satisfied customers, they are more predisposed to communicate favourable word of mouth to their friends regarding the brand. All in, firms want to protect the revenues from their high spending customers and hence, embarking on a customer loyalty reward program helps to enhance relationship between the firm and the customer.
Reward programs are also effective in increasing customer perceptions of switching costs. If they switch to competing brands, especially just before they accumulate the necessary credits for a reward, they forego all that they have accumulated. Hence, reward programs motivate customers to carry on with the firm until at least a reward is redeemed.
Particularly for service firms where their offerings are generally undifferentiated from one to another, reward programs are a means to tie customers to them and build a relationship.
However , consumers can be a member of several competing loyalty reward programs. What would make a consumer spend a larger share of his/her wallet on Brand A, and less on Brands B and C when s/he is a member of all three?
At the National University of Singapore Business School, we engaged in a study to address these questions. First, the attractiveness of a reward program is paramount. An attractive reward program gets a larger share of the customer wallet (i.e., behavioural loyalty or “share of wallet”) than less attractive programs, regardless of how loyal the customer is to the brand in terms of attitudinal loyalty (also called “share of heart”).................