The effects of introducing and terminating loyalty programs

The goal of this paper is to empirically investigate the effects of an loyalty program (LP) introduction and termination, accounting for simultaneous effects of LP designs, cross-customer effects and competition effects. Despite firms across the globe spend billions of dollars on LPs, it is not clear: whether these programs enhance customer loyalty, what happens if a program is terminated and which LP design elements enhance effectiveness of LPs.

The authors empirically investigate to what extent the effects of introducing and terminating a LP depend on: its monetary and non-monetary design elements, customer characteristics and competition. The empirical evidence is based on a bivariate hierarchical linear model, using a large-scale dataset involving 9,783 consumers rating 24 different LPs across eight industries.

While the characteristics of LP are more important in influencing customer behavior when they join the LP, the competitive environment and the duration of membership in an LP are the primary drivers of customer reactions to LP termination. Non-monetary discrimination between members and non-members is a more powerful tool in creating customer loyalty than offering higher discounts or saving points. The effect of discrimination on loyalty sustains when an LP is terminated.

This is the first research to empirically investigate the effect of an LP termination, accounting for simultaneous effects of LP designs and competition effects. The authors measured behavioral intentions in a hypothetical case of LP termination. Future research could assess the effects of LP termination and the moderating role of both monetary and non-monetary design elements on other behavioral loyalty variables based on, e.g. household panel data, when such data on LP terminations across industries becomes available.

When a firm considers the introduction of an LP or changing an existing one, non-monetary discrimination between members and non-members seems to be the most effective tool in building sustainable customer loyalty. Further, offering a relatively low saving rate is a viable way to keep costs down because the savings percentage does not significantly affect loyalty. For the same reason, firms can also consider reducing or eliminating LP-based discounts. The competitive environment and the duration of membership in an LP are the primary drivers of customer reactions to LP termination.

To the best of authors’ knowledge, the potential effects of LP termination have not been addressed in the current literature. The authors empirically assess the effects of LP termination and effects of those programs at the introduction. Understanding the factors that moderate the potential negative impact of terminating an LP is of crucial importance to managers and researchers alike. The paper is of great value for firms that consider introducing, modifying or terminating an LP.