1. Effectiveness of Loyalty
Programs

2. Topics Discussed
• Drivers of Loyalty Program Effectiveness
• LP Design Characteristics
• Achieving Competitive Advantage
• The 7-Point Check List for Successful Loyalty Program Design and
Implementation
• Minicases: Starwood Hotels
• CRM at Work: Tesco

3. Drivers of LOYALTY
PROGRAM Effectiveness
LP Benefits to
Demand side: Organization
Attitudinal
Loyalty 1.Commitment,
positive
Demand side: WOM!,
LP Design Behavioral Community,
Characteristics Loyalty True Loyalty
2. Efficiency
Profits:
Supply side:
Greater SCR*
Cost of
Loyalty
or retention
Customer Characteristics Program
Market Characteristics 3. Effectiveness
Firm Characteristics Profits:
Better value
proposition
through
learning
!Word-of-Mouth 4. Value
Alignment
*Share of Category Requirement

4. Loyalty Program Design Characteristics
• Classified according to:
– Reward structure
– Sponsorship (existence of partner network, network externalities)
• To know if an LP is effective:
– From the consumer’s perspective, are rewards attainable?
– From the consumer’s perspective, are rewards relevant?
– From the firm’s perspective, is the LP design aligned with the desired
goal(s)?

5. LP Customer Characteristics
• Skew-ness of customer value distribution varies across
industries (value heterogeneity)
– Similar usage and customer profitability of individual customers or accounts
(e.g.: gasoline industry)
– Different usage and customer profitability of individual customers or accounts
(e.g.: financial services or the telecom industry)
• Value alignment feasible in industries such as airlines,
hotels, rental cars, pharmacies, telecom and financial
services

6. Market Characteristics
• Market concentration (supply side)
– Double jeopardy (Ehrenberg et al ): small market share brands suffer because of
two threats:
• Low share brands are purchased by fewer customers than
high share brands
• Among those who buy the brand, they purchase it less
often
Repeat Purchase Probability
1
Super loyalty
0.8 brands
0.6
0.4
0.2
Double
Jeopardy Line
0
0% 100%
Market Share
Source: Graham Dowling and Mark Uncles (1997), “Do Customer Loyalty Programs Really Work?” Sloan Management Review. Summer 71-82.

7. FIRM CHARACTERISTICS
• Perishability of a product
– Hotel LPs: frequent users get upgrades to “better” rooms subject to availability.
Upgrades are only given when there is excess capacity that night. The reward of
an upgrade comes at very low marginal cost
– Airline seats
• Breadth and depth of the firm offering the product at
the store/retail level results in higher efficiency profits
because:
– A buyer is more likely to fulfill his needs
– A buyer has more opportunity for one-stop shopping (attributed to more time
saving)
– A buyer has more opportunity for behavioral loyalty (attributed to more purchase

8. Achieving Competitive Advantage
• LP program - to achieve competitive advantage
• Competitive advantage of a firm results in the ability to operate more profitably over a
sustained period of time
• A highly frequented category like Grocery Stores is more likely to attract members in to
its LP
• LPs with the goal of creating Efficiency Profits provide the smallest basis for achieving
competitive advantage
• The value provided to the customers participating in a LP must be greater than for
customers not participating
• Industries such as financial services or telecom can expect to reap competitive
advantage when pursuing a goal of value alignment

9. The 7-Point Check-list for Successful
LP Design and Implementation
• Is your LP’s goal compatible with marketing strategy?
• Is the design of your LP aligned with the characteristics of your
market, customer base, and your firm?
• Is cost management of LPs possible by mitigating costs via low
marginal cost rewards or via contributions from manufacturers?

10. The 7-Point Check-list for Successful LP Design and
Implementation (contd.)
• If LPs are withdrawn, design faults will not only result in
losses due to the program but have more lasting impact
in the form of customer dissatisfaction
• Chances for strategic success of your LP are highest if
your goal is to achieve effectiveness profits in your marketing
operations
• Do you have the necessary capabilities within your firm for
LP management? (e.g., data storage, data analysis, and

11. Loyalty Programs: Shackle or Reward
• Loyalty programs as they exist today fall short in terms of creating
attitudinal loyalty
• Loyalty programs focusing on incentives, deals, and promotions are
often a very costly proposition for the firm
• “LPs that are most likely to provide sustainable competitive
advantage are those that leverage data obtained from consumers
into more effective marketing decisions and thus result in true value
creation for customers. Loyalty is likely to follow”

12. Mini case: Starwood Hotels
• Operates a customer loyalty program called Starwood Preferred Guest (SPG) - allows
customers to accumulate points for staying and spending with Starwood
• Unique - points never expire and Starwood does not have “black-out dates” (dates
when customers cannot use their points )
• Challenges
– Collection of too much information on individual customer behavior without
knowing how to use it, exacerbated by customer’s concern about privacy invasion
– Very little knowledge over a large portion of its customer base; while roughly 7
million Starwood customers are members of the loyalty program, 6 million are
not
– Knowing the extent to which customers will tolerate frequent offerings; while
maximizing its cross-selling and up-selling opportunities

13. Summary
• The configuration and interaction of LP design, customer, market
and firm characteristics determines whether a LP achieves its
desired objective
• To know if a LP is effective, issues to be addressed include
attractiveness of LP, degree to which an accumulation of assets in
the program is relevant, and whether the LP’s design is aligned with
the desired firm goals
• The key reason a firm develops a LP program is to create
competitive advantage
• LPs that are designed to create Effectiveness Profits have the highest
chance of creating competitive advantage