Stanford Business

FEBRUARY 2007


Cautions About Customer Loyalty Programs

by Marguerite Rigoglioso

Loyalty or reward programs like frequent flier plans or buy-10-get-1-free cards have been touted as powerful tools for increasing company profits. But recent research suggests that, in fact, such programs have limited effectiveness—and sometime end up just costing organizations money.

Analyzing data from a reward program offered by a Southern California golf course, Brian Viard, assistant professor of strategic management, and Wesley Hartmann, assistant professor of marketing, found that the lure of getting 1 round of golf free for every 10 played motivated only a small fraction of customers to play more frequently—and these were infrequent players. The heaviest golf users—those responsible for the majority of the course’s sales—did not change their playing frequency as they approached a reward.

The work contradicts the perspectives of many economists and psychologists who have studied the reward program phenomenon. Hartmann and Viard argue that most researchers have failed to observe how the frequent customers, who often represent up to 80 percent of sales, respond to reward programs. “Up to this point, economists have not measured the effects of these programs on actual customers’ decisions, and psychology studies have focused mainly on simulated experiments that cannot reflect how heavy buyers behave when experiencing their second, third, and fourth spells in a reward program,” Viard says.

Do Frequency Reward Programs Create Switching Costs? Wesley R. Hartmann and V. Brian Viard, Stanford Working Paper #1941, July 2006. [Details]

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