BUS203: Principles of Marketing

When loyalty programs work, they result in one or more of the four effects of loyalty: the blocker effect, the spreader effect, the accelerator effect, and the longevity effect. We'll start by describing the longevity effect.

Figure 14.5

The horse that came in second in this Lone Star Park race is owned by one of the authors of this textbook. Note the advertisers in the background of the photo. The advertisers want to reach the same community as Lone Star Park, and they want their products to become the products of choice for that community. As you can tell, advertising at the track isn't just about reaching eyeballs – it's about being viewed as a member of the community, which could result in greater brand loyalty among the community's customers.

Figure 14.6 The Positive Effects of Loyalty Programs

The Longevity Effect

The longevity effect is lengthening the lifetime value of a customer. We discussed customer lifetime value (CLV) in earlier chapters. One result of a good loyalty program is that your buyers remain your customers for longer. Because a loyalty company has better information about its customers, it can create offerings that are more valuable to them and keep them coming back. Consider a loyalty program aimed at customers as they progress through their life stages. A grocery store might send diaper coupons to the mother of a new baby and then, five years later, send the mother coupons for items she can put in her child's school lunches.

Loyalty programs also affect the longevity of customers by increasing their switching costs. Switching costs are the costs associated with moving to a new supplier. For example, if you are a member of a frequent-flier program, you might put up with some inconveniences rather than switching to another airline. So, if you are a member of American's AAdvantage program, you might continue to fly American even though it cancelled one of your flights, made you sit on a plane on the ground for two hours, and caused you to miss an important meeting. Rather than starting over with Continental's Elite Pass program, you might be inclined to continue to book your flights on American so you can take a free trip to Europe sooner.

The Blocker Effect

The blocker effect is related to switching costs. The blocker effect works this way: The personal value equation of a loyalty program member is enhanced because he or she doesn't need to spend any time and effort shopping around. And because there is no shopping around, there is no need for the member to be perceptive to competitors' marketing communications. In other words, the member of the program "blocks" them out. Furthermore, the member is less deal-prone, or willing to succumb to a special offer or lower price from a competitor.

The blocker effect can be a function of switching costs – the costs of shopping around as well as the hassles of having to start a new program over. However, the effect can also be a function of relevance. Because the loyalty marketer has both information on whom the buyer is and data on what the buyer has already responded to, more relevant communications can be created and aimed at the buyer. In addition, because belonging to the program has value, any communication related to the program are already more relevant to the buyer.

The Spreader Effect

The spreader effect refers to the fact that members of a loyalty program are more likely to try related products offered by the marketer. For example, an American Airlines AAdvantage member who also joins the company's Admiral's Club airport lounge creates additional revenue for the airline, as a does the member's purchase of a family vacation through American's Vacation services.

The spreader effect becomes even more pronounced when a cross-promotion is added to the mix. Earlier we mentioned Lone Star Park might team with American to offer a trip package to the Kentucky Derby. Another example is Citibank offering you AAdvantage miles if you get a Citibank Visa card through American's AAdvantage program. Cross-promotions such as these encourage loyalty program members to try even more products from more producers.

The Accelerator Effect

When rats running in a maze get closer to the cheese, they speed up. Like rats in a maze, consumers speed up, or accelerate, purchases when they are about to reach a higher award level in a loyalty program, called the accelerator effect of a loyalty program. In American's AAdvantage program, for example, a member gets "Platinum" status after flying sixty flights or fifty thousand miles. Platinum members get special awards, like more frequent upgrades to first class, boarding ahead of everyone else, not having to pay for luggage and other fees, and double mileage toward free flights. Someone who has fifty flights and just needs ten more to become Platinum will start to fly American more frequently until the Platinum level is reached. Then, American hopes that the other effects (blocker, spreader, etc.) will occur.

Companies can capitalize on the accelerator effect by making it easy for members to track their progress and notifying them when they are close to reaching subsequent levels. American helps its Advantage fliers track their progress by sending them monthly updates on their levels. Couple such a notification with a special offer, and a company is likely to see even greater acceleration. The accelerator effect can also be used with promotions that create short-term, loyal behavior. Pepsi created a promotion with Amazon in which purchasers could accumulate points toward free music downloads. The promotion, launched with a Justin Timberlake Super Bowl ad, was a knock-off of Coca-Cola's MyCokeRewards.com. Although they weren't formal loyalty programs, both promotions led to an accelerator effect as customers got close to the award levels they needed to redeem prizes.