BUS203: Principles of Marketing

Just having a loyalty program is no guarantee of success, though. Eight studies of more than a dozen grocery-store loyalty programs in the United States and Europe showed that five programs had no impact on the loyalty of customers, two increased sales but not profits, two had mixed results, and five had positive results. There are, however, several characteristics of loyalty programs that can make them effective, each of which is discussed next.

Good Performance by a Company

The first characteristic of an effective loyalty program is performance. No loyalty program can overcome a company's poor performance. Even the most loyal buyer can put up with subpar performance for only so long.

Responsiveness by a Company

Responsiveness is how well a company can take customer information (such as complaints) and alter what they do to satisfy the customer. Loyal customers are more willing to complete surveys and participate in market research, but they expect companies to use the information wisely. For example, when customers complain, they expect their problems to be fixed and the company to use the information so that the same problems don't reoccur. Likewise, the members of influencer panels expect to be listened to. If you ignore their input, you are likely to alienate them, causing them to switch other brands.

A company's responsiveness – or lack thereof – also becomes evident to buyers when they spot a better offer. Precisely at that moment, they realize that the company that created the better offer was more responsive and worked harder to meet their needs.

Shared Identity among Participants

Loyal customers are like sports fans – they wear their "team's" colors. That's why loyalty programs have names that sound prestigious, like Continental's "Elite Pass" program or American's "Executive Platinum" program. Loyal customers also want to be recognized for their loyalty. Hampton Inn, which is part of the Hilton family of hotels, is one company that could do a better of job of recognizing its customers – literally. One of the authors stays regularly at the same Hampton Inn, only to be greeted every time on arrival with the question, "Is this your first stay with us?" The author is not only a regular guest at that hotel but a member of Hilton Honors, the hotel's loyalty program. But apparently the Hampton Inn's reservation system doesn't provide that information to its front desk clerks. If you fail to recognize customers who are loyal, you are essentially telling them that their business isn't that important to you.

Clear Benefits

What are the benefits of being loyal? A loyalty program should make those benefits clear. For example, Continental Airlines has a special boarding lane for its Elite Pass members. Travelers who are not Elite Pass members can easily see the special treatment members receive. If the elements of scarcity and status can be created by a loyalty program, the benefits of belonging to it will be obvious to customers.

Community Development

Finally, marketers who can put loyal customers together with other loyal customers are likely to build a community around the common experience of consumption. At Lone Star Park or American Airlines, common consumption is obvious – people are actually together. Building a community in which people don't actually consume goods and services together can be a bit more difficult, but recall that Kraft has done so with its online presence. Members of Kraft.com still share their experiences, their recipes, their questions, and their answers, thereby creating a sense of "we're in this together". Some of the postings might be related directly to Kraft products, whereas others might only be indirectly related. Nonetheless, they all provide Kraft with insight into what its customers are thinking. Meanwhile, its customers become more loyal as they participate on the Web site.

Keep in mind that a loyalty program isn't necessary to create loyalty. Lexus doesn't have a formal loyalty program. Yet studies show that Lexus owners are the most loyal luxury car buyers. Over half of all Lexus owners buy another Lexus. (The brand's slogan is "Once a Lexus buyer, always a Lexus buyer"). By contrast, Mercedes-Benz has a loyalty program, but only 40 percent of its buyers purchase another Mercedes.

A company can also offer its customers loyalty benefits that are not a part of a formal loyalty program. For example, Mercedes-Benz gives loyal buyers an opportunity to suggest new features via a contest, for which there is no prize other than the recognition the winner gets because his idea was selected. And like many other car manufacturers, Mercedes offers owners special trade-in deals. The challenge with loyalty promotions that lie outside loyalty programs is collecting the information marketers need to target customers.