Loyalty Programs and Consumer Behavior: Is Personalization Really More Effective?

By: Stephanie Lee

Each day, consumers face countless decisions regarding where to shop, what to buy, and how much. Though purchase behaviors remain fairly constant over time, they vary slightly based on various internal and external factors. Internally, consumer decisions are influenced by demographics and psychological factors. Demographics include physical characteristics such as age, race, gender, and socio-economic status (SES), while psychological factors include personal attitudes, perceptions, motivation. These are all factors that drive consumers to make the decisions that they do. However, the influence of external factors can often overpower internal factors. Cultural norms and values have heavy influence on the development of one’s personality traits; we are social beings by nature and want to be accepted by our community. Social circumstances and factors such as physical location, time and place within the family have been shown to strongly drive consumer decisions. In order to gain or retain acceptance, people want products and services that are considered desirable by their surrounding community.

This creates a challenge for companies: they need to remain desirable to their current customers while making themselves attractive to new business. They need to make sure that they remain relevant in the market in order to avoid losing business from consumers switching products. In order to solidify their brand image and commitment to customers, more and more companies are implementing loyalty programs (LPs). With membership, these programs allow consumers to accrue various discounts based on a total amount they spent in the store. The actual effectiveness of LPs has been debated, but memberships are continuing to rise across the markets.

Article: The Impact of an Item-Based Loyalty Program on Consumer Purchase Behavior

This particular study focuses on switching to a new kind of LP design – the item-based loyalty program (IBLP). This design replaces general price discounts with reward promotions based on individual purchase habits. Now, rather than getting rewards based off of their total spending habits, consumers can accrue redeemable points for frequently purchased items.

The intent of an IBLP is to encourage nonmembers to join the program, increase current customer tendency to visit the retailer and the average amount they spend per trip. This study takes place in a supermarket chain (“The Market”) with an established loyalty program already in place. The switch allows them to reframe their brand image in a way that emphasizes personalized service and customer satisfaction. The Market advertised their conversion to IBLP in various media, and amended their promotional tactics accordingly. The monetary values of rewards remain about the same as the previous discounts.

What They Found:

Overall, consumers were more responsive to the IBLP program, despite the fact that the monetary value of the rewards remained the same. This led them to become less responsive to competitive promotions, increasing the market’s customer retention. The amount of member attrition towards The Market was significantly reduced by this switch as well. While about half of these current consumers increased their tendency to visit that particular market, their average spending amounts only slightly increased. The IBLP makes their brand appear more innovative and novel, but is not enough to drive current customers to spend significantly more money. On the other hand, nonmembers increased their spending at The Market by 15.2% after the implementation of the IBLP, and many of them converted to member status. Additionally, those who joined the IBLP had more positive feelings towards it than those who were members of the previous LP.

Possible Explanations:

The item-based loyalty program provided more opportunities for customers to be reminded of promotions. Each time they made a purchase, they were immediately reminded of their earnings, which not only sensitizes them to these tactics, but it also keeps the brand name fresher in their minds. It also acts as a reminder of their need for specific items; if they get a reward points for a product, they are more likely to go visit the store and buy it. While The Market does not make money on the redeemed reward, the hope is that the member will purchase additional items. The more they are exposed to these programs within the company, the more likely they will be to join or increase their tendency to frequent that particular store.

Customers may not always effectively translate monetary worth from these reward points. Most consumers are reluctant or lack the desire to complete the conversion math, which can cause them to overestimate the value of the rewards. In other words, it leads them to believe that they are getting a better deal than they actually are. This approach assumes that the consumer is lazy and will not take the time to compute the actual value of their rewards. This particular study yielded that nonmembers were more prone to fall for the novelty of the new rewards program than current members. Current members were less responsive to the change, which did not significantly alter their spending habits. It would be interesting to see where the company is today in terms of their loyalty programs and consumers.

References:

Zhang, J. & Breugelmans, E. (2012). The Impact of an Item-Based Loyalty Program on Consumer Purchase Behavior. Journal of Marketing Research, Vol. XLIX (2), 50-65.

 

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11 thoughts on “Loyalty Programs and Consumer Behavior: Is Personalization Really More Effective?

  1. Skye Stewart: Portfolio November 19, 2015 / 7:40 pm

    I agree with your idea that “Customers may not always effectively translate monetary worth from these reward points. Most consumers are reluctant or lack the desire to complete the conversion math, which can cause them to overestimate the value of the rewards. In other words, it leads them to believe that they are getting a better deal than they actually are. This approach assumes that the consumer is lazy and will not take the time to compute the actual value of their rewards.” I think this is especially true today with the ability to be able to shop online. A lot of us are impatient and do not want to spend the time waiting for a sale to start, so we buy items at a higher price instead. I think this reflects the same idea. Rewards are only important to some people, but a lot of them just won’t care because if they want something, they are going to get it. Some people only use the rewards they get because they think they are getting a better deal, but they are actually not. Just because jeans are buy one, get the second one half off, doesn’t mean you need the second pair of jeans, but you get them anyway because it “sounds” like a good deal.

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  2. Whitney Torgerson November 23, 2015 / 4:26 pm

    I agree that customers are more engaged with companies that have Loyalty Programs. I know that I personal have a loyalty card or have signed up for one in stores that I visit, mainly because it is free and I receive points or a percentage off my purchases upon applying. Loyalty programs can be a helpful incentive for returning customers, it is also a good tool in measuring how attractive companies loyalty programs are to new customers and how often a company gets repeat customers.

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  3. Melissa Miller December 2, 2015 / 3:27 pm

    I personally believe as well that customers are more engaged with companies that offer Loyalty Prgrams. I know that I am loyal to some of the shops I go to because of their loyalty program. Customers want to feel like they are always getting a deal, and getting the most for their dollars. Loyalty programs encourage this. Loyalty programs are also beneficial to companies because all though they are giving discounts and promotions they are also taking business away from their competitors. If they can keep their customers loyal to their company then their competitors suffer.

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  4. Kedar Gandbhir December 5, 2015 / 3:55 pm

    Loyalty programs are a great way of creating incentive for customer retention. These programs also encourage customer spending. Customers are more likely to buy things with deals attached to them, like a buy one get one half off deal. At first look these discounts may look beneficial to just the customers but in reality it greatly helps the company as a form of customer retention.

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  5. Jane Paradise December 6, 2015 / 11:37 pm

    I agree with Kedar that loyalty programs are an excellent way of improving on customer retention – because the real goal here is to get new customers and try to lock them in, getting them hooked on your brand so that they will not go to a competitor. And if they can find new customers and ultimately retain them, this is a real feather in their cap because it attests to their true marketing skills. Aka, new customers are so confident with their newfound brand that they would not think of going elsewhere, and as a result the competition suffers.

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  6. Emily Koba December 7, 2015 / 11:29 pm

    I believe that customer loyalty programs can be an essential component of customer retention for a company. I do agree that consumers can tend to overestimate the monetary value of these reward programs. In many cases, these reward programs don’t save the customer as much as they appear to be. However, consumer still continue to sign up for these programs due to the fact that they make them feel appreciated and appear to be saving them money on purchases. As consumers we have gotten lazy and frequently do not take the time to compare deals. We are more prone to gravitate towards satisfying our loyalty programs because we believe the reward is worth the purchase.

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  7. Brad Daly December 9, 2015 / 11:30 pm

    I agree with Melissa. Loyalty programs make customers feel more involved and that they are constantly getting deals. Another aspect of this is that they possibly get notifications of sales earlier than everyone else which contributes to the involvement factor as well. I know that I am certainly loyal to many places that offer these type of programs and I think that they are great for saving money and getting special offers on products, as well as getting news of sales, new products being offered, etc. Involvement between company and consumer is constantly growing in this day and age and it certainly seems like a vast majority of places are offering these loyalty programs in order to keep people coming through the doors. I would not be surprised in the least if this trend continues and the offers get bigger and better in the long run.

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  8. Joe Pantalone December 10, 2015 / 3:48 am

    I agree that Loyalty Programs are a good way to increase interest in a company. The rewards that are offered are used for telling the consumers about sales and promotions that are occurring. It makes the consumer feel wanted and entices them to continue to use the company. There a certain companies that I fell loyal towards based on the rewards that are given to me.

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  9. Rebecca Armstrong December 10, 2015 / 6:19 pm

    Loyalty programs are a great way to gain repeat customers and build the success of the businesses. I know personally that if I have a loyalty or rewards card with a specific store I will only shop there for the most part. Some loyalty plans that have been a part of gave early releases, discounts, coupons, and more. This is a great way to make the customers feel special and keep returning. Even a loyalty program such as being a season ticket holder for the Red Sox and Bruins they offer you the first ticket to any event being held in their venue. I believe that the Red Sox have a great loyalty program and making the fans feel like an important part of the community. They have held private tours and batting practices at Fenway and these are the kind of things that keep the season ticket holder returning.

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  10. Alyssa Crowley December 10, 2015 / 7:22 pm

    Loyalty programs can be tricky. In some cases you are receiving a deal for being a loyal customer. In other cases it may sound like a good idea but the company is actually helping to push you to spend more with them without getting much in return. I am currently a TrueBlue member. Every time I fly with JetBlue I receive points that help discount or even cover future flights. Even when the company displays poor customer service I am still going to book my next flight with them. Loyalty programs have this control over our buying habits. Companies have continued to draw in consumers with these cost saving opportunities or should I say “cost saving opportunities”.

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  11. Megan Lac May 6, 2016 / 1:56 pm

    I don’t really understand how the idea of item-based loyalty vs total loyalty would intense more people to sign up? If customers received rewards on products that they frequently buy and not on all products, why would people want to join if they didn’t buy the same products often? Possibly I’m missing the actual details of the new loyalty system.

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