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.