Analysis of the Efficiency of Loyalty Programs: a Case Study.

Christophe BENAVENT is Professor at the IAE Lille where he is director of the CLAREE.
Lars MEYER-WAARDEN is preparing a doctorate of business administration at the IAE Pau
Dominique CRIÉ is Professor at the IAE Lille

Christophe.benavent@iae.univ-lille1.fr
Meyer-waarden@infonie.fr
Domicrie@aol.com

Abstract

Within the field of retailing, most companies have developed loyalty programs build around the concept of
loyalty cards. Do these programs are really efficient? Do they really increase customer loyalty ? Few evidence
come from the literature because very few empirical work has been done. The purpose of this communication is
first to contribute empirically to a better knowledge of this kind of marketing program, second to contribute to a
better understanding of their management.
This communication present the results of an extensive analysis of a case study. Three different analysis are
conducted. The first one deals with aggregated data at the store level, relative to a 37 month experiment in 15
point of sales. With panel-data analysis, we tried to test the effect of the card diffusion upon sales, margin, traffic
etc….The main result is that if we detect a significative effect, the size of this effect, measured through elasticity,
is very low. So low, that extrapolating the results, conditions of profitability of the program, should be a
selective diffusion.
The second analysis is related to desegregate data relative to the card's owners and their buying behaviour
history. We show with these data that, on an individual basis, there is no long-term effect, but strong short-term
one. These results suggest that loyalty cards seem to work as a promotional device more than as a loyalty induce.
The last analysis deals with the effect of mailings sent to the cards owners. With a survival analysis we tested the
acceleration of sales effect for 28 mailing campaigns. In most cases there is a significant reduction of the
interpurchase time.
In conclusion, a discussion about conditions of efficiency is developed. We claim that efficiency of loyalty
programs is dependant of two main factors : the ability to target responsive lead users; the quality of promotional
events associated with loyalty programs. The loyalty card, including reward schemes, is not sufficient to modify
behaviours. The flow of events, animations, associated to the loyalty card, is the key for successful programs
when applied to responsive customers.
 Analysis of the Efficiency of Loyalty Programs: a Case Study.

Numerous firms currently view customer loyalty programs as crucial, especially those used by
retailers. They lie within the scope of rather defensive strategies aimed at keeping customers [8] [9]
[26] [18] [32] and rely on a double belief that keeping a customer is less costly than gaining a new
one, and that the best customers are the most profitable ones.

By customer loyalty program one means a set of actions devised so as to stimulate and keep
up with some customers, and so as to minimise loss, namely the rate of lost customers, and increase
the amount of purchases. These programs often consist in issuing loyalty cards. Their use is
widespread among retailers, airlines, car rental companies, film developers…, that is to say in all the
sectors that deliver a good or a service in regular use and of a relatively high unit value.

Some authors are concerned about the efficiency of customer loyalty programs [31] [10] [24]
[28]. There would be no guarantee of efficiency; it would even be rather poor. That is all the more
surprising as many shops have taken up that kind of technique over the last few years. Would the lack
of rigorous studies then be due to an imitative effect? Should the role of these cards be reconsidered in
view of the facts?

The purpose of this paper is to assess the significance and nature of the effects of the
distribution of these cards by analysing a case in the retailing field. This case is formed of a behaviour
database that permits to retrace the history of test customers’ behaviours and of the actions exercised
over them for a three-year period.

On the basis of these data and through three different studies one will try to better appreciate
the efficiency of these programs after having investigated their conditions of success more precisely.
The first study is an econometric analysis on the aggregated series of fifteen stores. It will be
established that the effect, in terms of elasticity, though revealing, is extremely poor. The second study
will analyse the effects of the card on the individual level on the basis of desegregated data. The third
study will deal with the impact of stimulating operations on customers’ behaviours. From these series
of results we will try to draw some lessons relative to the use of customer loyalty development
systems based on loyalty cards.

Customer loyalty programs

When one assesses the works devoted to customer loyalty programs, one may notice that
surprisingly very little academic literature focuses on measuring their efficiency, still less on the
effects of these cards only [23] [5] [7] [28].

The following schema will be useful in order to understand these works better (figure 1); it can
serve as the framework of a general analysis and enable one to understand our work better as well as
the contribution of literature. The crux is undoubtedly the relation between some of the consumer’s
psychosocial states and his behaviours. Those States have been extensively investigated, whether they
concern the consumer’s relation to supply or more broadly the way he figures his relation to the
supplier. Indeed many authors try to associate loyalty with some variables such as satisfaction [1] [2]
[3] [6] [25] [27], commitment [11] [22], dependence, identification [3], trust [16] [22] or even relation
to the brand [14]. Yet one will note that on the empirical level few authors emphasise the determinist
quality of this association [20]. In most cases loyalty is not measured on the behavioural plan, but at
best with the intention of doing so.

Even though many authors underline the importance of the customer relation [3] [29] [32]
[26], including from a strategic viewpoint [21], and regard it as a change of paradigm [15], curiously
enough few directly study the influence of customer loyalty programs on buyers’ behaviours [5] [7]
[31] [28] [30]. One thus realises that within figure 1 only relation (A) and partially relation (B) are
examined. Relation (C) is hardly studied.

Figure 1: A conceptual framework of analysis

Caracteristics ofloyalty Psychosocial states: Internalbehaviours

programs:
- Contactfrequency
- Importance ofgranted
advantages
- Nature of therewards
- Degré d'association entre
les récompenses
- Informationdensity
….
- Attitude - Buying frequency
- Trust - Buyingregularity
- Attachement - Food rate
C - Commitment A - Purchase diversity
- Informationresearch - CustomerRetention
- Risk reduction Externalbehaviours
…. - Positiveword of mouth
- Advocate’sfunction
…..

….

Environment:
- Consumer’sexperience
- Competitiveenvironment
- Marketing pressure
…..

Here we will not deal with the main outcomes obtained initially, for techniques and customer
loyalty developing effects are very quickly assessed. Such research requires a high level of abstraction
and focuses on the psychosociological determinants of loyalty, mainly on its attitude component.

The methods of these customer loyalty programs often refer to the use of processes coming
from classical promotional techniques, urging consumers to multiply and perpetuate their purchases
through rewards in the form of vouchers or loyalty points. Other programs of the “frequent flyer” type
more clearly resort to the notion of service continuity, putting up barriers to prevent exit. Clubs also
make part of this array of customer loyalty development tools, the wine, book, record or video sectors
having acted as pioneers. Favouring differed payment by means of a credit, whether free or not,
equally permits to boost loyalty. The loyalty card therefore becomes the credit card.

Here are generally the objectives of customer loyalty programs:

- Keeping one’s customers and therefore preserving one’s market shares, keeping up the
purchase, margin and profit levels. This objective may be appreciated through attrition
rates.

- Provide the firm with a stable turnover basis. For a firm customer loyalty somehow means
a guarantee of future profit; calculations of lifetime-values are precious indicators.

- Increasing the customer’s loyalty and value, notably through additional sales or cross-
selling; beyond the preservation of the customer’s activity in time one may seek to
develop that activity.

- Writing off the cost of investing in the customer’s acquisition. In the press or insurance
sector those costs are high; better customer loyalty development allows one to control,
even to lower them.
 - Cutting operational costs of subsequent transactional flows.

- Developing and recruiting customers at a lower cost by making use of the loyal customer’s
advocate’s function or of prospects’ attraction for the program.

Implicitly these campaigns affect brand differentiation thanks to the innovative aspect of the services
offered to their customers. However, a certain number of other functions may indirectly be ascribed to
them such as: shifting from a product-oriented marketing to a customer-oriented one, and thereby
cutting the costs of communication with the market, knowing one’s consumers more precisely and so
their present and future demands. Most managers wish to direct these programs towards big buyers so
as to limit the defection rate, or towards big potential customers so as to move them to a higher value
segment.

Two general phenomena can account for the varied success these customer loyalty programs
may have. First it is the “double-jeopardy” phenomenon [12] that indicates brands with large market
shares at once hold a greater number of loyal customers, but also big consumers. One may therefore
expect programs led by leaders to prevail. Then, there being greater loyalty to products with high
involvement [1] one may very likely expect loyalty programs to be more efficient in that context.

Yet regardless of those arguments Dowling and Uncles [10] seriously question their
efficiency, putting forward that in a competitive market the initiator of such campaigns will surely be
copied and thereby the global result will amount to a reversion to the previous situation and will thus
only consist in an increase in marketing costs. So one would need matchless programs!

Another criticism may be made. Directing resources to good customers is probably inefficient
since a good buyer is already loyal. Incentives will remain useless and all one can hope for is stable
loyalty. The battlefield actually lies in the intermediate customer base: too small not to offer any
chance of increasing activity, but large enough to justify investment.

Hence the necessity to measure the efficiency of these loyalty programs and of their
components. The detailed study of literature reveals but little empirical research showing their
efficiency with a few exceptions [5] [23] [28].

In order to improve the measure of their efficiency it is necessary to modelise, even briefly,
the expected effects of a customer loyalty program relying on the distribution of a loyalty card. Here
one will very classically distinguish between a visit frequency effect and a price sensitiveness effect..

A customer that holds a loyalty card is urged to prefer a business to any others provided that
the advantages he gets are substantial. One should make a difference between two attraction effects: an
effect of preference, the customer does not alter the frequency of his visits to outlets, but will prefer
the business to another one; an increase in visits, the card urging the customer to increase his visits to
that kind of outlet. In this study they cannot be separated. The consequences of this effect on the traffic
(number of visits to shops) are easy to understand. Insofar as the size of the customer base is stable a
large part of traffic variations will be able to be ascribed to that effect. Part of them can also possibly
be due to conquest effects, but they are here considered as insignificant.

Possession of a card can also decrease sensitiveness to price. The first explanation is based on
an idea developed by some specialists in consumers’ behaviours according to which three sources of
usefulness must be distinguished: acquisition usefulness connected with the good, transaction
usefulness linked with the conditions of the negotiation and relational usefulness relative to the future
hoped-for profit [19]. The card holder can be led to grant importance to the last two forms of
usefulness and, in order to benefit from them, will heed the cost of the good less. Another explanation
is simply that by patronising an outlet more often and more regularly the consumer is less confronted
to the competitor’s price and, as he cannot compare, becomes naturally less sensitive to it. The
consequences of that effect are simple. Firstly he may be led to pay more for goods he usually buys,
which will bring him to choose better quality products, better known and more expensive brands.
Then, being less sensitive to price he will buy a great deal of goods of similar quality. These price
effects, whether direct or indirect, will naturally result in increasing the price of the average shopping
basket and therefore the turnover.

Schematically all these effects can be summed up in the following graph, which defines the
general framework of any study of the impact of the loyalty card (figure 2). One will note that the
upper part of the figure is relative to an individual level of analysis that we do not take into account in
this study, whereas the lower part is relative to a aggregated level of analysis which will be favoured.

Figure 2: General framework of analysis

Possession of the
loyalty card
+
- +
-
Average purchase - Sensitiveness to Frequency of Visit
volume price

+ - +
Mean Basket Store Visits Amount of
reductions
+ +
-
+
Turnover Margin

One immediately understands the potential impact of the card on the different measurable
parameters: the turnover, the traffic, the margin. Within the context of this study the problem is that
the two critical points, the effect of sensitiveness to price and the impact on the buying frequency,
cannot be measured directly.
Still it is indirectly possible to prove the existence of these effects by examining the following
table that provides the expected effects on the main performance criteria that can be observed at a
aggregated level in the framework of this analysis (table 1).

Table 1 : The expected results

The expected effects if: The card changes price sensitiveness

The card changes
Buying frequency
YES NO

YES Growing Turnover Growing Turnover

Growing Margin Stationary Margin
Growing Traffic Growing Traffic

NO Growing Turnover Stationary Turnover

Growing Margin Stationary Margin
Stationary Traffic Stationary Traffic

The reasoning is simple, based on the hypothesis that two principal effects must be observed: a
change in the customer’s buying frequency and a change in his sensitiveness to price; if neither of
them is registered, then the distribution must not be expected to change the gross margin level, the
turnover and the traffic at all. Conversely, if only the effect on the customer’s sensitiveness to price is
registered, then for a similar traffic level a higher turnover will have to be observed (shopping baskets
are more expensive) as well as a higher gross margin level. If only the effect on the customer’s buying
frequency is observed, both the traffic and turnover should increase (more visits entail a higher
turnover), whereas the margin level must remain constant.
An econometric study

Specifying a theoretical model clarifies our knowledge and our hypotheses. Nevertheless the
latter is not necessarily the most convenient one. We will therefore take up a slightly different model,
easier to assess, but also easier to interpret and consistent.

Y = a o (nbcards + 1) β exp(u )

Y here indicates any variable one seeks to test (traffic, shopping basket, number of products, turnover,
margin, margin level). In such a simple model parameter β stands for the elasticity of the action,
which is assumed to be constant and independent of the number of cards.

Parameter a0 represents the value of Y when the card is not launched (indeed if nbcards = 0
then one has Y= a0 ) , in other words a floor effect, exp(u) represents the effect of the factors that are
not taken into account in the model. Although this model does not completely describe the theoretical
structure of the problem, it enables us to achieve our purpose. It first appears very easy to implement
this model: the regression model seems sufficient. In practice things are different for several reasons:

1) The series are chronological, so they are very much auto-correlated. Yet in our case owing
to the poor effect of the card the hypothesis of a real positive effect risks being rejected because the
estimates of parameter β will be imprecise, but also biased.

2) The series are short: they only bear on 37 observations, which poses a serious problem of
precision of estimates. If the expected effect is poor, it simply risks not being tested at all. This is what
is happening in this case.

That problem can be solved if only one data table is taken into consideration, which gathers
the series relative to the fifteen outlets. This introduces great heterogeneity, on account of the different
activities of the outlets. This is taken into account by resorting to specific panel data analysis
techniques especially developed by econometrists (for an introduction for example see Hsiao [17] and
for further study see Maddala [20]). These techniques actually aim to isolate the effect of one or
several sources of heterogeneity so as to limit biased estimates and, above all, to increase the
efficiency of the model.

Econometrists have used various methods to solve this problem. Here we will only report the
results associated with the technique of the variable and random effect model which turns out to be
appropriate inasmuch as outlets are of a similar size. This technique consists in considering that the
adjustment error can be divided into a component relative to outlets (ε), another one to time (η), the
last one (µ) representing the remainder that cannot be ascribed to any known factor. The formal
structure of the model is the following:

ln(Yit ) = ln a o + β ln( nbcards it + 1) + u i t

With Yit = value of variable Y for outlet i at time t and ui t = ε i + η t + µ it

The set problem then consists in assessing the efficiency of a test plan of customer loyalty that
has been implemented in fifteen outlets over a period of three years.
The analysed data here only consist of several monthly indicators showing traffic in shops and
the turnover, the margin and the number of commodities and items sold in a specialised chain store.
The loyalty program is composed of a loyalty card that one must pay for- allowing one to benefit from
an immediate advantage beyond a certain point- and of a direct marketing programme aimed at card
holders.

Given the limited scope of the empirical analysis the number of hypotheses will be as limited
as possible. One thus assumes that the loyalty card alters customers’ behaviours in two different ways;
it is meant to affect purchases through rising frequency, but can also affect sensitiveness to price by
reducing it.

The obtained results are mentioned in Table 2. They concern the whole activity of an outlet,
but also distinguish between the sale of goods and that of services.

Table 2: Estimate results

Variables Elasticity β Adjusted r2 t p

Trafic TOTAL 0.01173 0.048 5.40 0.000
Products 0.01153 0.043 5.11 0.000
Service 0.01453 0.060 6.03 0.000
Mean TOTAL 0.00420 0.019 3.50 0.000
Basket Products 0.00296 0.006 2.12 0.033
Service 0.01468 0.001 9.53 0.000
Number Items TOTAL -0.00045 -0.001 -0.41 0.675

Products -0.00034 -0.001 -0.29 0.771

Service -0.00112 -0.000 -0.70 0.481
Turnover TOTAL 0.01601 0.070 6.54 0.000
Products 0.01459 0.057 5.90 0.000
Service 0.02983 0.185 11.27 0.000
TOTAL 0.00248 0.087 7.26 0.000

Margin Level Products 0.00500 0.045 5.24 0.000

Service 0.00164 0.003 1.69 0.090

R2 stands for the variance percentage explained by the card effect, separated from the effect of
the outlet and the auto-correlation effects. It proves to be small, of about 5% of the explained variance.
Column β provides the elasticity of the card. Column t represents a statistical test meant to verify that
the elasticity is significantly different from zero (and so that there is a real effect). Column p provides
the probability of there being no effect. As a rule it must be inferior to 0.05, which is the case except
for the number of items. Accordingly, there is a significant effect, yet surely of little scope.

These first results are clear. The accumulated number of cards has an effect on monthly traffic,
on the average shopping basket, on the turnover, and on the margin level. The effect on traffic is such
that whenever the number of cards doubles, the former rises by 1,17%, the total effect leading to a 3%
or 4% increase if customers are swamped with cards.

The effect on the consumption level in terms of number of items is not significant, yet one can
notice a significant effect on the shopping basket. Consequently this shows a decrease in the
customer’s sensitiveness to price. Let us note that the effect on the shopping basket, though
significant, is extremely small.

One can observe a significant effect on the margin level and the turnover, but these results
originate in the first two aspects. As far as the turnover is concerned, the value of parameter β will be
slightly higher than for traffic, as it is defined as the product of traffic by the average shopping basket.
Once again the number of cards turns out to exert an influence on both visits and prices. As for the
margin level the observed value is not inconsiderable: it corresponds to a 0,248% increase whenever
the number of cards doubles.
When comparing services and products one can see that the former seem to benefit from
results that are twice as high as those of the latter, as much in terms of traffic as in terms of average
shopping basket.
One will note that in the first place a crude test has been performed through a traditional
regression model for each outlet; it leads to reject the hypothesis of a double effect. A more
appropriate and sophisticated formulation thus permits to show very small effects.

From then on one may wonder how truly profitable the program is. In order to visualise the
effects and appreciate their significance better, let us examine the following graph, which represents
the impact of the distribution level on traffic (graph 3). By taking 15,000 monthly visits as a base
level, a massive distribution of the card permits to get around 500 extra visits, that is a maximum
impact worth 3,5% more than the initial level. The dotted curves represent the high and low
hypotheses, given the precision of the estimate of elasticity (trust interval: 95%).

Figure 3: Impact of the distribution level of the card on traffic

Nonetheless, what is most important to the business is to know whether these effects, though
poor, are profitable. To achieve this purpose we have built a simple simulation model that permits to
evaluate how much the card distribution contributes to the margin, taking turnover and margin level
elasticity into account as well as the unit cost of the card.

By varying hypotheses one obtains the following result: the maximum benefit would be
obtained by distributing but a good thousand cards. A maximum distribution of about 10,000 cards
(which represents a 25% penetration rate) leads to zero benefits. Beyond that figure the Customer
loyalty program becomes costly (figure 4).

Figure 4: Evolution of contribution according to the number of cards

 This therefore leads to the first managerial implication: the distribution of the card must be
selective and involve consumers whose behaviours are likely to be modified by the use of the card.

Individual desegregated effects

The second study deals with an individual level. At the aggregated level we have brought into
relief a significant, yet very marginal effect of the variable “number of distributed cards”. The
availability of data, that is to say the exhaustive file of card holders (50,000 names), and the dated file
of invoices (150,000 purchasing acts), permit a microscopic examination of effects. In this study we
will stick to a strictly descriptive approach examining effects in time.

The first step of our study will focus on a descriptive analysis. It merely consists in
representing the order of purchases (from the first use of the card to the last), the amount of expenses
and the number of days elapsed since the last purchase.
It clearly appears that the mean amount quickly drops according to the order of purchases. As
from 5 to 6 purchases the mean amount of expenses levels off (figure 5).

Figure 5: Influence of the order of purchases on the mean amount of expenses

1000

900

800

700

600

500

400
Mean MONTANT

300

200
1 3 5 7 9 11 13 15 17 19 21 23 25 31-40 51-100
2 4 6 8 10 12 14 16 18 20 22 24 26-30 40-50 >100

ordre de l'achat

The same remark can be made about the length of time between purchases (figure 6). Yet this
result is deceptive. There is an effect of selection and censorship that affects interpretation
considerably. It is perfectly clear as concerns lengths of time: the mean length of time between
purchases is not calculated regardless of rank. For instance, only individuals having made at least 15
purchases are taken into account in the calculation of the mean length of time between the 14th and
15th purchase. So it is with amounts even if the effect is probably less spectacular.
 Figure 6: Influence of the order of purchases on the inter-purchase time
100

80

60

40

20
Mean DELAI

0
2 4 6 8 10 12 14 16 18 20 22 24 26-30 40-50 >100
3 5 7 9 11 13 15 17 19 21 23 25 31-40 51-100

ordre de l'achat

Let us make the analysis again comparing things that can be compared. One may wonder
whether these results do not come from a great heterogeneity between individuals. That is why we will
go into detail and successively segment the population according to two criteria:
1) The date of entry: it consists in analysing sets of card holders separately, that is sets of card-
holder populations who have subscribed at the same time and have the same experience.

2) Buying frequency: it is simply seen as the total sum of purchases that have been made since
first holding the card. It roughly indicates the customer’s importance.

The effect of the first criterion on lengths of time is noticeable, yet non significant (figure 7).
The lengths of time between the first sets of card holders’ purchases are longer than those of the last
ones, but that is the result of a censorship bias, as the last sets have not yet had time to make the
coming purchases. The length of time between their last purchase and the date of reference of the
study is therefore shortened.

Figure 7: Mean inter-purchase time per set of card holders according to quarter of entry
130 DEMAND_Q
120
2 Q 94
110
3 Q 94
100
4 Q 94
90
1 Q 95
80
2 Q 95
70
3 Q 95
60
4 Q 95
50
1 Q 96
40
2 Q 96
30
Mean DELAI

3 Q 96
20

10 4 Q 96

0 1 Q 97
2 4 6 8 10 12 14 16 18 20 22 24 26-30 40-50 >100
3 5 7 9 11 13 15 17 19 21 23 25 31-40 51-100

ordre de l'achat

Q stands for the quarter of the subscribing year

Conversely it is clearer to examine the evolution of expense amounts: there is no difference

between sets of card holders except for the first purchases (figure 8). Several groups can be observed :
as far as the first sets of card holders are concerned the purchase level is worth around 1200 FF
whereas it is only worth 700 FF or 800 FF for the last ones. This can easily be explained by the
fluctuating modes of the card’s promotional criteria.
 Figure 8: Mean amount per set of card holders according to quarter of entry
1700
1600
1500 DEMAND_Q
1400
2 Q 94
1300
1200 3 Q 94

1100
4 Q 94
1000
1 Q 95
900
800 2 Q 95

700 4 Q 95
600
1 Q 96
500
400 2 Q 96
Mean MONTANT

300 3 Q 96
200
4 Q 96
100
0 1 Q 97
1 3 5 7 9 11 13 15 17 19 21 23 25 31-40 51-100

ordre de l'achat

The evolution is therefore rather similar: the high price of the first purchase merely results
from an opportunist behaviour; one takes the card when one means to buy an expensive item, whose
price is determined by the rules that permit to write off the card’s cost. The second purchase is worth
around 520 FF, whatever the sets of card holders, which means that these rules no longer intervene.
The third purchase is worth about 400 FF. This price levels off around 325 FF after the 7th or 8th
purchase. It is important to know if this price corresponds to the mean purchase of customers that hold
no cards.

By segmenting on the basis of the number of purchases one can observe that the price curve
scarcely varies, shopping baskets are homogeneous: whether one is a major or a minor customer the
shopping basket is the same. Accordingly they can be distinguished by frequency (figure 9).

Figure 9: Mean amount of purchases according to the total number of purchases

1200

1100

1000 Nb total d'actes d'a

900 1

800 2

700 3

600 4

500 5

400 6-10

300 11-15
Mean MONTANT

200 16-20

100 21-30

0 31-50
1 3 5 7 9 11 13 15 17 19 21 23 25 31-40 51-100
2 4 6 8 10 12 14 16 18 20 22 24 26-30 40-50 >100

ordre de l'achat

So a more subtle analysis of the lengths of time between purchases is necessary. Here a double
phenomenon becomes apparent:

1) The length of time between the purchases of customers who will not persevere increases as
soon as the first purchase.
 2) The length of time between the purchases of customers who will buy products regularly
slightly decreases between the second and third purchase. Thus there is a significant effect of
acceleration and then levelling off of the buying rhythm (figure 10).

Figure 10: Mean inter-purchase-time according to the total number of purchases

140

120
Nb total d'actes d'a

2
100
3

80 4

60
6-10

11-15
40
16-20
Mean DELAI

21-30
20
31-50

0 >50
1 3 5 7 9 11 13 15 17 19 21 23 25 31-40 51-100
2 4 6 8 10 12 14 16 18 20 22 24 26-30 40-50 >100

ordre de l'achat

By using accounting data and those of the card-holder file it is possible to calculate the
evolution of shopping baskets of card holders and “non card holders”separately. This calculation will
allow us to appreciate the impact of the card better (figure 11).

Figure 11: Evolution of card holders’ and non card holders shopping baskets

1200

1100

1000

900

800

700

600

500

400

300

200

100 autres

0 carte
JUN 94 SEP 94 DEC 94 MAR 95 JUN 95 SEP 95 DEC 95 MAR 96 JUN 96 SEP 96 DEC 96 MAR 97

DATE

The outcomes are remarkably clear. Non card holders’ shopping baskets hover around 170 FF,
they are stationary. Since September 1995 card holders’ shopping baskets have been hovering around
450 FF. Bigger variations can easily be explained through a quantity effect: there are much fewer
buying actions among card holders (for they are less numerous) than among the others. Consequently
the curve obtained is not as smooth. We have seen that for loyal card holders the buying level settled
at 325 FF in the long run, which may be retained as the right indicator of card holders’ mean shopping
baskets.
The steady evolution of figures and the previous outcomes lead us to a simple conclusion: the
card does not increase the mean of the shopping basket (except in the very short run), but permits to
select those who buy more, and more often. A card holder thus is worth two non card holders.

The conclusions are clear:

 1) The card’s effect is mostly a short-term one and then essentially affects the volumes of
purchases. The latter are significant on buying the card and then decline.

2) The impact on patronising behaviours is not obvious; from one purchase to the next
patronising does not change much, except for small buyers for whom an increase in lengths of time
can quickly be seen.

3) Eventually the card seems to play a mainly promotional role, which is not inconsiderable,
far from it, but surely does not play a relational part as general thinking imply.

4) The card’s effect especially contributes to selecting the best customers rather than altering
their behaviours (except for the best ones). Card holders’ mean shopping baskets, after effects due to
opportunities, can be estimated at 325 FF against 170 FF for non card holders.

The impact of associated incentives and promotional activity

An obvious question arises from the previous study: since the effects seem to come into play
only as regards the first two or three purchases, and then to decrease quickly, is the program efficiently
animated? To put it differently, does the card work as an informative medium? Does it provide useful
information? In the third part we will therefore focus our attention on the effect of incentives caused
by the sending of promotional offers on populations of various sizes.

For each of these operations the database permitted to know on the individual level whether
the card holder was subject to the incentive or not. In order to perform this test we use a Survival
Analysis technique, the Cox model [31], to measure the effect that follow-up by mailing has on the
waiting period before the next purchase. As all consumers are not stimulated one has a control sample
that is all the more valid because the targeting process has only partly responded to specific criteria.
One may thus compare the curves indicating a customer’s probability of buying again whether the
customer has been stimulated or not. One obviously expects incentives to shorten the waiting period
before the next purchase (figure 12).

Figure 12: the effects of mailings

mailing

Of course in order to improve the quality of the model one takes account of the length of time
between the last purchase and the date of the mailing. One understands that a long period is linked
with a short time for reaction; so, to suppress this effect one introduces this variable into the model.
The total number of purchases made until that period has also been retained together with the amount
of the last purchase. Other variables are added, but they play a minor and insignificant part (customer,
age, gender characteristics...).

In order to illustrate this effect figure 13 reproduces the curve of mean survival for an
operation. The event that one seeks to modelise is the purchase, as a consequence these accumulated
survival functions give us the probability that after a certain waiting period the purchase still may not
be made. In the example it clearly appears that stimulated buyers are less likely to follow that course
than others. Thus after 200 days 46% of stimulated customers still have not bought anything, against
75% in the non stimulated group.
 Figure 13: Curve of mean survival for an operation

Accumu-
lated
Probabilité
-bility of Stimulated buyers
not
buying
again

Number of days before re-purchase

This very model has been assessed for each of the 26 mailing campaigns (table 3) for which
we had enough information. We transfer the parameters of the model to them. In half of the cases the
effect is significant at the level of 5% and the sign goes in the expected direction: it is negative, which
means that when a customer has been stimulated he is less likely not to have bought anything after a
period of waiting time. In 6 cases a positive effect can be observed, in 7 cases no positive effects can
be seen.

A few complementary analyses have been attempted to associate some characteristics of the
operations with these parameters. Nothing significant could be identified, except for a surprising
negative correlation between the number of customers involved and the effect (r=0,60) and between
the time the mailing was sent and the effect (r=0,37).

This can easily be interpreted: in the case of heavy operations higher investments in quality of
communication have been agreed, which has no doubt significantly improved the persuasive quality of
messages. The second result can be understood as a learning effect: from one operation to the next the
quality of offers has been improved.

If we examine the other variables, we will immediately notice that the previous number of
purchases as well as the period of time that has elapsed since the last purchase have growing effects in
time. This reveals a significant selection effect. As for the length of time since the last purchase, as
operations go along, the frequency of card holders who have become inactive, increases more and
more, so that these lengths of time significantly increase. So we do not actually measure what we want
to measure; indeed we measure customers’ level of activity. We can therefore make the assumption
that the efficiency of incentives is all the more significant as the percentage of customers is high. The
same analysis can be carried out regarding the accumulated number of previous purchases. Lastly we
can notice that the higher the amount of the previous purchase, the later its renewal.
 Table 3: Effect of buying behaviours and incentives on the period during which one buys again

Length of time Number of

Nb of since last Amount last past pur-
Date Mail-ings Description of Offer Mailing purchase pur-chase chases
08.94 2508 specific discount on 3 products - 0,007 * 0,0024 * 0,7013 *
10.94 4362 the same for 8 products + doubled points 0,097 * -0,0229 * 0,6584 *
11.94 1033 5 offered points - 0,060 * -0,159 * -0,0556 0,8201 *
12.94 6858 specific offers on 9 products 0,054 -0,1734 * -0,0247 * 0,8267 *
02.95 10628 -10% on the whole shop - 0,059 * -0,1591 * 0,0041 0,9769 *
04.95 13651 specific discount on 4 products 0,054 * -0,1924 * 0,0664 0,7213 *
04.95 573 5 offered points - 0,022 -0,1801 * 0,0217 0,9954 *
05.95 935 gift vouchers - 0,028 -0,1772 * 0,0209 1,0335 *
05.95 12788 doubles or trebled points for next collection - 0,068 * -0,1894 * 0,026 1,0358 *
06.95 14482 Questionnaire - 0,018 -0,2025 * 0,0186 1,0071 *
07.95 4352 Night opening - 0,010 -0,2171 * 0,044 1,0248 *
08.95 12511 couponing - 0,089 * -0,2114 * 0,0338 1,168 *
09.95 18936 a 100FF rebate for a 600FF purchase - 0,032 -0,2545 * 0,0657 1,1874 *
12.95 4060 -10% on a chosen item 0,044 * -0,2593 * 0,0535 1,2352 *
02.96 15770 Informative mailing - 0,462 * -0,2968 * 0,0523 1,1148 *
03.96 11332 Sending of vouchers to settle points - 0,170 * -0,2427 * 0,036 1,1149 *
04.96 11134 Gift vouchers offered in a mini-catalogue - 0,126 * -0,2575 * 0,0348 1,1285 *
06.96 19390 Specific rebates on 4 products - 0,201 * -0,324 * 0,0383 1,1302 *
08.96 3527 Night opening 0,032 * -0,3818 * 0,0404 1,3004 *
08.96 4634 a 50FF rebate a 150FF purchase - 0,066 * -0,3847 * 0,0393 1,2731 *
10.96 1388 -15% on a chosen item + 5 points - 0,024 -0,392 * 0,0359 1,2951 *
12.96 36468 -15% on a chosen item - 0,357 * -0,4943 * 0,0413 1,31
03.97 5280 Informative mailing 0,068 * -0,6103 * 0,0341 1,4663 *
04.97 7420 100 offered points for 100FF - 0,102 * -0,6765 * 0,0398 1,4691 *
04.97 2017 Doubled or trebled points for next collection - 0,074 * -0,6712 * 0,0296 1,4439 *
05.97 2048 Doubled or trebled points for next collection - 0,068 * -0,6896 * 0,0244 1,4487 *

Obviously more subtle and thorough analyses of the phenomenon are necessary; for instance by
systematically stratifying models according to the customer set or else by introducing interactive terms
(for example exposition to incentives and period during which one buys again). In our study this work
is not necessary since we have brought the basic facts into relief: first and foremost, animating
operations of the card-holder file are significantly effective, and there exist learning effects.

This learning effect is first specific to the management team of the program, who from one operation
to the next, seems to have learnt how to target better and build better offers. Which brings us to the
idea that if the effect is a promotional one, having a card-holder base enables one to improve the
efficiency of operations. The learning effect is also relative to customers themselves. In view of the
present state of data and analyses we must remain careful because the selection effects prevail.

Strategic role of the loyalty card

The results of this research are at first sight very clear ones: the loyalty card contributes but a
transitory and rather weak factor as to the increase in the turnover, which is in keeping with Dowling
and Uncles’ works [13]. One could thus be tempted to conclude too quickly that it is useless.

Here are the conclusions that can be drawn from this study:

1) The card no doubt has a positive effect on the turnover, the margin level and patronising.
Hence, on the individual level, the card probably increases patronising and decreases the
customer’s sensitiveness to price.
 2) However these effects are very small considering the variations of the same indicators.

3) The simulation game leads to a general recommendation: the card is useful, its impact is
certain, but its distribution must be all the more controlled as its direct cost is significant.
That control must involve identifying the sensitive targets which are sure to react, either
because they will change the way they patronise the shop or because they will choose
different products. It must rely on an analysis of profitability according to the targeting
strategies.

One must however complete those conclusions on the basis of the results obtained in the third
study, which emphasise the essential role of the card and the database it permits to form, noting that:

1) in most cases it has a significant effect on the lengths of time during which one buys again

2) that learning effect can be observed.

Consequently this requires a more thorough analysis of the card’s effect on the individual level
and of its determinants. This analysis must especially bear on animation programmes, not only from a
static viewpoint (the operation), but above all from a dynamic one: the successive operations and the
learning effects the programme generates.

This work should end up with a proposal of segmentation criteria. The latter would permit, on
the one hand, to better measure the consumer’s sensitiveness to the customer loyalty developing action
and, on the other hand, to assess the potential value of the targeted customers better. This fosters the
development of customer databases as well as their statistical exploitation.

The results obtained in our case are in keeping with literature: the impact is small, but
especially selective. The programs devised on the basis of loyalty cards are fully profitable only when
applied to a small number of customers. The main role of the cards would be to select and identify
customers, thus leading to a better adjustment of resources, the final allocation of those resources
taking place as the firm assesses customers’ -those involved in the loyalty program- sensitiveness to
customer loyalty development actions.

One may therefore wonder whether one of the reasons for the relative failure of customer
loyalty programs may lie in the absence of precise customer segmentation before their
implementation. In that case Uncles’s argument [11] would be partly invalidated: by building
customer loyalty among customers that are actually likely to become loyal, one partly gets away from
the interplay of competition and imitation. Conversely, these programs would permit to minimise the
interplay of competition and to restore margins.
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