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The Impact of Loyalty Programs on an Organization’s Customer Retention

Introduction

As organizations increasingly become globalized, the need for loyalty programs has

become a priority for most in order to remain competitive and generate adequate revenue.

Multinational companies have to innovate and place a particular emphasis on quality

enhancement of products and services. For instance, experts in the hospitality field have to

persistently innovate and come up with programs that ascertain customer retention for the long-

term. This logic is based on the simple knowledge that customers prefer places where they are

guaranteed particular enticements. Keeping that in mind, getting to understand if loyalty

programs actually work is of particular importance.

In order to comprehend the efficacy of loyalty programs, two questions ought to get

answered, namely: do loyalty programs help retain customers?; do loyalty programs ascertain a

company’s profitability? Ultimately, retaining the right customers has positive and long-term

benefits to a firm but the company has to go out of its way to make sure that its customers stay

happy. The key to understanding the impact of loyalty programs revolves around the idea that

retention strategies work as a dynamic incentive model that relies on providing benefits

contingent upon long-term cumulative purchasing. This research will therefore assess the impact

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of loyalty programs on customer retention (dependent variable) by appraising the non-monetary

strategies approaches of point system, tier system, upfront charging for VIP benefits, all of which

constitute the independent variables address the need for marketing experts to concentrate on

consumer behavior in terms of their spending ability.

Customer Retention

First, it is important to make sense of the dependent variable (customer retention) and

independent variables (loyalty programs). Vats argues that “the key to consumer retention is

customer retention” (9). The fundamental aspect of consumer retention pertains to the emotions

aroused by the experience along with the company’s strong reputation. Customer is a primary

objective for most business because obtaining a new customer requires more spending as

opposed to maintaining a current relationship with an existing customer (Magatef et al., 79). The

primary focus of retention programs pertains to winning over the occasional customer and

turning him or her to a regular customer with the expectation that they will recommend their

family and friends. Customer retention is therefore all about giving the customers the best

experience by invoking relationship models that ascertain the customer’s long-term buying.

Customer Loyalty and Loyalty Programs

Secondly, customer loyalty is the customer’s preference for a particular brand of services

or goods over competitor ones and therefore he or she shop’s consistently. As such, a customer’s

satisfaction and subsequent loyalty to a particular brand can be attributed to positive emotional

experience triggered by a company’s use of structured marketing efforts that inspire loyal buying

behavior (Miranda 6). That said, a company manages to motivate loyalty by their customers

through rewards programs that offer free merchandise, special sales coupon, or endow the

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customer with the privilege of testing out new products. Consumers essentially share their

personal data with the organization. Marketers design effective loyalty programs taking into

consideration: the increased likelihood of customer repurchase, recognition of inconsistent

customers and curtail spending for the identified segment, focus on committing resources to

winning over customers that exhibit potential for making consistent purchases (Rust et al. 195).

The subsequent section discusses two studies that establish a correlation between loyalty

programs and customer retention.

Impact of Loyalty Programs on Customer Retention

Conducted by Margatef and Tomalieh, the study The Impact of Customer Loyalty

Programs on Customer Retention, established a correlation between loyalty programs and

customer retention by investigating “the probability of a customer endorsing the company’s

services to others, the likelihood of repeated buying, and probability of switching” (84).

Independent variables include tier system, point system, and charge on an upfront fee for VIP

perks. The researchers collected quantitative data by issuing surveys to a total of 350 respondents

whom the researchers could contact. The participants were asked about their opinion regarding

different kinds of loyalty programs, including: point system, tier system, charges an upfront for

VIP benefits. The researchers therefore hypothesized that all the above mentioned loyalty

programs have a significant effect on customer retention.

Point systems refer to the earning of rewards in the form of gifts, discounts, or special

treatments, such as cards issued at the supermarket to record credit points. Tier system rewards

customers for taking part in a company initiative and inspires repeat purchasing by toping up the

customer’s rewards as he or she advances up the devotion ladder. Charging an upfront fee for

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VIP perks involves encouraging customers to pay a one-time annual fee that allows them to later

collect points on their consumptions. Findings of the study showed that all three loyalty

programs are important for building relationships with customers and maintaining them as well.

Particularly, the major impact was traced to tier system followed by the charge of upfront fee,

and lastly the point system.

Despite its success, the study was limited in the sense that the sample size was too small

and limited in terms of time taken to collect the data. Loyalty programs are essentially difficult to

evaluate using standard techniques, considering the rewards for aggregate purchasing might in

the long run affect behavior (Lewis 291). Future researchers might consider increasing the

sample size and adopt a longitudinal approach to assess if participant opinion changed over time

based on the location where they did their shopping.

Another study by Liu through a longitudinal approach quantifies on a massive scale the

efficacy of a loyalty strategy in the store industry where the fundamental research question is

“whether loyalty programs change consumers’ patronage levels and exclusive loyalty to the

firm” (19). As such, the study aims to respond to three queries: How do customers adjust their

usage levels having joined a loyalty program? Do customers increase their loyalty over time? and

In what way do consumers with dissimilar spending levels react to the program? The study chose

1000 participants all of whom qualified as regular consumers at a convenience store. Researchers

selected respondents based on two criteria: 1) the customer was inducted in the loyalty program

during its first year of operation; 2) the consumer bought items at the store at least two times.

The results of the study showed that based on customers’ initial usage, the loyalty

program had diverse impacts on their behavior. Heavy buyers at the start of the program

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benefited the most by claiming their rewards. Even so, their spending and loyalty to the store

significantly reduced over time. In contrast, light and moderate spenders over time increased

their purchase frequency and as such became more loyal to the store. These findings support the

claim that ‘loyalty programs can fast-track customers’ buying constancy and in the long run

increase company profits (Liu 32). A surprising outcome is highlighted by the fact that customers

who began with low usage altered their behavior more than heavy spenders. This fact contradicts

the widely recognized belief that loyalty programs are meant for heavy buyers.

One of the limitations identified within the study revolves around the fact that it examines

the behavior of members of a loyalty program without taking into consideration a control group

comprised of consumers that never signed up for the program. Even though longitudinal data

eliminates self-selection bias that obscures cross-sectional evaluation of loyalty programs (Tsao

et al. 649), the failure to include a control group might result in the likelihood of unnecessary

factors emanating from the trends as opposed to the loyalty program. That being the case, future

researchers ought to undertake a complete assessment of loyalty programs that makes use of

longitudinal data acquired from both program members and non-program members (Liu 31).

Discussions

The fundamental finding in Margatef and Tomalieh’s study The Impact of Customer

Loyalty Programs on Customer Retention was that all three programs: point system, tier system,

charges an upfront for VIP benefits are significant in buildings relationships with customers and

maintaining them as well. However, the researchers discovered tier rewards to have the greatest

impact on customer retention. According to Tanford, tiered rewards are considered effective,

particularly in hotel loyalty programs because they create a sense of identity and feelings of

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status that lead to brand loyalty (286). To put this analogy into perspective, Tanford investigated

the effect of reward tier on traits designated as loyalty indicators. The researcher performed a

survey on 800 active hotel loyalty program members and findings revealed “that the perceived

value of privileges and benefits upsurges at higher tiers, thereby meeting a significant

requirement that effective strategies must add value” (292). These findings ought to be

encouraging to hoteliers because as much as they value the efficacy of tiered rewards to produce

loyal attitudes, Tanford’s investigation reveals that middle and lower tier groups have

substantially higher loyalty behavior. Hoteliers should therefore provide more incentives to lower

and middle tiers as a way of inspiring guests within this classification to ascend to higher tiers.

For examples, giving members temporary elite benefits such as suit upgrade or VIP lounge

access would provoke them to choose that brand next time and in so doing, upgrade their tier

level.

Liu’s findings were also somewhat similar to Margatef and Tomalieh’s discovery. In his

study The Long-Term Impact of Loyalty Programs on Consumer Purchase Behavior and Loyalty,

Liu learns that when it comes to usage levels, spending for heavy buyers over time significantly

drops while that of moderate buyers increases. Keeping this mind, Loyalty programs cost a lot of

money and so companies ought to focus on customers with low and moderate usage levels since

evidence proves that they gradually upgrade to high usage levels. This finding falls in line with

McCall & Voorhees’s discovery that reward based consumer preferences change as customer

effort increases (47). In other words, once low-effort consumers become satisfied with the

rewards, they tend to want larger efforts and in so doing, they become loyal to the brand.

Conversely, high-involvement customers have nothing to look forward to in terms of ascending

up tier reward system.

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Conclusion

All things considered, the studies examined in this analysis illustrate a correlation

between loyalty programs and customer retention. More importantly, the analyzed readings share

a common discovery that loyalty programs ought to be directed towards attracting and retaining

low-involvement consumers. Tangford proves this fact in his discovery that consumers in the

base and middle levels of the tier reward system tend to become loyal to the brand as they seek

out the prestige and status associated with higher rankings within the tier reward structure.

Managers should therefore adjust their customer relationships strategies to focus on low and

average spending customers as opposed to targeting consumers with advanced spending

capabilities.

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Works Cited

Lewis, Michael. “The Influence of Loyalty Programs and Short-Term Promotions on

Customer Retention.” Journal of Marketing Research, vol 40, no. 3, 2004, pp. 281–292. JSTOR,

www.jstor.org/stable/30162339. Accessed 27 Mar. 2021.

Liu, Yuping. “The Long-Term Impact of Loyalty Programs on Consumer Purchase

Behavior and Loyalty.” Journal of Marketing, vol. 71, no.4, 2007, pp. 19–35. JSTOR,

www.jstor.org/stable/30163995. Accessed 26 Mar. 2021.

McCall, Michael, and Clay Voorhees. "The drivers of loyalty program success: An

organizing framework and research agenda." Cornell Hospitality Quarterly, vol. 50, no.1, 2010,

35-52.

Miranda, Kennylyn, "The Effects of Loyalty Programs on Profits and Customer

Retention" (2018). Senior Capstone Projects. https://scholarsarchive.jwu.edu/hospcapstone/1

Magatef, Sima Ghaleb, and Elham Fakhri Tomalieh. "The impact of customer loyalty programs

on customer retention." International Journal of Business and Social Science vol 6, no. 8, 2015,

78-93.

Rust, Roland T., and Anthony J. Zahorik. "Customer Satisfaction, Customer Retention, And

Market Share". Journal Of Retailing, vol 69, no. 2, 1993, pp. 193-215. Elsevier BV,

doi:10.1016/0022-4359(93)90003-2.

Tanford, Sarah. "The impact of tier level on attitudinal and behavioral loyalty of hotel reward

program members." International Journal of Hospitality Management vol. 34, 2013, 285-294.

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Tsao, H-Y et al. "The Impact Of Loyalty And Promotion Effects On Retention Rate". Journal Of

The Operational Research Society, vol 60, no. 5, 2009, pp. 646-651. Informa UK Limited,

doi:10.1057/palgrave.jors.2602564.

Vats, Saurabh. "Methods to Improve Customer Retention And Satisfaction Level To Build A

Strong Brand". International Academic Journal of Business Management, vol 6, no.1, 2019, pp.

8-20.

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