Marketing Myth: Loyalty Programs Lead to Large Revenue Growth

Tam Le is the Regional Strategy Senior Manager for Carat APAC.

The following article is the second in a series of what we’re calling “Marketing Myths.” There are a lot of misconceptions and “rules of marketing” out there that have been disproven over time by research. Each article in the series will focus on one marketing misconception, drawing largely on the work of Byron Sharp and the book How Brands Grow. Through the series, we hope to help you avoid these marketing myth pitfalls and make you stronger media professionals.

3 – 5 minute read


Since moving to Asia, I was proud to sign up for a Singapore Airlines KrisFlyer number. I couldn’t wait to be rewarded for my loyalty! But looking through my flight history, this sentiment feels like déjà vu. While in the U.S., it seems I’ve declared my loyalty for many airlines within the past two years alone. In no particular order, I am also a member of the following “loyalty” programs: United MileagePlus, American Airlines AAdvantage, Delta SkyMiles, Southwest Rapid Rewards, JetBlue TrueBlue, and even Spirit Airline’s FREE SPIRIT. What’s more, this list only covers the frequent flyer programs I’m enrolled in; it doesn’t even begin to cover all the carriers and airline alliances I’ve flown. It appears that I’m a philandering polygamist!

THE FOUR TYPES OF BUYERS

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Of course, I’m not the only unfaithful consumer out there. In fact, consumers like me, heavy buyers of a category with low brand loyalty, are the most desirable consumers for loyalty programs. As high buyers of a category, we have more loyalty to give, and if a loyalty program could convince us to shift our spending, then the brand has much to gain. However, keep in mind, motivation for the consumer to be loyal to just one brand isn’t high as we will probably accumulate similar rewards with competitors.

Heavy buyers of a category with low brand loyalty, are the most desirable consumers for loyalty programs.

The remaining categories of consumers are unlikely to contribute to revenue growth for a company through loyalty programs:

Light Buyers of a Category, Low Level of Loyalty

A majority of consumers fall into this category—remember the amended 50-20 rule from last month’s Marketing Myth where it was found that the heaviest 20% of buyers contribute to about 50% of sales volume? Introducing a loyalty program will capture some of these consumers (because there are so many of them) and hopefully convert some of them into more loyal buyers of the brand.

However, it is difficult to change a consumer’s category purchase rate from low to high, and as low category buyers, they will most likely fail to accumulate enough points for rewards and eventually forget the program. For example, I have a membership card with the drugstore Watsons, so I try to purchase from them versus their competitors whenever I need to get something from the drugstore; however, there are only so many times in a month that I need to go to a drugstore. I’m not going to increase my purchases within the category just because I am enrolled in their loyalty program.

So even if a brand’s loyalty program wins over light buyers of a category, they are still light buyers. Therefore the value of this consumer segment comes from their sheer number which balances out their low purchasing rates.

Even if a brand’s loyalty program wins over light buyers of a category, they are still light buyers.

Light and Heavy Buyers of a Category, High Level of Loyalty

Consumers already-loyal to a brand are the ones who will most likely sign up for a loyalty program. First, they come into contact with the brand more often, so will have more opportunities to find out about a loyalty program. Second, because they purchase from the brand so often, they see their high likelihood of receiving rewards from such a loyalty program.

For consumers who are already brand loyal, there’s not much change that a loyalty program will evoke. These consumers can’t really purchase the brand any more than they already do, and they don’t need to change their behaviour in order to earn rewards. As a result, implementing a loyalty program will only reward already-loyal consumers without receiving increased revenues in return.

Implementing a loyalty program will only reward already-loyal consumers without receiving increased revenues in return.

SO DO LOYALTY PROGRAMS WORK?

Given the previous paragraphs, I think you would be surprised to hear that the Ehrenberg-Bass Institute actually found that loyalty programs result in a positive effect on loyalty—although it is a very small and weak effect. Despite this loyalty effect, it is too small to noticeably drive revenue growth, and given the costs of a loyalty program, the effect on profits is presumably negative.

The loyalty effect is too small to noticeably drive revenue growth, and given the costs of a loyalty program, the effect on profits is presumably negative.

THEN WHAT ARE THEY GOOD FOR?

After all of this, you may be wondering why any business would continue the costly endeavour of maintaining a loyalty program.

Firstly, these types of programs are tricky for a company to exit from. Consumers with lots of points do not take kindly to them being taken away.

Secondly, if used to their full advantage, loyalty programs can be used to build consumer databases. A robust database that charts consumers’ purchase history can be a powerful tool for personalized direct marketing. And once the database collects enough purchase history data of enough consumers, the data can be mined for insights like the infamous diapers and beer correlation.

Bottom line: if companies don’t expect their loyalty programs to drastically increase loyalty for their brand or stimulate any revenue growth, and instead viewed them as a method to build databases, then they won’t be disappointed by unrealistic expectations.

To read more Marketing Myths: https://rocketapac.wordpress.com/category/media-musings/marketing-myths.
Frequent Flyer credit card image courtesy of
http://www.laptopmag.com/images/wp/purch-api/incontent/2011/03/april_410_frequentflyer_sf.jpg.