10. Loyalty Programs: Design and Effectiveness

Loyalty programs (LPs) are critical CRM tools used to identify, reward, and successfully retain profitable customers. This chapter gives a deeper introduction into the strategic use of this tool by presenting several industry examples. In two parts, it deals with the design and the effectiveness of LPs. Initially, this chapter details the objectives and design of various loyalty programs, along with several LP failures that highlight the elements and determinants of a successful program. By reviewing several of these LP characteristics, this chapter offers a systematic investigation of the outcomes and determinants of LP success, as well as guidelines for designing optimal programs. The key dimensions of LP design, including reward and sponsorship, also are explained in detail and illustrated with relevant case studies. Then in the second part of the chapter, the discussion of the effectiveness of loyalty programs introduces four key drivers of effectiveness and details their influence schematically. Empirical evidence about the performance of LPs across various industry segments also illustrates the success factors, leading into explanations of how firms can create competitive advantages by operating effective loyalty programs and focusing on value alignment. Finally, a seven-point checklist sums up the most important prerequisites for successful design and implementation of loyalty programs.