Why Loyalty Programs Cannot Prevent Switching
In retail, it is often much more difficult to attract new customers than it is to increase sales from existing ones. Locking in customers through loyalty programs can be an effective way to accomplish this, rewarding repeat purchases and increasing the costs of switching to competition. However, this approach does not work on all customers, with redemption rates below 14% globally, and dropout rates as high at 75%. Previous research has suggested that there might exist cultural and individual factors that influence how customers engage with loyalty programs, particularly an individual’s tolerance for uncertainty, capacity for trust and collectivist vs individual values.
This is an issue, as most companies inadvertently treat all customers as equal in their loyalty programs, offering rewards based on behavioural (such as repeat purchase) rather than personal factors. As such they may be under-optimising loyalty programs, particularly when designing programs for international markets. Despite this however, very few studies have actually measured the impact these individual level cultural values influence the effectiveness of loyalty programs.
Methodology
This multi-country study collected data from university students in Brazil (n=119), Russia (n=113), India (n=116), China (n=120) and Germany (n=104). The participants were given money and asked to buy toothpaste from one of five different sellers, with each offering a different loyalty program. Neither the seller or product was branded, and this process continued over 20 rounds of product purchasing.
- Seller one offered no loyalty program.
- Seller two offered a discount of 10% on each purchase.
- Seller three offered a 50% off on every 5th purchase.
- Seller four offered points with each purchase that could be redeemed for product related rewards such as toothbrushes.
- Seller five offered points with each purchase that could be redeemed for non- product related rewards such as post-it notes.
During the first 10 rounds, the price of the product was kept constant for each of the five sellers, but for the final 10 rounds the price for each seller randomly varied from round to round. Participants were able to keep whatever money they had left over at the end of the study, as well as any loyalty program rewards, they had earnt. The average payout at the end of the study was around US$10. The participants were then assessed via a questionnaire that captured consumer attitudes, individual-level cultural values and personal characteristics.
Key findings
- Customers who are more trusting are more likely to stick to a chosen loyalty program than those who are less trusting.
- A customer’s tolerance of uncertainty influences this relationship; the more comfortable they are with uncertainty the less trust influences loyalty.
- Collectivist cultural values make it more likely for a customer to switch when a competitor offers a better price.
Recommendations
Managers who wish to reduce switching should focus on building trust with their customers, as this will increase the impact that their loyalty programs will have on switching. This is particularly important in low involvement products, like the toothpaste used in this study, where branding plays a less important role in decision-making.
In countries that culturally have a lower tolerance of uncertainty (such as Brazil, Russia and Germany), trust is even more important in establishing effective loyalty programs. Through clever marketing that establishes trust in these customers, retailers might encourage loyalty without the need for highly competitive loyalty programs and discounts. However, when customers have a higher tolerance of uncertainty (such as in China and India), customers are more likely to “shop around” regardless of their trust in the brand, and so firms may need to provide more competitive offers to increase the costs to consumers in switching.
Collectivist vs individualist cultural values also influence responses to loyalty programs, with collectivist cultures (such as Brazil, Russia, India, and China) generally less sensitive to loyalty program incentives. This may be because these incentives are generally targeted at the individual and provide little group-level benefit. Managers targeting customers in these markets should instead offer loyalty incentives that increase group welfare, such as providing supplies to schools or sporting clubs.
This paper demonstrates that the universal application of loyalty programs cannot prevent switching behaviour. Instead, a customer’s tolerance of uncertainty, trust and cultural values influence how they will respond to these programs. In designing loyalty programs, managers should avoid a “one-size-fits-all” approach, instead deploying sophisticated data analytics to better match their programs to the emotional and cultural needs of their target audience.
Researcher
More information
The research article is also available on eprints.