How many loyalty program tags do you have on your key chain, or loyalty apps on your phone? One? Two? How about a dozen?
The 2020 Loyalty Report from Bond Loyalty says that US consumers on average belong to 14 loyalty programs.
When loyalty programs are that common, competition is bound to happen. Consumers are likely to be loyalty program members of multiple companies that directly compete with each other. In some sectors such as credit cards, restaurants, and travel, this competition can get pretty intense.
How do consumers choose among these competing programs?
A recently published research study in the Journal of Marketing Research by Professor Jia Liu from Hong Kong University of Science and Technology and Professor Asim Ansari from Columbia University can shed some light on that process.
The choice game
The research study can best be described as a choice game. Imagine that there are two (fictitious) rival loyalty programs from the airline industry:
- Company A: they charge higher prices, but program members get to a free reward faster (because of a lower reward threshold).
- Company B: program members need more points for a free reward, but the overall price is better than A.
So A had a more generous program, but B had better prices. Which one would you buy from?
In the game, study participants made 24 hypothetical purchases between the two companies under various prices and program designs. Their game goal was to have as much of the initial budget left as possible after all the purchases were made.
What choice strategies do people follow?
The basic idea was to see if people would make their decisions based on price, or whether they would pay more attention to free rewards.
Across people who played the game, the researchers discovered five distinct choice strategy segments, as shown below. (We renamed these segments to make them easier to understand.)
The largest segments are the shoppers and the optimizers. These people are rarely completely loyal to either company. They value both price and what they get out of a loyalty program.
There is a significant reward-seeking segment too though, accounting for 17% of the individuals. Rewards are the primary driver of their decisions. The result is a significant portion of the segment being entirely loyal to company A, which offers more opportunities for rewards.
At the other extreme are the very price-sensitive consumers. Not surprisingly, they are much more likely to be loyal to the low-priced company B.
What does the market outcome look like?
With the different choice strategies, what does the outcome look like for each of the two companies? Who gets a bigger share of the pie?
If we look at all the purchases across the entire study, people picked the lower-priced company B more often, at just over 60% of the time.
Does this mean that A’s strategy does not work? Not necessarily. The study showed wide-ranging outcomes depending on the design, as shown below.
Out of these 8 design versions, 4 of them put A and B’s shares roughly neck to neck with each other.
What do these 4 designs have in common?
They all required A to have a better promotional price than B. In other words, company A needed to follow a high-low price strategy: normally charging a higher price but dipping lower during promotions.
So what have we learned from all these? Here are a few key takeaways:
- Most consumers are neither completely short-sighted (focusing only on price) nor completely long-term oriented. Instead, they are likely to consider both how much they pay now and what they can gain over time from different loyalty programs. Consumers are also diverse in their choice strategies.
- A loyalty program does not work in isolation from other aspects of the business strategy. To be successful in competition, loyalty program design and management should take into account other aspects of the company’s offerings.
- When overall price advantage is not feasible, one success strategy is to construct a slightly more generous loyalty program together with a high-low price strategy featuring periodic competitive pricing.
More food for thought
The study findings are skewed in favor of a low-price strategy (company B). But it is important to remember that loyalty programs are not just earn and burn activities. For many programs, sticking to a single program also means more intangible benefits such as premium tiers and VIP treatments.
So in the real world of more sophisticated loyalty programs, we speculate that the market share for company A from the study will be higher than it was in the game.
Another important note is that consumers rarely choose from just two competing companies and programs. With more programs and options, we are likely to see simpler, more extreme strategies such as the price seekers or the reward-seekers to become more common.
We encourage you to check out the original publication for more complete study details and insights.
Liu, Jia and Asim Ansari (2020), “Understanding Consumer Dynamic Decision Making Under Competing Loyalty Programs,” Journal of Marketing Research, 57 (3), 422–444. https://doi.org/10.1177%2F0022243720911894
A pre-publication version of the paper can be accessed for free on the SSRN website.