Loyalty Programs Not Always Winners

A new study finds that reward cards might not work for some companies.

TORONTO – Most companies view loyalty programs as a way to keep current customers coming back again and again. But a new study discovered that reward cards might not always work, Marketing Daily reports.

Ryerson University professor Saeed Zolfaghari, who directs the school’s industrial engineering program, found that loyalty programs have little research to back up claims of keeping customers happy and shopping. The study used a mathematical model that calculated the effectiveness of the initiative.

The results go against conventional wisdom when it comes to loyalty programs: that companies don’t need to spend on these programs to keep loyal customers. “Loyalty programs entice people to become, and remain, customers,” said Zolfaghari. “Our model demonstrates that if average customer satisfaction increases over time, there is less incentive for a company to offer a loyalty program. Essentially, your customers are already happy with you.”

Zolfaghari and his partner created a model that maximizes revenue and included a loyalty program. “In our model, we also found that as the number of customers who intended to make a purchase in the second period increased, a company had to increase their price in the first period to offset the discount offered on subsequent purchases. To make up for increased reward costs in the future, you need to increase your prices in the present,” said Zolfaghari.

“A Stochastic Model on the Profitability of Loyalty Programs” appeared in the online April edition of Computers & Industrial Engineering.