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J. of the Acad. Mark. Sci. (2016) 44:88107 DOI 10.1007/s11747-014-0405-6
ORIGINAL EMPIRICAL RESEARCH
Understanding loyalty program effectiveness: managing target and bystander effects
Lena Steinhoff & Robert W. Palmatier
Received: 25 August 2013 /Accepted: 29 July 2014 /Published online: 22 August 2014 # Academy of Marketing Science 2014
Abstract Loyalty programs are a ubiquitous marketing tactic, yet many of them perform poorly and the reasons for loyalty program failure remain unclear to both marketing managers and researchers. This article presents three studiestwo experiments and one surveyin support of the notion that a greater understanding of loyalty program performance demands an expanded theoretical framework. Specifically, researchers and managers must account for loyalty programs effects on both target and bystander customers in the firms portfolio, the simultaneous effects of three performance-relevant mediating mechanisms (gratitude, status, unfairness), and the contingent effects of program delivery (rule clarity, reward exclusivity, reward visibility) on specific mediating linkages. The results provide insights into why and when loyalty programs fail and into the complex trade-offs managers face. Loyalty programs have opposing effects on target and bystander customers loyalty and sales. While rule clarity suppresses both negative bystander as well as positive target effects, reward visibility enhances both types of effects. Exclusive rewards offer a means to alleviate negative bystander effects without affecting targets. The article both conceptually and empirically establishes a comprehensive analysis framework that can help marketing managers and researchers evaluate and improve loyalty program effectiveness.
Keywords Loyalty program . Bystander effect . Reward programs . Reward elements . Relationship marketing
Loyalty programs, in business practice and as a focus of marketing research, have become vastly popular, such that U.S. companies spend more than $1.2 billion on them each year, program participation has topped 2.6 billion, and the average U.S. household subscribes to 21.9 different programs (Berry 2013; Wagner et al. 2009). As these numbers suggest, loyalty programs have become a key component of customer relationship management (Kivetz and Simonson 2003, p. 454). However, their financial performance rarely meets expectations (Daryanto et al. 2010; Henderson et al. 2011), which often results in their termination (Nunes and Drze 2006). Even Starbucks recently decided to halt its rewards program due to poor performance (Allison 2010), and Safeway ended its loyalty scheme due to its lack...