In business, simple loyalty programs can strongly increase customer retention, Washington University in St. Louis researchers have found. And when the U.S. economy edges closer to normal following the global coronavirus pandemic, such programs may be a method to help businesses get back on their feet.
Olin Business School researchers studied a loyalty program at a chain of men’s hair salons, collecting data on more than 5,500 customers. Under the program, for every $100 a customer spends, he gets a $5-off coupon.
“This loyalty program did increase loyalty,” said Raphael Thomadsen, professor of marketing. “In fact, the size of the effect is incredibly large given the simplicity of the program.”
The program — also known as a rewards program — increased the lifetime value of the hair salons’ customers by 29%, with more than 80% of that lift coming from increased customer retention, the researchers found.
The increased lift happened despite the fact that coupon redemption was low, suggesting that psychological factors rather than rational economic factors are driving the results.
“For example, the presence of the rewards program can make the customer feel emotionally connected to a particular firm, which leads to the customer visiting the firm more often,” the authors write in “Can Non-tiered Customer Loyalty Programs Be Profitable?” The paper is under minor revision at Marketing Science.
Co-authors of the paper include Yulia Nevskaya, assistant professor of marketing at Olin, Arun Gopalakrishnan of Rice University and Zhenling Jiang of Georgia State University. Both Gopalakrishnan and Jiang have Olin ties. Gopalakrishnan was an Olin assistant professor of marketing from 2015-19. And, last year, Jiang received her PhD in marketing from Olin.
‘Even a simple program will add considerable value’
The researchers did not study the response to loyalty programs during the current economic crisis. But Thomadsen and Nevskaya agreed such a program could help businesses to recover.
“It is often easier for companies to get in touch with their loyalty program members than with other clients,” Nevskaya said. “That is another benefit of having a loyalty program. The right tone and message and being sensitive to likely shifting needs of consumers during and after the COVID-19 epidemic should definitely help.”
Loyalty programs are popular at many businesses. Some programs, such as those for airlines and hotel chains, are complex and include multiple tiers, and they’ve proven to be quite successful. But a vast number of loyalty programs are set up in much simpler ways, with no tiers.
Over time, managers and academics have questioned the efficacy of simple loyalty programs, finding they have little or no benefit, according to the paper. But previous studies contained a significant flaw, the authors say. Those measured the programs’ effectiveness by increased sales per customer visit or by increased visits. The flaw? They didn’t measure the programs’ impact on keeping customers.
The managerial implications of the findings are clear, Thomadsen said. Many businesses are not going to implement complex loyalty programs, either because of the scale of their businesses — think yogurt shops, pizza parlors, coffee houses — or because they philosophically oppose setting up a tiered system.
“Our research suggests that even a simple program is likely to work well,” he said. “Even if another business only gets half of the lift we get, a simple loyalty program will still add considerable value.”