CUSTOMER LOYALTY PROGRAM AS A TOOL OF CUSTOMER RETENTION: LITERATURE REVIEW

Abstract

Customer loyalty is a highly valuable asset. To gain loyalty of current customers and create attachments, the growing ranks of entrepreneurs decide on implementation of loyalty programs. This article aims at providing a theoretical outlook on various approaches on loyalty programs derived from literature review and identifing the factors which lead to success of a company. The literature review offers some directives for managers which are useful in the preparation of rewarding programs and are also a source of valuable customer information that helps in building future marketing strategies. We concluded that loyalty programs impact customers using financial and psychological factors to maintain long-term loyalty. Furthermore, loyalty programs should include financial as well as affective components as only financial incentives don’t guarantee a long-term relationship.

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CUSTOMER LOYALTY PROGRAM AS A TOOL
OF CUSTOMER RETENTION: LITERATURE REVIEW
Magdalena Hofman-Kohlmeyer
1
Abstract: Customer loyalty is a highly valuable asset. To gain loyalty of current customers and create
attachments, the growing ranks of entrepreneurs decide on implementation of loyalty programs. This article aims
at providing a theoretical outlook on various approaches on loyalty programs derived from literature review and
identifing the factors which lead to success of a company. The literature review offers some directives for
managers which are useful in the preparation of rewarding programs and are also a source of valuable customer
information that helps in building future marketing strategies. We concluded that loyalty programs impact
customers using financial and psychological factors to maintain long-term loyalty. Furthermore, loyalty
programs should include financial as well as affective components as only financial incentives don’t guarantee a
long-term relationship.
JEL Classification Number: M31, DOI: http://dx.doi.org/10.12955/cbup.v4.762
Keywords: loyalty program, customer loyalty, customer retention.
Introduction
In the last couple of years, the role of customer loyalty in a company’s performance has been widely
acknowledged. It is known that there is a positive relationship between customer loyalty and
profitability. Companies try to build long lasting relationships with customers as the feelings of
attachment leads to generation of higher profits. Entrepreneurs are looking for progressive tools to
maintain customer satisfaction and interest resulting in regular purchases. Successful loyalty programs
can help convert satisfied customers to loyal customers which protects market shares over time.
(Vinod, 2011).
This article aims at providing an outlook on various approachs on customer loyalty programs as a tool
for customer retention derived from literature review. Managers should identify important factors
leading to a successful program.
To achieve this goal, the first part of this analysis focuses on the definitions of customer loyalty. The
second part refers to customer loyalty programs in literature review. The final part of the article offers
conclusions based on the mentioned literature review and states some directives that could be valuable
to managers.
Customer loyalty
According to Tabaku and Zerellari (2015), there are two approaches on customer loyalty: behavioral
and attitudinal. The behavioral approach on customer loyalty refers to the customer consistently and
continuously buying from the same provider. Whereas, attitudinal loyalty is a result of a psychological
connection with the product or service, involving a preference and components like a positive attitude
and commitment.
Ludin & Cheng (2014) describe customer loyalty as a continuous relationship between the customer
and the brand. It can be seen as resistance to switch brands inspite of any situation or problem
encountered during the business process. Additionally, they describe customer loyalty as repeated
purchases of a product from the same brand.
Loyalty behaviors show an increase in number of purchases, an increase in number of customers and
lower price sensitivity (Varela-Neira, Vazquez-Casielles & Iglesias, 2010). Loyal customers guarantee
a reduction in marketing costs for long periods of time. (Mascarenhas, Kesavan & Bernacchi, 2006).
Loyalty programs
Loyalty programs have existed for 30 years. American Airlines was the first to launch a loyalty
program and called it “Frequent Flyer Program”. This program was based on the fundamental
1
Magdalena Hofman-Kohlmeyer, Faculty of Management, University of Economics in Katowice, Katowice,
Poland, magda-hofman@o2.pl

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statement that all customers are not created equal. Thereafter, loyalty programs have disseminated into
hotels, rental car, financial services and restaurants. Over the years, loyalty program have become
prevalent (Vinod, 2011). Loyalty programs are a marketing strategy focused on offering benefits to
achieve loyal customer retention. These programs are also called frequent purchase programs or
reward programs because benefits depend on purchasing frequency (Gómez, Arranz, Cillán & 2006).
Meyer-Waarden (2008) states previously used definition of loyalty programs as an integrated system
of marketing actions that aims at making customers more loyal by developing a personalized
relationship with them. Developing approach treats customer loyalty program as a tool for relationship
management. This tool gives an opportunity to create personalized communication. Companies record
information by loyalty cards and possess instruments of dissemination and individualization of
marketing mix (Meyer-Waarden, 2008). It enables managers to hold customers data and create
customer databases. Collected data may be exploited for many reasons, like price discrimination,
direct marketing, customer profiling and to promote products. However, it must be kept in mind that
customers are afraid of losing their personal data and expect appropriate privacy protection therefore,
customer loyalty is reliant on the customer’s trust in the company. Creation of safe customer profiles
can address this issue and will help attract privacy sensitive customers (Enzmann & Schneider, 2005).
Gómez, Arranz & Cillán (2006) emphasize that customer loyalty program have to build behavioral and
affective loyalty. According to behavioral approach, loyalty program play an important role in the
purchase frequency. Participants in this program make a higher number of visits to the retailer than
non-participants.
Key components for developing Loyalty
The key components for developing affective loyalty are: attitude, satisfaction, trust and commitment.
 Attitude is a lasting affection towards an object or an experience. Positive attitude is inevitable
to build a true loyalty (Gómez, Arranz & Cillán, 2006).
 Satisfaction is defined as an evaluation of the perceived discrepancy between prior expectation
and the actual performance of the product. In the context of services, perceived satisfaction is
related to confirmation or disconfirmation of expectations (Sahin Dölarslan, 2014).
 Trust is a key factor to make customers loyal. Service or product suppliers should gain the trust
of a customer and ensure them that the transmitted data is confidential.
 Commitment is when there is a rational and affective bond in the relationship. Some authors
admit that there is no customer loyalty without emotional aspects. Only repeated transactions is
not enough for loyalty to last (Gómez, Arranz & Cillán, 2006).
Hoffman & Lowitt (2008) indicate the importance of the way managers run loyalty programs. It is
vital to maintain a customer’s loyalty for a long time. Incentive not only lure customers into occasional
purchase but also enhance loyalty. The expiration dates on loyalty cards enable managers to achieve
short term financial goals. Customers will probably try firm’s offering, but it is difficult to determine
what products they may choose next time. Loyalty programs not only have financial benefits but
provide customers with a feeling of intelligence and pride when they buy something for a better price
or get something free (Hoffman & Lowitt, 2008), especially when something is expensive. When
buyers feel like special customers, they start to identify more strongly with the company (Meyer-
Waarden, 2008).
Rewarding Systems and Virtual Communities
Within the last couple of years the role of the Internet in business has been widely acknowledged,
especially when it comes to selling products via e-shops. In terms of e-commerce, there are two
different types of programs: rewarding system and virtual communities. Rewarding systems give
members financial benefits (Enzmann & Schneider, 2005). The popular form is based on cash-back
reward program where suppliers pay certain amount of money for every qualified purchase which is a
fixed percentage of purchase amounts. This kind of rewarding program causes increase in sales in a
short interval of time but customers don’t necessarily repeat purchases (Altinkemer & Ozcelik, 2009).

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Virtual communities refer to social aspects, like an online discussion panel on product related
problems (Enzmann & Schneider, 2005). Since social media became popular, loyalty program have
started to use Facebook, Twitter and Linkedin for marketing purposes where firms communicate with
members about offers and promotions (Vinod, 2011).
Equity-based Loyalty Programs
Altinkemer & Ozcelik (2009) describe new types of electronic loyalty programs. The alternative of
solutions mentioned above is equity-based loyalty program where customers become fractional owners
of the firms. Customers collect shares instead of discounts but the amount of equity is very small,
usually around one percent of unit share. Howve, it is not possible to implement this program without
IT applications and the Internet. In this model, customers are obligated to go back to the same firm
after an initial purchase (Altinkemer & Ozcelik, 2009).
Benefits of Loyalty Programs
Meyer-Waarden (2008) carried out survey in retail outlets to examine the effects of loyalty cards on
the behavior of customers. As a result, during the three-year period, card owners demonstrated higher
number of purchase and higher loyalty than average. He concluded that loyalty programs cause a
decrease of degree of price sensitivity in a customer’s mind, and the buyers are ready to pay more than
usual. Furthermore, loyalty is always followed by an increase in number of purchases.
Tahal (2014) carried out a research about customer loyalty programs in electronic commerce. He
gathered information on companies that are running e-shops and asked opinions of people who were
typical online customers. On identifying the company’s expected benefits of the loyalty program, the
following result were obtained (shown in Figure 1):
 the company’s reputation advanced by 73%,
 brand awareness increased by 95%,
 profit increased by 77%,
 turnover increased by 100%, and
 number of repeated purchases increased by 95%
Figure 1: Company benefits from using loyalty program
Source: Tahal (2014)
Tahal (2014) also indicated benefits from buyers point of view. Loyalty program attracted customer by
using incentives such as, discount on selected items, remuneration based on points gathering, listing to

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the valuable gift draw, gifts (small free items), instant quantity discounts, money voucher for the next
purchase, flat discounts on the favorite items and other incentives (Shown in Figure 2).
Figure 2: Buyers benefits from using loyalty program
Source: Tahal (2014)
Loyalty programs provides many advantages such as an increase in sales revenues and a closer bond
between current customers and the brand (Khan, 2014).
Customers may shift products and services to look for better value or price all the time and from an
entrepreneural point of view, of is important to reduce these customer shifts. Managers try to outsmart
their competitors using various marketing tools to maintain customer loyalty (Bose & Rao, 2011).
Conclusion
This paper gives a theoretical approach on influence of loyalty program on customers’ loyalty and
profitability of the company. Literature review contains many approaches on loyalty programs for
managers.
Many authors emphasize that loyalty programs contain financial and affective components. Only
financial benefits don´t guarantee retention of the customer. Customer reward program is a source of
valuable information and is important to build customer knowledge databases. Collected data should
be the basis for development of a marketing strategy. Managers must protect the privacy of the
customers as customer loyalty is reliant on the customer’s trust on the company.
Conclusively, loyalty programs are profitable because it is less expensive to retain existing customers
than to attract new ones (Altinkemer & Ozcelik, 2009).
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