Reward or loyalty programs have been widely used since American Airlines introduced its “AAdvantage Program” in 1981. Since that time, reward programs have grown in terms of popularity, and there are now many variations of such programs around the world. They are especially favored by service establishments, including airlines, banks, hotels, supermarkets, restaurants, gasoline stations, and other retailers. Often viewed as a major component of customer relationship management (CRM), reward programs are used as a tool to retain customer loyalty.

Advocates for reward programs argue that they work, and that loyal customers are less costly to serve. Hence, in the long run, reward programs are expected to be profitable. However, detractors claim that such programs are widely misunderstood and often poorly applied. They rationalize that when all players in the industry offer similar reward programs, then there is no longer any competitive advantage, and the costs of retaining existing customers and gaining new ones will increase. Ineffective reward programs may hurt more than they help service firms. Worst of all, reward programs, once established, are extremely difficult to discontinue.

As such, there is an urgent need to clearly understand the mechanism underlying reward programs and how it affects consumer acceptability of such programs. More specifically, we need to re-examine the key attributes of reward programs and understand their effects in different service conditions. To do this, we conduct an experiment in two service settings (i.e., bank and restaurant), and manipulate the two key attributes of rewards, type and timing, and test their effects on customer loyalty when customers are satisfied or dissatisfied. ‘Type’ indicates that the reward is directly or indirectly related to the service in question, while ‘timing’ refers to the notion that the reward can be redeemed either immediately or at a later time (at a higher value). To illustrate, in the bank context, for every $100 charged to the credit card, a direct-immediate reward is a rebate of $1 credited immediately into the account to offset bank charges, a direct-delayed reward is a rebate of $2 credited immediately into the account, which can be used at the end of the year to offset future monthly bank charges, an indirect-immediate reward is a $1 shopping voucher valid immediately at select department stores, and an indirect-delayed reward is a $2 shopping voucher valid at select department stores during the upcoming Christmas season.

Based on a public sample consisting of 205 respondents, our analysis shows that when consumers are satisfied, they prefer delayed, direct rewards (of higher values) to immediate, direct rewards. However, when consumers are dissatisfied, they prefer immediate, direct rewards to delayed, direct rewards (of higher values). What is interesting is that the preference for direct over indirect rewards is apparent only if the rewards are delayed (for the satisfactory service experience) or immediate (for the dissatisfactory service experience). In other words, satisfaction plays an important moderating role on reward type and reward timing. Another noteworthy finding is that that the higher face value of indirect-delayed incentives does not increase customer loyalty in either satisfaction condition. Our results are consistent across both the bank and restaurant service settings, and lead us to conclude that the effectiveness of reward programs is highly dependent on the interplay among service experience, reward type, and reward timing.

The findings from this study have significant managerial implications. Firstly, reward programs should be used to strengthen the value proposition of the service firm and not just merely for repeat purchase. Managers should remember that loyalty building should be viewed as a long-term process. To this end, it is essential for companies to offer the correct type of reward programs, and our research indicates that delayed rewards would be more effective in this regard, assuming that the customer is satisfied with the service experience. Real-life evidence such as airline frequent flyer programs and delayed discounts from Laundromats (e.g., ten washes qualify the customer for a free wash) support this conclusion. Secondly, the service organization should strive to provide a positive service experience whenever possible. Our findings imply that delayed, direct rewards would be effective only when customers are satisfied. This further affirms the notion that satisfaction is positively related to customer loyalty.