Executive Summary

In the retailing sector, consumers typically patronize multiple outlets, which confronts these outlets with an important issue: determining how to gain a greater part of consumer expenditures.One potential avenue is to increase consumer lifetime duration and repeat purchases through loyalty programs giving their customers rewards after they’ve purchased a certain number of products. Therefore, retailers are increasingly using loyalty schemes as a part of their marketing mix. The common thread is that loyalty programs provide customers with a tangible or intangible benefit for repeatedly purchasing the company’s product(s).

A high priority area involves customer management. Customer relationship management programs (CRM) are not new in retailing, but their level of sophistication has accelerated in recent years.

Though the benefits to the customer are clear, the fundamental question facing retailers is, “What is the impact of loyalty programs on purchase behavior?”  This question is particularly intriguing as these programs can be very expensive. For example, the grocery retailer E. Leclerc in France devotes approximately €18 million of its annual marketing expenditures to managing its program. Other retailers, such as Safeway, have decided to give up their loyalty schemes to save $75 million.

This research, using BehaviorScan single-source panel data, examines the impact of loyalty schemes on customer lifetime duration and share of consumer expenditures in grocery stores.

Our investigation gives an answer to the following important question: Do loyalty programs modify purchase behavior or are “heavier” customers simply more loyal ?

The findings suggest that after the program subscription, loyalty schemes influence customer behavior and share of consumer expenditures, at least in the short-term, and appear to protect stores from losing customer shares.  Furthermore, study findings reveal that focal store’s loyalty program membership significantly reduces the relative risk of defection. Loyalty cardholders thus display longer lifetimes. Again, the impact seems relatively short-term.

Our results indicate that the loyalty programs tend to change the shopping behavior of some consumer segments after they join the program, even if some already loyal buyers were being rewarded for their established shopping patterns. The loyalty scheme probably prevents loyalty card holders from changing their behavioral patterns, such as shopping more at competitors’ stores, or creates a purchase concentration effect for the focal outlet. This suggestion might offer an explanation for why many multiloyal shoppers, who already use several chains on a regular basis, join all available programs to take advantage of their benefits.

In contrast, the simultaneous possession of competitive loyalty cards of geographically close retailers decreases lifetime duration and makes customers more vulnerable. Taking into consideration the large number of multiple-card holders, the effects of competing loyalty schemes by geographically close retailers may cancel one another out as a greater degree of imitation than innovation emerges.

Furthermore, the findings suggest that the higher the share of consumer expenditures in a store is, the longer the lifetime duration will be. This indicates that the more customers purchase proportionally in a store, the longer they will remain with that retailer. Besides, the impact of share of consumer expenditures on lifetime duration increases with time (from year one to year two and three).

Finally, we find that the farther a household is from the competitive stores, the more its defection risk decreases. It is interesting that loyalty schemes moderate the negative distance effect on share of consumer expenditures, but this impact is strongest when the distance is small (less than one kilometer), which signifies that program memberships are even more positively linked to stores’ share of consumer expenditures when the distance is less.

These findings have multiple, important implications for retailers for managing customer portfolios and lifetime value.   First, loyalty programs have great possibilities to the extent to which customer share and lifetime duration can be created or fostered. This insight is important when retailers design and evaluate the outcomes of programs aimed at changing customer behavior.  Second, measurable factors can predict retention, given that store defections in the grocery industry are inevitable. Retailers can gather shoppers’ information, such as customer shares, lifetime duration, and loyalty card portfolios, as well as store distance, then use these data to segment according to customer vulnerabilities, defection risks, deal proneness, price sensitivities, or lifetime values. With this information, retailers can undertake tailored strategies and incentives to appeal to different segments and restore their patronage. Loyalty schemes thus may become strategic tools to manage customer heterogeneity by selecting, identifying and segmenting consumers, which improves and personalizes the focus of marketing resources.  Finally, the study results suggest that loyalty programs should go beyond just rewarding usage and reward customers according to future-oriented measures such as estimated customer lifetime value (CLV).  Accordingly, customer loyalty should be managed at different levels: the first level by treating all shoppers equally and rewarding them in proportion to their total expenses to encourage more spending. At the second level, customer data that shows customer-level differences, can be used to determine whether  particular customer groups qualify for additional rewards.