Unintended Consequences of Loyalty Initiatives

Abstract

Firms launch loyalty initiatives (e.g., loyalty programs, relationship marketing investments) in the hopes of eliciting greater behavioral loyalty (e.g., less defection, more expansion). Extant research evaluates the direct effects of loyalty initiatives on customer performance without considering how they interact with preexisting intrinsic loyalty mechanisms already operating in the background. This research draws on literature from relationship marketing, signaling, attribution, persuasion knowledge, and habit to propose a holistic conceptual model that delineates how three intrinsic loyalty mechanisms--habit-based, dependence-based, and relationship-based intrinsic loyalty--work to secure customers' existing business, and how loyalty initiatives alter, rather than simply augment, these preexisting effects. The model is tested with a longitudinal field experiment at a major telecom provider, where existing customers were randomly selected to receive a new loyalty initiative (i.e., no-strings-attached gift of two months' free calling). Overall, the loyalty initiative failed to have a significant direct effect on customer retention or expansion; however, the loyalty initiative altered the preexisting effects of the intrinsic loyalty mechanisms, resulting in positive (intended) and negative (unintended) consequences for customer retention and expansion. For instance, habit suppressed changes--reducing defection and expansion--unless a customer received the loyalty initiative, in which case habitual customers were "awakened" to consider changes, and consequently, it eliminated the positive effect of habit on retention and reversed the negative effect of habit on expansion. By uncovering these opposing interaction effects, this research contributes to the loyalty research domain by helping explain loyalty initiatives' mixed performance record in past studies that primarily focused on examining the direct effects of various types of loyalty initiatives. By clarifying how loyalty initiatives combine with intrinsic loyalty mechanisms to affect customer performance, this research also provides insights for practitioners responsible for targeting customers with loyalty initiatives.