Understanding Loyalty Program Dynamics

Abstract

Loyalty programs have been referred to as the ubiquitous customer relationship management tool. However, despite the growing practice and research in loyalty programs, the field remains unclear on the effectiveness. Across two essays of this dissertation, I propose an emerging theory of loyalty program dynamics that synthesizes extant insights on loyalty program effectiveness, empirically analyze the key loyalty program enhancement strategies using field data, and conduct two experiments to reveal the mechanisms based on customer relational states. Essay 1 offers a comprehensive model of loyalty program effectiveness based on empirical research and psychological theories. Specifically, the model consists of psychological, design, and operational elements of loyalty programs, and each element is observed in light of customer relationship stages. Through this model, I propose that extant findings on loyalty programs that seem conflicting can be resolved by accounting for the key customer relationship stages—i.e., acquisition, onboarding, expansion, and retention. In closing, this research suggests a set of 12 propositions that account for differential effects across the stages. Essay 2 extends the insights from Essay 1 by empirically testing the differential impact of the key loyalty program enhancements (i.e., points multiplier and expiring promotions) on customer performance that depends on the types of customer relational states (i.e., customer temporal state and loyalty program state). Through a multi-method approach, consisting of a field data analysis and two lab experiments, this research suggests a set of managerial takeaways and future research avenues in loyalty programs literature. With an integrative theory of loyalty program enhancements, this research delineates the trade-offs and mechanisms associated with the key loyalty program enhancement strategies and customer relational dynamics.