Loyalty Programs: Do They Create Customer Loyalty or Program Loyalty?

As I was having my hair styled last week, I realized that I was the epitome of a loyal customer. I have followed Lynn to three different salons within the past year without incentives such as coupons, frequent customer cards, or discounts after so many visits. Moreover, I have recommended her to several of my friends.

If I had been merely a satisfied customer, I might have found someone else at the original salon which was offering discounts to retain its clientele. When you think about it, how many satisfied customers has your business lost lately?

Many companies conduct satisfaction surveys, believing that satisfied customers will also be loyal customers. However, in a 1995 Harvard Business Review article, “Why Satisfied Customers Defect,” T.O Jones and W. E. Sasser, Jr. found high rates of defection among customers who were merely satisfied while only those customers who were identified as highly satisfied were likely to purchase again.

According to a businessweek.com article by Fred Reichheld and Rob Markey(NPS: The Next Six Sigma?, September 22, 2006), customer loyalty can be gauged by responses to the question: "How likely is it that you would recommend this company to a friend or colleague?" Those customers who were most likely to recommend a company “bought more goods and services, bought them more often, gave the company a greater share of their wallet, and were more likely to talk up the company to others.”

If you are typical, you probably belong to several loyalty programs, but your loyalty may be attached more to the program rewards than to the company providing them. Here are some measures which have been identified to promote the consumer behaviors that are valued by companies:

- Engaged and empowered employees who provide high levels of service
- Customer feedback that enables companies to understand and reward their best
customers
- Products or services that are perceived as high quality and tailored to
customers’ needs
- Rewards that are desirable, attainable within a reasonable amount of time,
and renewable

There’s also a downside to loyalty programs. As a University of Florida study (Steven Shugan, 2007) points out, when businesses promise future giveaways, they trade immediate cash benefits for future liabilities. In addition, some programs may reward new customers more than existing ones through various enrollment incentives or special offers.

Developing customer loyalty requires a lot of motivation, focus, and work.