The Myth of Loyalty Programs: Insights from Sharp’s Classic Study

Today’s paper is Byron Sharp’s 1997 “Loyalty Programs and their Impact on Repeat-Purchase Loyalty Patterns” – a classic that remains surprisingly relevant.

Takeaways for marketing practitioners?

1. Loyalty programs don’t create “excess loyalty”: The core finding – that loyalty programs don’t generate significant loyalty beyond what’s expected for a brand’s market share – remains empirically supported. You can’t “buy” loyalty through points alone.

2. Focus on penetration, not retention: To get more loyal customers, you first need more customers. The “Double Jeopardy” law holds: smaller brands have fewer buyers, and those buyers are slightly less loyal. It’s not a problem you solve with a loyalty program.

3. Consumers are polygamous: Even Gold-status flyers will fly competitors when price or schedule is better. Loyalty cards don’t fundamentally change buying patterns – people buy from a repertoire of brands.

4. Modern loyalty programs have different value: If the core behavioral findings still hold, why do brands keep investing? The value proposition has shifted from plastic-card discounts to digital data collection. First-party data, personalization, and keeping brands “available” on customers’ phones may be the real benefits – not the points themselves.

Long Version:

I recently revisited Byron Sharp’s 1997 paper from the International Journal of Research in Marketing. It asks a straightforward question: Do loyalty programs actually generate “excess loyalty” – meaning, do customers buy from a brand more than you’d expect given its market share?

The answer, then and now, is no.

Sharp applied the “Double Jeopardy” law to loyalty programs. This law, well-established in marketing science, states that smaller brands face a double penalty: they have fewer buyers, and those buyers are slightly less loyal. The paper examined whether loyalty programs could help smaller brands break this pattern.

They couldn’t.

The data showed that loyalty program members didn’t deviate from expected buying patterns based on their brand’s market share. A 5% market share brand had the loyalty profile you’d expect for a 5% market share brand – regardless of whether it had a loyalty program.

This finding has held up remarkably well. The Ehrenberg-Bass Institute continues to publish research demonstrating that loyalty is largely a function of penetration. You get loyal customers by getting more customers, not by bribing existing ones with points.

But if the science is clear, why is every brand launching a loyalty app?

Here’s where the conversation has evolved since 1997. The paper evaluated loyalty programs in their original form: plastic cards offering delayed rewards. The mechanism was simple: buy more, earn points, eventually redeem for something. The goal was retention.

Today’s loyalty programs are fundamentally different. Starbucks isn’t really trying to make you drink more coffee through points – they’re building a direct channel to you. Nike’s app isn’t about shoe discounts – it’s about first-party data.

There are two camps in current research:

Camp A (The Scientific View): Sharp’s findings still hold. Meta-analyses show only weak correlations between loyalty programs and repeat purchase behavior. People remain polygamous buyers regardless of their loyalty status. A loyalty card on your keychain (or app on your phone) doesn’t fundamentally change how you make purchase decisions.

Camp B (The Relationship Marketing View): True, behavioral loyalty is hard to change. But loyalty programs now drive mental availability (notifications keep brands top-of-mind) and physical availability (making it easier to buy). The value is data-driven personalization and targeted media spend, not the points themselves.

Here’s my take: Both camps have a point.

If you’re launching a loyalty program expecting it to fundamentally change customer buying behavior, the evidence suggests you’ll be disappointed. The patterns of buyer behavior Sharp described in 1997 – the predictability of loyalty given market share, the polygamous nature of consumers – remain true.

But if you’re building a loyalty program as a data acquisition and customer engagement channel – to understand your customers, personalize their experience, and stay accessible when they’re ready to buy – that’s a different game entirely. Just don’t confuse that with “creating loyalty.”

The paper remains important because it challenges the fundamental assumption that loyalty programs generate loyalty. They don’t. They might generate data, engagement, and convenience. But if you want more loyal customers, you’re better off focusing on growth.

Reference:
Sharp, B. (1997). Loyalty programs and their impact on repeat-purchase loyalty patterns. International Journal of Research in Marketing, 14(5), 473-486.

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Continue reading: Do Loyalty Programs Actually Create Loyalty?

Analysis and Future Implications of Loyalty Programs

The analysis focuses on Byron Sharp’s 1997 paper “Loyalty Programs and their Impact on Repeat-Purchase Loyalty Patterns”, which continues to significantly influence today’s marketing strategies.

Main Takeaways

1. Loyalty programs don’t generate “excess loyalty”: Contrary to common belief, brand loyalty isn’t significantly increased through loyalty programs. This suggests you can’t “buy” loyalty exclusively through points or rewards.
2. Increase market penetration, not retention: Rather than retaining existing customers, gaining a larger customer base appears to be the effective method of achieving customer loyalty. Smaller brands naturally have fewer buyers who are measurably less loyal, and loyalty programs don’t necessarily solve this problem.
3. Consumer behaviour remains polygamous: Irrespective of loyalty programs, consumers will switch between brands based on factors like price or convenience.
4. Modern loyalty programs are data-focused: Today’s loyalty programs aren’t as focused on direct rewards or discounts. Instead, they aim to gather first-party data for personalization and customer engagement purposes. Thus, the value lies more in data collection and maintaining brand presence on customers’ devices.

Implications and Possible Future Developments

Despite loyalty programs not generating “excess loyalty”, there’s a noticeable evolution since Sharp’s paper was published. Modern loyalty programs have shifted focus to digital data collection, personalization, and brand presence on customers’ devices, rather than point rewards. Therefore, it’s crucial for brands to comprehend the function and limitations of loyalty programs. Expectations over how these schemes will alter buying behavior should be realistic.

Loyalty programs will likely continue to evolve as technology progresses. This could lead to even more personalization and data collection strategies. Integration with AI and machine learning could further enhance these capabilities by auto-analyzing customer behavior and trends in real-time. Thus, the future of loyalty programs likely lies within these areas of development.

Actionable Advice

1. Focus on expanding customer base rather than retaining existing consumers. Increase market penetration to enhance brand loyalty.
2. Realign your marketing strategy understanding that customers are inclined to switch between brands. Offer quality, convenience, and competitive pricing to stay relevant.
3. Leverage loyalty programs as a means of data collection, customer engagement, and product personalization. The true benefit of these programs lies in their ability to collect first-party data providing valuable consumer insights.
4. Invest in technology to amplify the potential of loyalty schemes. AI and machine learning can offer valuable insights into consumer trends and help tailor more personalized experiences.

Remember that the goal of your loyalty program isn’t necessarily to generate excess loyalty through points alone, but rather to understand your customers better, personalize their experience, and make your brand easily accessible when they decide to purchase.

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