New Research Shows Loyalty Programs Improve Customer Lifetime Value

Loyalty programs are often framed as an effective motivator in promoting long-term customer retention. By offering perks like free items and coupons, brands can sustain customers and promote engagement with their most frequent customers. 

While many companies consistently utilized them to reward customers and prompt repeat purchases, they’re now becoming a more active piece of their overall digital strategies as customers adopt new retail technology. With new digital habits like mobile ordering and online shopping becoming normalized, customers are more likely to join rewards programs and download retail apps. 

But, with loyalty programs gaining such traction, it's worth considering whether or not they are actually effective as a customer retention tool. Researchers set out to do just that, in a new study investigating the effectiveness of loyalty programs by measuring their overall profitability. 

Non-Tiered vs. Tiered Loyalty Programs

The study, titled ‘Can Non-tiered Customer Loyalty Programs Be Profitable?’, identified two types of loyalty programs to highlight the differences between each structure. A tiered loyalty program, or one that offers increased rewards as customers enter higher thresholds, is typically connected with hotel chains or airlines. This kind of loyalty structure keeps customers locked into programs with the promise of increasing benefits. Non-tiered programs, the researchers note, offer rewards like “buy 10 get 1 free” or “$X off of every $Y you spend” and they are most utilized in retail and service industries.  

The study states that non-tiered programs are more ambiguous when it comes to how they increase customer demand or become profitable since users don't actually earn a status. Additionally, without the lock-in status of a tiered structure, there are less apparent consequences for skipping a visit because they incur no loss of the increasing value.

This study specifically analyzes non-tiered programs in an attempt to uncover whether a lack of economic lock-in can still promote loyalty and improve long-term retention rates.

Do Loyalty Programs Actually = Loyalty?

After analyzing data from a non-tiered loyalty program at a hair-salon chain over a five year period, the research indicated a 29.5% increase in customer lifetime value. The increase was ultimately attributed to a reduction in customer attrition. 

Researchers also note that the program reduced the probability that customers would enter a long hiatus from using the specific hair salon — meaning they never went long periods of time without using the service. 

In contrast, the study found that the loyalty program had little impact on customer spending per visit, and a very small impact on the frequency in which customers visited the salon. 

This makes sense, in a non-tiered program customers aren’t always technically rewarded for the amount that they spend at a retailer, many rewards can be based on frequency. Additionally, the findings that state customer spending had little to no increase are apparently consistent with former research on the subject. However, the frequency data may be limited in the sense that customers are more likely to be on a stricter schedule when it comes to service purchases. For a salon, a customer may not be inspired to spontaneously spend more or come in on a whim without an actual need for that service. Therefore, if this study looked at a retail establishment selling specific products, customers could be inclined to make more frequent purchases.

What’s most interesting is that the study was able to prove a considerably larger correlation between the use of loyalty programs and a reduction in attrition. Their findings indicate that reduced attrition rates accounted for over 80% of the program's total lift. Also, contrary to popular belief, the effects were actually largest for the customers who are most and least involved with the company before the program is limited. The research notes that many companies believe that moderate customers are more likely to benefit from and respond to loyalty programs because they “have room to grow with the company and can be motivated by the extra rewards they earn.” But, this research indicates that groups on the extreme are more likely to be invested in the program and show the most effects on retention rates.

This study ultimately points to the fact that loyalty programs are in fact beneficial as a customer retention tool. However, it may not only be the monetary rewards that are inspiring customers to continue making purchases in non-tiered programs. Because the presence of the loyalty program did not impact spending or frequency, these customers were likely not changing their typical habits to receive rewards. But, they were still less likely to seek out a new retailer, indicating the fact that the program did hold value in their eyes. Therefore, there may be more psychological factors at play that imply a more rational but casual sense of loyalty towards brands that implement these programs.