Used by businesses for more than 25 years, loyalty programs aim to entice consumers to make repeat purchases by offering them rewards -- things like discounts on future purchases or points toward free airline tickets.

Since companies continue to expand them, one would think loyalty programs are powerful tools for boosting market share. Our research indicates many aren't, at least not as designed.

The Journal Report

The biggest problem with loyalty programs, we would argue, is that most retailers adopt a one-size-fits-all approach: They use monetary rewards to encourage repeat purchases. But product discounts won't change buying behavior in the long run in shoppers who value things like personalized service, convenience or shopping pleasure more. These types of consumers may change their behavior to access the price promotion, but they likely will revert back to their regular brands or buying habits shortly thereafter, resulting in, at best, a temporary change in sales and market share.

Loyalty programs also seem to be mainly of interest to existing customers -- the heavier, more frequent, more loyal buyers of the store, who tend to live closer to it. In researching grocery stores, our team found that 88% of loyalty-card holders were clients of the store two years before joining the program. Loyalty programs often fail to attract the competition's customers because the rewards aren't compelling enough to make them want to switch brands or stores. Indeed, the proliferation of loyalty programs offering the same kinds of rewards has destroyed a key reason for them in the first place: differentiation.

Wesley Bedrosian

A more effective way to woo customers and maintain their patronage is to offer them individualized rewards, based on what they value. By offering different types of rewards to different groups of shoppers, companies set themselves apart and give people a reason to keep coming back. Providing access to a speedy checkout lane, for example, would be a more powerful way to win the loyalty of a person who hates grocery shopping than would a discount on a future purchase.

Here is how to build a loyalty program with the best chance of paying off:

  • Group customers according to purchase motivations.

To create customized loyalty programs, companies need to understand what drives various clients to make purchases. To get this information, they can survey shoppers on their purchase motivations, analyze the data customers provide on loyalty-program enrollment forms and review shoppers' transaction histories.

We uncovered five different purchase motivations when we surveyed shoppers in France from 2005 to 2007: an economic motivation, where the main goal is to save money; a hedonistic motivation, where the aim is to feel pleasure; a routine-loyal, or risk-avoiding, one, where the goal is to reduce the risk of being disappointed by a purchase by remaining loyal to a favorite brand or store; a relational one, where buyers seek to establish a relationship with a store or its staff and be recognized as a privileged client; and a functional one, where the aim is to decrease the time and effort devoted to making purchases. (This last motivator has been identified only in the grocery-store context.)

For Further Reading

See these related articles from MIT Sloan Management Review.

  • Do Customer Loyalty Programs Really Work?

By Grahame R. Dowling and Mark Uncles (Summer 1997)
The contention that loyal customers are always more profitable is a gross simplification.

  • Linking Customer Loyalty to Growth

By Timothy L. Keiningham, Lerzan Aksoy, Bruce Cooil and Tor Wallin Andreassen (Summer 2008)
The authors argue that there is no single metric that equates the entire customer experience.

  • Throttling the Customer

By David Wagner (Summer 2006)
Long a strategy in business-to-business settings and the insurance sector, firing the customer consists of identifying and purging your portfolio of the least profitable customers in order to increase margins or concentrate on your best clients.

  • The Microeconomics of Customer Relationships

By Fred Reichheld (Winter 2006)
Using a metric known as "net promoter score," the author believes firms can now measure the dollar value of customers based on satisfaction levels.

  • Managing the Total Customer Experience

By Leonard L. Berry, Lewis P. Carbone and Stephan H. Haeckel (Spring 2002)
Offering products or services alone is no longer enough: Organizations must provide their customers with satisfactory experiences.

Motivations can vary, depending on what a person is buying. For example, a person can be a functional consumer in a grocery store and a hedonistic consumer in a clothing store.

Companies can use customers' ages, incomes, sex and other factors to draw general conclusions about what motivates them to make purchases. In grocery stores, younger customers generally tend to be economical consumers, but also hedonistic ones. Older clients with higher incomes tend to be relational and routine-loyal consumers but also functional ones. Consumers with low incomes are usually economically orientated, while women are more hedonistic. Men, especially executives, generally are more functional.

  • Determine if customers perceive a loyalty program's rewards to be valuable.

Shoppers will change their buying behavior in response to a reward if they judge the value of that reward to be higher than its cost -- the obligation to make a future purchase or to give out an email address, for example. An important step in designing rewards, then, is to make sure customers perceive them as being valuable.

Our team grouped reward types into five categories and identified the groups of shoppers most likely to view them as valuable:

--Economic rewards include things such as price reductions and purchase vouchers. People most concerned about their budgets will perceive these types of rewards as valuable.

--Hedonistic rewards include things such as points that can be exchanged for spa services or participation in games or sweepstakes. These rewards have more emotional value and will attract people who shop for pleasure.

--Social-relational rewards include things such as mailings about special events or the right to use special waiting areas at airports. Consumers who want to be identified with a privileged group will value these kinds of rewards.

--Informational rewards include things such as personalized beauty advice or information about new products or services. They will attract consumers who like to stick with one brand or store.

--Functional rewards include things such as access to priority checkout counters or home delivery of groceries. Consumers who want to reduce the time they spend shopping will value these most.

Loyal to a Fault

  • The Issue: Despite their popularity, loyalty programs often fail to boost companies' market share.
  • The Background: Many programs use monetary rewards to encourage repeat purchases. The problem is, not all shoppers care equally about discounts.
  • The Bottom Line: To be effective, loyalty programs should be more individualized, offering different rewards to different shoppers, based on what they value.
  • Increase intrinsic rewards; decrease extrinsic ones.

Intrinsic rewards are those that match up with a consumer's natural purchase motivations; extrinsic rewards are those that sit apart from a person's normal shopping goals. A monetary reward would be intrinsic for a person who bases purchase decisions on price; it might be extrinsic for a consumer who shops for pleasure.

An extrinsic reward can motivate a person to take action, but the change probably won't last long. That's because the reward is "buying" a person's interest in making the purchase instead of reinforcing the person's natural inclination to do so. That puts the focus on the prize, instead of the brand or store, so when the reward is collected, the motivation to repurchase quickly disappears. This type of reward may even reduce a consumer's intrinsic interest in making a purchase.

Intrinsic rewards, meanwhile, reinforce a person's natural shopping motivation. Consumers will perceive intrinsic rewards and the loyalty programs that offer them to be valuable, increasing the likelihood that they will resist competitors' offers and stay loyal to a brand or store.

  • Weigh other factors that may influence the effectiveness of reward types.

Reward types can become more or less compelling, depending on the type of product or service being sold.

Intangible rewards such as beauty advice and special services are more effective when the product or service being sold is expensive and requires some thought and effort to purchase -- luxury goods, cars, and cosmetics are good examples. That's because those types of rewards can be used to emphasize a brand's image and uniqueness, giving shoppers a reason to continue making repeat purchases.

Immediate, tangible rewards such as "buy one, get one half off" promotions work best when the product being sold requires little effort to purchase and poses little risk to the buyer -- things like toilet paper, chewing gum or noodles. The downside to immediate, tangible rewards is that they do little to reinforce the value or uniqueness of a brand, so consumers tend to focus more on the prize than on the product being promoted. For this reason, companies selling "low involvement" products should use prudence when investing in rewards programs because they may not get a big payoff in return.

Perhaps the best approach when it comes to loyalty programs is to use them to get to know customers -- how much they spend, what kinds of promotions they respond to and what things they value. Collecting and analyzing this data would allow companies to identify the customers they consider most important and target them with appropriate rewards offers, increasing the likelihood of retaining their patronage and capturing a greater share of consumer dollars overall.

—Dr. Meyer-Waarden is an associate professor in the department of management and cognition sciences at the University of Toulouse III-Paul Sabatier in Toulouse, France. Dr. Benavent is a professor in the department of management sciences at the University of Paris X-Nanterre. They can be reached at