Do Loyalty Programs Really Work?

Do loyalty programs really create loyal customers? If the incentives disappeared, would the customers keep coming back? These are questions being asked by many people regarding the actual effectiveness of loyalty programs. For example, one of the brands that I am most loyal to is Honda, which has never offered a loyalty program to entice me to buy from them. Instead, I remain loyal to Honda for free because of the quality and service I receive from my Honda car and the Honda dealerships I’ve been to. On Monday, Byron Smith from Microsoft gave a very interesting speech on how Microsoft is trying to use loyalty programs to create incentives for Internet users to switch from their current search engine over to Microsoft Live. In this presentation, he gave examples of how Microsoft will be working to attract more users to its website by giving them X-Box Points that can then be redeemed on other merchandise. American Airlines came to my mind at this time because I could see a parallel between what Microsoft wants to do and what American Airlines started doing over 25 years ago with their frequent flier loyalty program called AAdvantage.

American Airlines has found its loyalty program to be extremely profitable for them. The reason for its profitability is that American sells its frequent flier miles to retailers that then use those miles as rewards for its customers. Since the incremental cost for passengers on airplanes is so low (about $20), American is receiving customer loyalty with very little incremental cost. Also, airlines don’t have to allow customers to redeem miles if there are no available tickets and if there are available seats, it is better for them to give a ticket away than to let the plane leave with many empty seats. So for the airline industry, loyalty programs such as the frequent flyer programs are a great strategic fit for making profit. The question then lies in whether this is actually creating loyalty to the airline or is it just a way for customers to find a great deal on a flight?

For Microsoft, I understand the need for them to create loyalty to Microsoft Live. Right now, Google is the hands-down leader in the Internet search engine profit war because it had the best search engine when it came out. Now, Microsoft has improved its own search engine and is betting that people will love it if they give it a try. They have done research that shows that people will definitely switch to Microsoft if they are rewarded for it, which means that they are not extremely loyal to their current search engine. Byron also mentioned though, that if the products are not equivalent, then the rewards will not have the effect it should. Also, he wonders, just like other people in the marketing world, will this loyalty program create true loyalty to Microsoft’s brand? Or will this just be a temporary fix for the deeper problem of having an inferior product? There is no question that loyalty programs can help switch some users from one brand to another. The ultimate question is how can we get those users to be completely loyal to our brand even if we weren’t paying them.