The Impact of Loyalty Programs on Customer Retention

Loyalty Programs play a significant role in a company’s customer retention plan. They help motivate consumers in choosing a company over their competitors by offering monetary rewards or special treatment rewards to loyal consumers. Loyalty Programs were first introduced to Canadians in 1958 when A.J. Billes decided to boost gas bar business by giving away Canadian Tire 'Money '. (Canadian Tire Corporation, 2010). Canadian Tire ‘Money’ is still a very successful loyalty program that millions of Canadians utilize on a daily basis, but what makes a loyalty program successful? What do consumers look for in a loyalty program? These questions and others will be discussed in the following paper based on research done on loyalty programs and the role they play in customer retention. There are two main categories of loyalty programs that retailers can offer to their consumers; monetary rewards programs such as Canadian Tire ‘Money’ and Shopper’s Optimum Points, and special treatment rewards such as you would see in a hotel chain or with airlines. Monetary rewards programs are utilized more frequently by consumers when compared to special treatment rewards because consumers will select the program that maximizes their utility over an extended period of time. (Lewis, 2004). The collection of Canadian Tire ‘Money’ is an excellent example of this; consumers will continue to shop at Canadian Tire just to save up their coupons they earn with each purchase. Hierarchical programs are an option that can be added to the standard monetary or special treatment rewards to help steer consumers to a business psychologically, by implying a perceived sense of status. Status is the relative rank in a hierarchy of prestige. (Status, n.d.). According to research done by Dreze & Nunes (2009) “Consumers will be more loyal to a brand to achieve an elite status ranking.” I believe status is important to people because we always feel the need to compare our achievements to others, whether we

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