developing a cost-effective brand loyalty program

Brian Wansick
University of Illinois

While trading stamp programs were perhaps the first brand loyalty programs, American Airlines' AAdvantage program in 1981 stimulated an interest in loyalty programs that quickly spread to nearly every major airline in the country. Complementary services such as hotels and rental car agencies soon followed. By the end of the decade, however, some companies began to question the effectiveness and necessity of their own pro­grams. In 1990, for example, both Radisson and Omni Hotels retreated from their loyalty pro­grams to concentrate more on service (Seacord, 1996).

For some companies, the decision to establish a loyalty program was made according to a commonly held apocryphal belief that it is six times more expensive to obtain a new customer than it is to keep a current one and to encourage him or her to increase their consumption frequency (Wan-sink and Ray, 1996). Indeed, if a company increases customer retention by 2 percent, costs can decrease by as much as 10 percent (Conlon, 1996). Yet, for whatever reason, loyalty programs are being adopted with increasing frequency by credit cards issuers, long distance carriers, restaurants, and even coffee shops. Recently, consumer packaged goods companies have begun to experiment with these programs. They typically give participants the opportunity to receive various promotional products by collecting and redeeming points on packages (Hem, 1998).