The Myth of Customer Loyalty Programs and Customer retention.

By Niels Kjellerup Publisher and Editor of Ashgrove May 25th 2003/


Today’s announcement that the ANZ bank (Australia’s 3rd largest bank) will raise fees of credit card holders, who is actually paying up their balance monthly, i.e. taking advantage of the interest free period, is a wake up call for corporations investing marketing dollars in so called Loyalty Programs.

It was Prof. Herzberg who pointed out that awarding people to act in a certain way was not motivation, but bribery. ‘The difference becomes clear’, according to the professor, ‘when you stop these rewards. If the activity continues, then its motivation, if they stop its bribery in one form or other’.

What we’re seeing is the beginning of the collapse of the elaborate Customer Loyalty Programs. With mounting cost’s to sustain these programs, it’s becoming abundantly clear that the effect on the participant’s business model and profit line is in doubt to say the least.

A little noticed article ‘The Mismanagement of Customer Loyalty’ by Werner Reinartz and V. Kumar published in the June 2002 issue of the Harvard Business Review contains a year long study of Customer Loyalty programs.

Tracking the loyalty programs of 3 Corporations over a 4 year period the findings support the conclusions of the ANZ senior executives –

1)      Little or no evidence that customers who purchase steadily from a company over time are necessarily cheaper to serve, less price sensitive or particularly effective in bringing in new business.

2)      Much of the common wisdom about customer retention is bunk. To get strong returns on relationship programs, companies need a clearer understanding of the link between loyalty and profits.

3)      To identify the true apostles, companies need to judge customers by more than just their actions.

4)      No company should ever take for granted the idea that managing customers for loyalty is the same as managing them for profits.

The article provides new ideas and methodologies to determine much more precisely when to let go of a customer and how to improve ROI on a loyalty program.


Most companies business model needs revision, not only when it comes to reflecting the impact of Loyalty Programs on the bottom line, but in how customer service and Call Centres add value to the future revenues streams.


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