On the Value of Customer Loyalty Programs - A Study of Point Programs and Switching Costs

Sammanfattning: The increased prevalence of customer loyalty programs has been followed by an increased academic interest in schemes. This is partly because the Internet has made competition 'one click away'. It is also because information technology has made it more economical for firms to collect customer information by way of loyalty programs. Point programs are a type of loyalty program where firms' reward customers for repeat purshases or sum spent in order to induce switching costs on them. Researchers have paid attention to how to measure the value of such schemes. Previous research indicates disparity of what detemiines the value of point programs. The main aim of this thesis is to explore dimensions of point programs and analyse these dimensions in regards loyalty program value. A particular aim is to discuss and define the concepts customer loyalty and customer alty program. A better understanding oft hese concepts are necessary in order to be able to better understand what determines loyalty program value.Six dimensions of point programs are explored; value of choice, reward valuation, alliances, consumer age. non-linearity and theprincipal-agent relation. A theoretical model of loyalty program value to the firm is developed. In the model, loyalty program value is a function of the following parameters: the customer's subjective value of rewards, the customers subjective best altemative forgone, the firm's marginal 3st ofproducing rewards and the fum's ability to exploit customer switching costs induced. The most interesting findings from analysing the dimensions are: a) researchers seem to not have distinguished between the non-linearity of point functions and the non-linearity of the reward function of point programs. I suggest that the non-linearity ofthe reward function does not necessarily have to depend on the non-linearity of point function; b) Previous research points out that customers cash value of rewards depend on the number point function; b)previous research points out that customers cash value of rewards depend on the number eward altenatives (value of choice). I also suggest that how multidimensional and demand inelastic each reward is impact on customer's value of choice in point programs; c) I also propose that principal-agent "lations and consumer arbitrage may impact on firm's ability to utilize customer switching cost in terms of ising price. Generally, raising price has been suggested as the firm strategy to utilize customer switching cost. I propose that firms may not want to charge higher prices from loyal customers and that one important value ofcustomer-lock in might be reduced uncertainty of future cash flows.