Chapter 1: Understanding Short-Term Loyalty Programs

When businesses face limited resources, they often experiment with short-term loyalty programs instead of committing to long-term rewards. These temporary initiatives feature point accumulation and redemption structures akin to their permanent counterparts, but they typically last just a few weeks or months.

Examples of Successful Programs

Some widely recognized short-term loyalty programs include various promotional offers that entice customers. These programs can exist independently or serve as additions to ongoing permanent loyalty initiatives.

Effectiveness and Design Strategies

The question remains: Do short-term loyalty programs yield results? How can they be crafted for optimal success? A recent study conducted by researchers at the University of Amsterdam provides valuable insights from their analysis of 879 short-term loyalty programs in the grocery retail sector across 45 nations.

Success Metrics Explored

Before delving into the findings, it's essential to clarify the primary metric used for assessing success. The study focused mainly on a redemption metric, which measures the percentage of a retailer's sales attributed to reward redemptions. This figure serves as an indicator of customer engagement with the program.

The redemption rates varied significantly, from less than 1% to 83%, averaging around 14%. Keep this context in mind as we explore the findings, noting that these insights are primarily based on this participation metric.

Program Duration: Finding the Sweet Spot

The duration of a short-term loyalty program is critical. If a program runs too long, customer interest may wane, while a program that is too brief might not allow sufficient time for customers to earn rewards. The programs in this study spanned from approximately one month to six months.

The research revealed that an 18-week duration maximized effectiveness based on the redemption metric. Programs lasting less than 13 weeks were generally less successful. Interestingly, the ideal duration varied with the retailer's pricing strategy: everyday-low-price retailers saw peak effectiveness around 20 weeks, while high-low pricing retailers peaked at about 16 weeks.

Reward Design and Value

The nature of rewards significantly impacts program performance. Some analyzed programs provided percentage discounts, while others offered completely free products. The average discount across programs was about 80%, with deeper discounts leading to higher redemption rates. This effect was particularly pronounced among retailers with smaller market shares and in competitive environments.

Purchase Requirements and Participation

While generous rewards are appealing to consumers, they can be costly for retailers. Increasing purchase requirements can help balance these costs. The study found that stricter purchase conditions improved program participation, especially in competitive markets.

Variety in Reward Options

Typically, programs offered around nine reward choices, with some providing over 20. For high-low pricing retailers, increasing the number of reward options did not enhance program performance, but it was beneficial for those employing an everyday-low-price strategy.

Market Factors and Program Success

Other factors influencing program success include:

• Retailers with larger market shares typically gained more from short-term loyalty programs than smaller competitors.
• Long-term loyalty programs often hindered the effectiveness of short-term ones.
• High-low pricing strategy retailers fared better than everyday-low-price retailers.
• Programs in markets with lower retail concentration experienced greater success.

Sales and Profit Implications

While much of the discussion so far has centered on redemption metrics, it’s crucial to examine whether short-term loyalty programs positively impact sales and profits.

Sales Impact Analysis

For programs with detailed sales data, the average sales increase attributed to these initiatives was found to be 4.1%, with a midpoint of 2.5%. The uplift primarily came from program participants who redeemed rewards, with their spending increasing by around 19%, while non-redeemers showed stagnant spending.

Profitability Considerations

The profit effects of short-term loyalty programs depend on the cost structure. Many programs passed operational costs to consumers, leading to minimal additional costs for retailers. Among those that offered more savings to consumers, a striking 98% reported profitability based on gross profit margins.

Key Takeaways for Implementation

Here are some essential takeaways from the research:

• If considering a temporary loyalty program, assess your market position and existing strategies. Larger market shares, high-low pricing strategies, and the absence of permanent loyalty programs can yield greater benefits.
• The ideal duration for short-term loyalty programs is approximately four to five months.
• Offering free products as rewards can be more effective than discounts, and raising purchase requirements can help manage costs.
• The number of reward options has limited impact, aiding primarily everyday-low-price retailers.
• Focus on encouraging redemption, as most sales growth will come from those who redeem.

Cautionary Notes

It's important to note that this study was specific to grocery retail programs, and results may differ across other retail or non-retail sectors. Additionally, while short-term loyalty programs can serve as effective promotional tools, they may not cultivate long-lasting customer loyalty like their long-term counterparts.

Further Reading

For a comprehensive understanding, we recommend reviewing the original research paper, which includes an analysis of cross-cultural differences not covered here:

Bombaij, Nick J.F., Sarah Gelper, and Marnik G. Dekimpe (2022), "Designing Successful Temporary Loyalty Programs: An Exploratory Study on Retailer and Country Differences," International Journal of Research in Marketing.

For additional insights into customer loyalty, check our resources on loyalty strategies.

The first video explores how to create effective loyalty programs specifically for Airbnb and short-term rental guests, offering practical strategies and insights.

The second video discusses five standout strategies for successful loyalty programs, emphasizing what sets them apart in today's competitive landscape.