UNDERSTANDING THE EFFECTIVENESS OF LOYALTY PROGRAMS… 1

Understanding the Effectiveness of Loyalty Programs on Customer Retention of selective

Business Administration Students of Our Lady of Fatima University Antipolo Campus
Ellendale G. Vicente1,2,3, Pauline C. Arceo1,2,3 , Carlo Beriña 1,2,3,
Aldrich T. Ronquillo1,2,3, Charles Sia1,2,3 , Randy Valmoria1,2,3 , Alexander Gutierrez1,2,3,4

1
College of Business and Accountancy
2
Research Development and Innovation Center
3
Our Lady of Fatima University

4
Research Adviser

March 2019

OUR LADY OF FATIMA UNIVERSITY COLLEGE OF BUSINESS AND

ACCOUNTANCY
UNDERSTANDING THE EFFECTIVENESS OF LOYALTY PROGRAMS… 2

1.0 Introduction

Have you experienced being valued in a restaurant or mall or even in a supermarket?

What do you feel if other customers get access instantly on something that you also want to
access? Would you avail that particular card to get a VIP experience? Some customers’ think that
having a loyalty card can make their purchase easy and convenient and some customers don’t
want to because they will only shop once or just sometimes. But little did they know, there’s a lot
of benefit having a loyalty card. Customers have an endless choice and move between into
different brands. So in order for their customers to come back, they need to build a connection
with their customers and to invest in customer loyalty. According to 3Cinteractive, 64 percent of
brands reported an increase in loyalty program membership over the years.
Loyalty programs have a significant advancement as the brands seek new ways to
become more valuable for the customers. An article published by Steve Olenski (2014), In fact,
the “growth hacker” movement, a recent collection of marketing gurus and regular business
owners, whose sole aim is the growth of the company, began by using loyalty programs as their
traditional model to expand a company. These individuals allocated all of their energy towards
growing their business and saw customer loyalty as one of the easiest ways to ensure this
outcome.
Have you ever wondered how much it costs to business to acquire a new customer
compared to the costs for selling to existing ones? Harvard Business Review indicated that it

OUR LADY OF FATIMA UNIVERSITY COLLEGE OF BUSINESS AND

ACCOUNTANCY
UNDERSTANDING THE EFFECTIVENESS OF LOYALTY PROGRAMS… 3

costs about 5 to 25 times more to acquire a new customer than it does to sell to existing ones. Not
only that, but existing customers spend 67 percent more than new customers.
The main objective of the study is to know how effective the four loyalty programs
namely paid program, point program, partnership program, and tiered program in attaining
customer retention. In order to reach this main objective, the research will address the following
sub-objectives: the researchers want to identify the extent or effect of point program on customer
retention; identify the extent or effect of paid program on customer retention; identify the extent
or effect of partnership program on customer retention, and identify the extent or effect of tiered
program on customer retention.
This type of research contributes to the field of marketing to find the proper loyalty
program or recommendation that can be used in the business in order to succeed. This would help
the future researchers as a reference or guide of how effective loyalty program is. In addition, it
could cost less and create more benefits for your business in the long run.

2.0 Literature Review

A large and growing body of literature has investigated customer retention; for the
purpose of increasing the value of company’s customer base, a company needs to have
knowledge of which customer it should target, when and how it should contact those customers,
amount of resources to be allocated and these scarce resources are divided for various acquisition
and retention activities. (Anecla Kanwal & Amer Rajput, 2014).
Superior customer retention occurs when the process of complaints handling is documented.
Recent evidence suggests that relationship marketing tools such as customer service,
personalization, brand community, and loyalty/rewards programs are positively associated with
customer retention. Relationship marketing activities assist firms to develop a significant
relationship with their customers.
In recent years, customer retention has gained increased value among both goods and
service providing firms. However although extensive research exists on the concept of customer
retention and it’s measures and instruments, studies and research on how professional service
firms retain their customers remain limited.
Another study conducted by Tamuliene & Gabryte, 2014, explained that customer
retention is one of the main relationship marketing objectives. Currently, the perception and
application of customer retention are significantly valuable for companies. Thus, in order to

OUR LADY OF FATIMA UNIVERSITY COLLEGE OF BUSINESS AND

ACCOUNTANCY
UNDERSTANDING THE EFFECTIVENESS OF LOYALTY PROGRAMS… 4

perceive and apply marketing principles in practice relevantly, it is important to ground

theoretically and assess empirically customer retention.
A study conducted by Margarita Išoraitė (2016) states that all scientific opinion of the
loyalty programs is similar. Loyalty program aims to educate buyers loyalty to the company, its
products or services, giving the customer added value, whether financial or non-financial support.
Loyalty programs aim to retain the existing customers and encourage their loyalty, but loyalty to
each company's objectives vary according to the company. Loyalty programs are: 1) to reward
loyal customers, 2) to collect information in order to know what are the best customers, 3) to
manipulate the behavior of buyers, the promotion applies to an individual in order to encourage
customers to try new products, 4) to respond to competitors' actions.

Alicia Fiorletta (2014) in her article "Relations, Not Rewards, is Key to Successful
Loyalty Programs", stated that in the last four years, retail stores had seen a decline of consumer
engagement in traditional loyalty programs. She emphasizes the fact that the retailer must start
focusing more on their loyalty initiatives so that they can compete in a better manner. In her
article, she stated that there were 2.65 billion of total loyalty program subscriptions in 2012. As
per the research conducted by Colloquy, the active subscription memberships slipped from 46 %
in 2010 to 44% in 2012. The study further shows that points programs, discounts, punch cards
and rewards, which were earlier regarded as star loyalty programs are nowadays losing their
attractiveness to consumers, and as a result, retailers now need to revamp their strategies to retain
and attract customers. Moreover, customers are confused regarding some of the existing tiring
reward systems such as gold, silver,and bronze, as they do not know what tier they belong to in
their favorite loyalty programs. Such reward programs create more confusion for the customers
rather than improving their shopping experience. Alicia Fiorletta further stated that it is essential
for the retailers to deliver value to the customers so as to maintain and earn their loyalty. Retailers
must use loyalty programs for establishing an emotional connection with the consumers rather
than focusing only on increasing transactions. The article also reflects that instead of reinventing
different loyalty schemes for different channels, a central engagement hub should be practiced by
the retailers for their loyalty programs. In this regard, the Omnichannel approach is most suitable
for the retailers to design their loyalty programs as it results in a lot easier in marketing strategy
(Fiorletta, 2014).

OUR LADY OF FATIMA UNIVERSITY COLLEGE OF BUSINESS AND

ACCOUNTANCY
UNDERSTANDING THE EFFECTIVENESS OF LOYALTY PROGRAMS… 5

According to a study by HelloWorld, younger customers are more inclined to prioritize

innovative tactics in loyalty programs, with 55% of Millennials and 38% of Gen-Xers expressing
a preference for surprise and delight tactics, a feat less appealing among Baby Boomers (23%).
Meanwhile, Millenials believe that loyalty programs should offer meaningful brand connections.

2.1 Theoretical Review

Bucket Theory of Marketing

Andrew Ehrenberg coined the phrase 'leaky bucket' to describe this syndrome: in effect,
firms are putting customers into a leaky bucket, and instead of preventing them from leaking
away through the bottom of the bucket, the firm keeps topping up the bucket with new customers.
Every business is like a leaky bucket, the water in the bucket represents the customers, many
businesses have a number of holes in it and the water flowing out in the holes represents the
customers leaving the company and lost sales-including future revenue, so in order for a company
to be profitable is to keep pouring more and more water in the bucket or plug the holes in the
bucket. (Jim Palmer, 2010).

OUR LADY OF FATIMA UNIVERSITY COLLEGE OF BUSINESS AND

ACCOUNTANCY
UNDERSTANDING THE EFFECTIVENESS OF LOYALTY PROGRAMS… 6

Figure 1

Customer retention is one of the key concepts in relationship marketing. Most companies
concentrate on recruiting new customers to replace customers who move on, rather than seeking
to retain customers. (Blythe J. Key, Concepts in Marketing, 2009).
Instead of pouring more water in the bucket (which is attaining new customers), it is far
less for a company to plug the holes (retaining customers through loyalty programs) because
recovered long-term customers can be worth much more to a company than newly recruited
customers.

Relationship Marketing Theory

Relationship Marketing (RM) can be defined as an approach to establish, maintain, and
enhance long-term associations with customers and other stakeholders.
Relationship marketing mainly involves the improvement of internal operations. Many customers
leave a company or defect from a company not because the customers didn’t like the product, but
because the customers were frustrated with the customer service. A key assumption is that all
parties will be able to meet their objectives through the relationship. A business may retain its
customers by creating a good relationship with them using loyalty programs.

OUR LADY OF FATIMA UNIVERSITY COLLEGE OF BUSINESS AND

ACCOUNTANCY
UNDERSTANDING THE EFFECTIVENESS OF LOYALTY PROGRAMS… 7

Firms have started focusing on relationship marketing as a core marketing strategy for
establishing a long-term and profitable relationship with the customers that is beneficial for both
the company and the customers.
Thus, according to them, customer retention can be defined as 'zero defection' or 'no-
switching' of the profitable customers of the organizations to their competitors. On the other hand,
customer retention as the longevity of the customer's relationship with the firm.

Commitment-Trust Theory
The commitment-trust theory of relationship marketing is composed of two fundamental
factors, trust, and commitment. These two factors must exist for a relationship to be successful.
Relationship marketing involves forming bonds with customers by meeting their needs and
honoring commitments. Rather than chasing short-term profits, businesses forge long-lasting
bonds with their customers. As a result, the customers trust these businesses, and loyalty helps
both parties fulfill their needs.
Trust - Trust is the confidence both parties in the relationship have that the other party won’t do
something harmful or risky. Businesses develop trust by standing behind their promises.
Commitment - Commitment involves a long-term desire to maintain a valued partnership. That
desire causes the business to continually invest in developing and maintaining relationships with
the customers. For example, The business could offer discounts or loyalty programs.
2.2 Variable Discussion
Certain variables are to be used by the researchers to conduct their study which
understands the effectiveness of loyalty programs on customer retention. The following variables
are:
2.2.3 Paid Program
The paid program is a kind of loyalty program wherein a customer pays a
monthly or annual fee to join VIP members club. This is for a customer to gain or to receive
special services, discounts or unique opportunities that a company has to offer. These benefits and
exclusive rewards are being offered only to the customer who paid the membership. So, if a
customer does not belong to the VIP Members Club, he will not be able to get the same benefit
that a member enjoys.

2.2.4 Tiered Program

OUR LADY OF FATIMA UNIVERSITY COLLEGE OF BUSINESS AND

ACCOUNTANCY
UNDERSTANDING THE EFFECTIVENESS OF LOYALTY PROGRAMS… 8

The tiered program is a type of a loyalty program in which the customer gets
different rewards depending on the tier they're in. for the customer to move on to the next tier
there is a milestone to pass. The milestone is determined or measured by how many the customer
has spent. Simply put, this program is based on the levels of loyalty, the customer gets more
points every time they purchase something, the more loyalty points the customer received, the
higher loyalty level they will reach, and the higher the level they will reach, the more rewards the
customer will receive.

2.2.5 Point Program

Point programs are the most popular used type of reward program. Its basic
principle is to spend more to get more, meaning the more the products you purchase, the more
points you will earn. By rewarding your customer using this program, you can add your
customer value. But most point program only has a specific time frame wherein customers can
exchange or use the points they earned to redeem or avail certain rewards depending on the
companies program rules. And most of the time, it is used by any retail store.
2.2.6 Partnered Program
The partnered program is also known as a multi-brand program. Two companies
form a partnership in order to make a loyalty program. This loyalty program creates a business
relationship to help the growth of their business. It has an effect and will create an impact
especially to customers. An example is buying a product that has additional points or has a freebie
versus the same product alone. Customers will choose a partnered program product which has an
additional benefit for them rather than buying the same product alone. With the said example, two
companies will have more customers who will patronize their product because of the benefits that
they are getting.
2.2.7 Customer Retention
Customer retention is the ability of a company or business to retain its customers.
This refers to actions being conducted by the companies in order to reduce customer
defection. Keeping customers means keeping the profit.

Problem Statement and Hypothesis

The purpose of this research is to provide data on how effective loyalty programs in driving
customer retention.

OUR LADY OF FATIMA UNIVERSITY COLLEGE OF BUSINESS AND

ACCOUNTANCY
UNDERSTANDING THE EFFECTIVENESS OF LOYALTY PROGRAMS… 9

1. What is the level of assessment of the different loyalty programs offered by retailers:
a. Point Program
b. Tiered Program
c. Paid Program
d. Partnered Program
Ho: The Loyalty Programs offered by the retailers have not significantly affected the customer
retention

2.3 Research Paradigm

Loyalty Programs

 Point Program
 Tiered Program Customer Retention
 Paid Program
 Partnered Program

Figure 2
3.0 Research Methods

3.1 Research Design

This research makes use of a quantitative research strategy. According to Babbie
Earl of The Practice of Social Research, quantitative method emphasizes objective
measurements and statistical, mathematical, or numerical analysis of data collected
through polls, questionnaires and surveys.
3.2 Research Locale
The researchers have gathered their information at Our Lady of Fatima
University, Antipolo Campus. The respondents are Business Administration Students
because they are knowledgeable about Loyalty Programs. The researchers aim to provide

OUR LADY OF FATIMA UNIVERSITY COLLEGE OF BUSINESS AND

ACCOUNTANCY
UNDERSTANDING THE EFFECTIVENESS OF LOYALTY PROGRAMS… 10

data on how effective loyalty programs on customer retention with a total of 100
respondents.

3.3 Population and Sampling

The researchers used Purposive Sampling Technique for the statistical treatment
of their data. According to Ashley Crossman (2018), a purposive sample is a non-
probability sample that is selected based on characteristics of a population and the
objective of the study. Purposive sampling is also known as judgemental, selective, or
subjective sampling.

3.4 Research Ethics

The researchers strived to avoid bias data analysis, data interpretation and other
aspects of research. The researchers avoided careless errors and negligence. The
researchers made sure that all the data and information that has been gathered will only
be used in the study.
3.5 Research Instrument
The researchers will use a rating scale questionnaire for gathering data. The scale
is essential in the study because it is the communication point between the
researchers and the respondents. The rating scale enables the evaluation of the data
gathered from the respondents.
3.6 Data Collection
The researchers will use a rating scale survey questionnaire as the main
instrument for gathering data. The researchers must provide a consent letter to an
adviser so that the respondents are aware that the survey being conducted is
authorized. The researchers assured that the chosen respondents have knowledge of
the study.
3.7 Data Analysis
The data collected were presented using descriptive statistics. The t-test was used
to analyze the hypotheses of the study. The software used was the Statistical
Package for Social Services. (SPSS V.20).

Range Interpretations
3.51-4.00 Strongly Agree

OUR LADY OF FATIMA UNIVERSITY COLLEGE OF BUSINESS AND

ACCOUNTANCY
UNDERSTANDING THE EFFECTIVENESS OF LOYALTY PROGRAMS… 11

2.51-3.5 Agree
1.51-2.5 Disagree
1-1.5 Strongly Disagree

Figure 3 Ranges and Interpretation of Mean Score of Data

References

Ahmad, R., Canterbury Business School, The University, Canterbury, Kent.

Babbie, E., The Practice of Social Research, 12th ed. Belmont
Bernazzani, S., Customer Loyalty: The Ultimate Guide Available at
https://blog.hubspot.com/service/customer-loyalty
Blythe, J. (2009), Key Concepts in Marketing [Online] Available at:
knowledge.sagepub.com/view/key-concepts-in-marketing/n5.xml
Buttle, F., Macquarie Graduate School of Management, Macquaire University, Sydney, Australia
Crossman, A. (2018), Understanding Purposive Sampling,
https://www.thoughtco.com/purposive-sampling-3026727
Fiorletta, A. (2014), Relations, Not Rewards, is Key to Successful Loyalty Programs.
https://www.retailtouchpoints.com/features/author/73-aliciafiorletta?start=1040
Ganesan, S. (1994), “Determinants of Long-Term Orientation in Buyer-Seller Relationships,”
Journal of Marketing, Vol. 58, April, pp. 1-19.

OUR LADY OF FATIMA UNIVERSITY COLLEGE OF BUSINESS AND

ACCOUNTANCY
UNDERSTANDING THE EFFECTIVENESS OF LOYALTY PROGRAMS… 12

Palmer, J. (2010), he News Letter Guru; Stick Like Glue [Online] Available at
https://www.sticklikegluebook.com/
Koiranen, M. (1995), “Custopreneurship Coalitions in Relationship Marketing.” In: Juha, N. (ed.),
Understanding Stakeholder Thinking, pp. 184-194. Helsinki Finland: LSR-Publications.
Olenski (2014), from: https://marketinginsidergroup.com/author/steve-olenski/page/6/
CAS CRM; Customer Loyalty through Customer Satisfaction and CRM [Online] from
https://www.cas-crm.com/crm-its-benefits/crm-glossary/customer-loyalty.html
Concept Draw; Leaky Bucket Diagram [Online] from
https://www.conceptdraw.com/examples/bucket-theory-of-marketing
TechTarget,RelationshipMarketing[Online]from:
https://searchcrm.techtarget.com/definition/relationship-marketing

OUR LADY OF FATIMA UNIVERSITY COLLEGE OF BUSINESS AND

ACCOUNTANCY