Fee-Based Loyalty Programs: An Empirical Investigation of Benefit Redemption Behavior and Its Effects on Loyalty

Abstract

Loyalty program (LP) membership gives customers access to benefits such as free, discounted, or upgraded products or services; however, firms are increasingly charging customers enrollment fees for access to benefits instead of allowing them to earn benefits through repeat patronage. We sketch the evolution and design of LPs over the past 200 years and distinguish between several types of programs (free rewards-based programs and paid membership programs) and the types of benefits they offer (discounts and giveaways). We propose a theoretical model that hypothesizes that members who pay directly for LPs will use different benefits than customer who receive LP membership as a bundled package. Furthermore, we hypothesis that different benefit use moderates loyalty behavior. We test the hypotheses using a database of restaurant LP customers and find partial support for our hypotheses; in response to the sunk-cost effect and expectancy-value theory, a paid LP enrollment brings with it a need to self-justify and find the easiest path to investment payoff. Bundled members are more inclined to use lesser-used benefits. Our results suggest that proliferation of benefits may not translate into improved service, loyalty, or satisfaction.