Do loyalty programs really enhance behavioral loyalty? An empirical analysis accounting for self-selecting members

One of the pressing issues in marketing is whether loyalty programs really enhance behavioral loyalty. Loyalty program members may have a much higher share-of-wallet at the firm with the loyalty program than non-members have, but this does not necessarily imply that loyalty programs are effective. Loyal customers may select themselves to become members in order to benefit from the program. Since this implies that program membership is endogenous, we estimate models for both the membership decision (using instrumental variables) and for the effect of membership on share-of-wallet, our measure of behavioral loyalty. We use panel data from a representative sample of Dutch households who report their loyalty program memberships for all seven loyalty programs in grocery retailing as well as their expenditures at each of the 20 major supermarket chains. We find a small positive yet significant effect of loyalty program membership on share-of-wallet. This effect is seven times smaller than is suggested by a naive model that ignores the endogeneity of program membership. The predictive validity of the proposed model is much better than for the naive model. Our results show that creating loyalty program membership is a crucial step to enhance share-of-wallet, and we provide guidelines on how to achieve this. (c) 2007 Elsevier B.V. All rights reserved.