Improving Loyalty Program Management by Effectively Segmenting Your Member Base

By Michael McCall Director of The School of Hospitality Business, Michigan State University. | December 25, 2011

Co-authored by Clay M. Voorhees, Ph.D., Assistant Professor of Marketing, Michigan State University

There is little doubt that most managers both inside and outside the hospitality industry believe that they must have a loyalty program. Indeed, loyalty programs have grown exponentially since American Airlines launched AAdvantage in 1981. While the basic idea of any loyalty program has been to reward your best customers, managers continue to face challenges on how best to optimize these often expensive programs. Added to these questions are the challenges posed by a customer culture that has created an expectation of rewards in return for patronage. Consequently, managers are often faced with the question of trying to identify and reward the "right" customers.

In a recent review of the reward program literature we suggested that the key drivers of a successful reward program can be found in 3 buckets: The structure of the program; the structure of the rewards offered; and the degree to which the customer fits with the program. At that time we also suggested that it is important for program managers to begin thinking about how they might best differentiate their program from that of their competition. We argued that a critical feature of a successfully differentiated program rested in the need to properly segment your customers both within and across program tiers. In many ways these issues were captured by a hotel manager who commented that while he felt he needed a program because everyone else had one, he was not sure what his program actually accomplished. This manager's quote was significant on a variety of levels.

First and perhaps foremost was that he had a program in place not for reasons of marketing strategy but because the competition has one. Unfortunately, a careful examination of the myriad of programs currently in existence suggests that they are often copycat programs. Yet while no marketer would introduce and promote a product that is "just like our competition," reward programs do precisely that. An often tell tale sign of this "me-to" approach is found in the use and reliance upon three tiers of precious metals as program-customer categories.

In this article we attempt to discuss ways in which program managers might differentiate their programs from the competition through improved segmentation. While the primary orientation is directed at hotels, we believe that the basic ideas and recommendations would be useful both inside and outside the hospitality industry.

Segmentation Bases

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