The effects of loyalty program introduction and design on short- and long-term sales and gross profits

Loyalty programs (LPs) are marketing investments designed to foster behavioral loyalty among a firm’s best customers and, ultimately, increase firm performance. Surprisingly, the effectiveness of introducing LPs on firm performance in the short and long term has not been thoroughly evaluated. This research examines the extent to which introducing an LP can increase both firm sales and gross profits. Leveraging data from 322 publicly-traded firms that introduced an LP between 2000 and 2015, the authors demonstrate that introducing an LP can increase sales and gross profits in the short term (within the first year), and these positive effects are sustained long term (for at least three years). However, the effects on gross profits do not become significant until the second quarter after LP introduction, and their overall impact on performance lags substantially behind sales. Complementing these primary findings, the results reveal that offering an LP with tiers or earning mechanisms can provide firms with significant increases in sales and gross profits. Taken together, this research demonstrates that introducing strategically designed LPs can dramatically increase firm performance in both the short and long term.