Customer loyalty programs

Customer loyalty programs are attempts to bond
customers to a company and its products and services
by offering incentives-such as airline frequent flyer
programs or special credit cards with valuable
benefits-to loyal customers. In support of loyalty
programs, companies often invoke the "80/20"
principle, which states that about 80 percent of
revenue typically comes from only about 20 percent of
customers. However, this profitable 20 percent are not
necessarily loyal buyers, especially in the sense of
exclusive loyalty. Studies have demonstrated that only
about 10 percent of buyers for many types of
frequently purchased consumer goods are 100 percent
loyal to a particular brand over a one-year period.
Moreover, 100-percent-loyal buyers tend to be light
buyers of the product or service. "Divided loyalty"
better describes actual consumer behavior, since
customers typically vary the brands they buy. The
reasons for this behavior are fairly straightforward:
people buy different brands for different occasions or
for variety, or a brand may be the only one in stock or
may offer better value because of a special deal. Most
buyers who change brands are not lost forever;
usually, they are heavy consumers who simply prefer
to buy a number of brands. Such multi-brand loyalty
means that one company's most profitable customers
will probably be its competitors' most profitable
customers as well.
Still, advocates of loyalty programs contend that such
programs are beneficial because the costs of serving
highly loyal customers are lower, and because such
loyal customers are less price sensitive than other
customers. It is true that when there are start-up
costs, such as credit checks, involved in serving a new
customer, the costs exceed those of serving a repeat
customer. However, it is not at all clear why the costs
of serving a highly loyal customer should in principle
be different from those of serving any other type of
repeat customer. The key variables driving cost are
size and type of order, special versus standard order,
and so on, not high-loyalty versus divided-loyalty
customers. As for price sensitivity, highly loyal
customers may in fact come to expect a price discount
as a reward for their loyalty.

The primary purpose of the passage is to
A. question the notion that customer loyalty programs
are beneficial
B. examine the reasons why many customers buy
multiple brands of products
C. propose some possible alternatives to customer
loyalty programs
D. demonstrate that most customers are not
completely loyal to any one brand of product or
service
E. compare the benefits of customer loyalty programs
with those of other types of purchase incentive
programs

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