ARTICLE IN PRESS

Journal of Retailing and Consumer Services 15 (2008) 429442

www.elsevier.com/locate/jretconser

Which retailers adopt a loyalty program? An empirical study

Jorna Leenheera,, Tammo H.A. Bijmoltb
a
SEO Economic Research, University of Amsterdam, Roeterstraat 29, 1018 WB Amsterdam, The Netherlands
b
Department of Marketing, Faculty of Economics and Business, University of Groningen, P.O. Box 800, 9700 AV Groningen, The Netherlands

Abstract

This paper examines antecedents of retailers loyalty program adoption and their perceptions regarding loyalty program effectiveness.
The investigated antecedents consists of sector, competitive and demand, and rm characteristics. To test the hypotheses, we surveyed
180 retail companies active in 15 retail sectors, 37% of which have a loyalty program. The survey data are complemented with
expert judgements on sector characteristics. We estimate multi-level models for both loyalty program adoption and perceived
effectiveness (tobit-2 specication). We nd that the sector characteristics assortment homogeneity and average purchase frequency
stimulate loyalty program adoption considerably. Further, customer-oriented rms are most likely to adopt loyalty programs. Contrary
to loyalty program adoption, the effectiveness of a loyalty program in terms of additional customer knowledge and customer loyalty is
hardly affected by market and organizational factors. But it appears that retail companies should better take into account their
technological skills necessary for obtaining useful information from the customer loyalty program data.
r 2007 Elsevier Ltd. All rights reserved.

Keywords: Loyalty programs; Retail strategy; Customer relationship management

1. Introduction suitable for their specic company or for the market in

Retailers are realizing more and more that it pays off to
invest in customer relationships (DeWulf et al., 2001;
Sirohi et al., 1998; Srivastava et al., 2000). Loyalty
programs enable retailers to identify individual customers,
to determine their protability, and to differentiate
between them by giving personalized incentives and
rewards (e.g., through points schedules). Therefore, a
considerable number of retailers currently use loyalty
programs as a means to intensify relationships and to
stimulate customer loyalty. Although the growth in retail
loyalty programs is remarkable, they are not equally
widespread in all sectors. And even in retail sectors where
they are popular, several players do not use them. Food
Marketing Institute (Weinstein, 1999) reports that about
60% of the American retailers do not have loyalty
programs, and 70% of these non-adopters have no plans
to introduce them in the future. They consider them not
Corresponding author. Tel.: +31 20 5251678; fax: +31 20 5251686.
E-mail addresses: j.leenheer@seo.nl (J. Leenheer),
t.h.a.bijmolt@rug.nl (T.H.A. Bijmolt).
which they are operating. Distinction can thus be made
between two groups of retailers: the adopters and the non-
adopters of loyalty programs.
Existing academic research demonstrated the rationale
behind loyalty program adoptions theoretically (Kim et al.,
2001; Zhang et al., 2000), and provided empirical evidence
of their effectiveness (Bolton et al., 2000; Leenheer et al.,
2007; Magi, 2003). More specic research exists on the
inuence of loyalty program design elements, e.g., on
consumer preferences for specic rewards (Dre`ze and
Nunes, 2004; Kivetz and Simonson, 2002; Roehm et al.,
2002), the effectiveness of delayed versus immediate
rewards (Yi and Jeon, 2003), and cost-effectiveness of
rewards (Wansink, 2003). Notwithstanding this growing
stream of research on loyalty program effectiveness
programs, it remains unclear in which sectors and under
which market and organizational conditions companies are
likely to adopt loyalty programs. In other words,
considerable literature exists on the effects of loyalty
programs once they are adopted, but insight is lacking
under which circumstances retailers start to use loyalty
programs in the rst place.

0969-6989/$ - see front matter r 2007 Elsevier Ltd. All rights reserved.
doi:10.1016/j.jretconser.2007.11.005
 ARTICLE IN PRESS
430 J. Leenheer, T.H.A. Bijmolt / Journal of Retailing and Consumer Services 15 (2008) 429442
This study aims to provide insight into the drivers of
retailers loyalty program adoptions and the perceived
success of these programs. To this end, we conduct a survey
among 180 retailers in the Netherlands. Contrary to
existing literature on loyalty programs, which is based on
empirical or experimental consumer data, we take a
retailers perspective. Retail managers work with loyalty
programs on a daily basis, and can draw from a wide
experience and numerous (proprietary) information
sources. Specically, our study contributes to the literature
on loyalty programs in two ways.
First, our survey among retailers on the adoption
of loyalty programs provides insight into sector character-
istics, market and demand characteristics, and rm
characteristics (e.g., assortment homogeneity, competitive
intensity, and technological skills) that stimulate or restrain
a loyalty program adoption. To broaden academic insight
into managerial decision-making and to support future
retail decisions, it is important to understand why some
retailers have adopted loyalty programs and others have
not. Similar descriptive studies on retail strategy have
recently been done on e.g., pricing strategy (Bolton and
Shankar, 2003; Shankar and Bolton, 2004) and promo-
tional activities (Voss and Seiders, 2003).
Second, we contribute to the literature by studying
whether sector, competitive and demand, and rm char-
acteristics inuence the effectiveness of the adopted loyalty
programs. If retailers take these characteristics into
account appropriately during the adoption stage, these
characteristics will have a limited impact on the effective-
ness of the adopted programs (Wierenga and Oude Ophuis,
1997). The investigation will thus shine light on the
question whether retailers base the adoption decision on
the appropriate criteria.
We distinguish between two types of benets that a retail
company can derive from its loyalty program. First, loyalty
program rewards could stimulate customer loyalty. A
second benet is to obtain customer-specic data, by
scanning customers loyalty cards at every purchase
(Mauri, 2003). These data could enhance customer knowl-
edge in terms of better customer-specic insight into
product preferences, marketing-mix responses, etc. In
existing research the effect of loyalty programs on
customer knowledge has received scant attention. Ob-
viously, a retailers perspective is needed to obtain insight
into this aspect.
The rest of this paper is structured as follows. First, we
develop hypotheses on factors that may inuence loyalty
program adoption. The subsequent sections describe the
research method and present the results of the empirical
study. Finally, we draw several important conclusions from
our study and discuss managerial implications.
2. Hypothesis development
Retail companies have traditionally been transaction
oriented rather than relationship oriented (Mulhern, 1997).
Currently retail strategy is moving towards a relational
perspective with customers rather than products as the
central focus (Sheth et al., 2000). Several authors have
proposed classications or stages of relationship market-
ing. Loyalty programs t best within the early stages of
relationship marketing. Coviello et al. (2002) label the rst
stage of relationship marketing as database marketing, and
characterize it as the use of technology-based tools to
target and retain customers. Day (2000) speaks of value-
adding exchanges: the focus of the rm shifts from getting
customers to keeping customers. A rm pursues this
objective by developing a deep understanding of their
customers needs, tailoring their offering to these needs as
closely as possible, and giving continuing incentives for the
customer to concentrate most of their purchases with them.
Berry (1995) classies level one relational strategies as
those that rely primarily on pricing incentives to secure
customer loyalty. These denitions have in common their
focus on the creation of customer databases, the improve-
ment of customer knowledge and customer value, and the
enhancement of loyalty.
As such, the benets of loyalty programs t very well
with these relationship-marketing denitions. A loyalty
program can be dened as an integrated system of
marketing actions, which aim to make member customers
more loyal. A customer must become a member and
identify himself as such with his loyalty card at every
purchase occasion, to take advantage of the loyalty
program.
We dene the enhancement of customer knowledge and
customer loyalty as the two key potential benets of a
loyalty program for the retailer. Customer knowledge
concerns the understanding of the needs and wishes of
customers on individual or segment level (Campbell, 2003).
In mass markets, customer databases are considered crucial
to obtain customer knowledge (Gronroos, 1999; Mulhern,
1997; Winer, 2001). Through the scanning of loyalty cards
customer-level data are obtained, so that a retailer can
identify the different transactions of a specic customer
(Mauri, 2003). Second, loyalty programs can enhance
customer loyalty by giving incentives to program members
through e.g., saving features, special actions, and direct
mailings. Customer loyalty can be described as a deeply
held commitment to rebuy or repatronize a preferred
product consistently in the future (Oliver, 1999). Loyalty
consists thus both of an attitudinal and a behavioral
component (Dick and Basu, 1994). Empirical evidence
exists that loyalty programs are indeed able to stimulate
both attitudinal loyalty (Roehm et al., 2002; Yi and Jeon,
2003) and behavioral loyalty (Bell and Lal, 2002; Magi,
2003).
As argued by Day (2000) building strong customer
relationships is neither appropriate nor necessary for every
market, customer or company. In the same vein, relation-
ship instruments such as loyalty programs are not a useful
investment for every retail company. Following the
categorization of Voss and Seiders (2003), we assume that
 ARTICLE IN PRESS
J. Leenheer, T.H.A. Bijmolt / Journal of Retailing and Consumer Services 15 (2008) 429442
the company assesses the expected effectiveness of a loyalty
program (and decide on loyalty program adoption
accordingly) on the basis of three broad categories of
antecedents: sector characteristics, competitive and de-
mand characteristics, and rm characteristics. We use
literature on loyalty programs, organizational adoption,
and relationship marketing to identify the specic char-
acteristics and conceptualize their inuence on loyalty
program adoption. We now discuss two sector, two
competitive and demand, and four rm characteristics,
which may impact retailers loyalty program adoption.
Fig. 1 shows the accessory research framework.
2.1. Sector characteristics
Retailers naturally belong to a specic retail sector,
mainly depending on their product assortments. The sector
membership is supported by sector-specic trade organiza-
tions and publications (Voss and Seiders, 2003).
2.1.1. Assortment homogeneity
Assortment homogeneity is the degree of between-
retailer variability in product assortment among rms
operating in the same retail sector (Voss and Seiders, 2003).
If assortments are relatively similar retailers nd difculty
differentiating from each other, and consumers have a
stronger tendency to switch between retailers, e.g., because
of price promotions. Zhang et al. (2000) show analytically
that loyalty programs are preferred over price promotions
when consumers have a strong tendency to switch between
retailers. Under such circumstances, preventing customers
from switching is more protable than attracting new
customers. Heterogeneous assortments are better custo-
mized to the preferences of specic consumer segments,
and thereby function as a relational bond that creates a
natural switching barrier (Bhattacharya and Bolton, 2000;
Sector Characteristics
-Assortment Homogeneity
-Purchasing Frequency
Competitive & Demand
Characteristics
- Competitive Intensity
- Customer Profitability Diversity
Firm Characteristics
- Customer Orientation
- Technological Skills
- Centralization
- Company Size
Fig. 1. Conceptual framework.
431
Sheth et al., 2000). On the other hand, in sectors with
homogenous assortments, loyalty programs can function
as a tool to put up switching costs and support behavioral
loyalty. Therefore, we hypothesize:
H1. Retail companies active in a sector in which product
assortments are more similar are more likely to adopt a
loyalty program.
2.1.2. Purchase frequency
Purchase frequency in a sector is dened as the number
of times an average consumer makes a purchase at a
retailer in the sector (core potential transactions). Dwyer
et al. (1987) describe a buyerseller relationship as a series
of discrete exchanges (transactions), amalgamated through
relational bonds. Because transactions are the crucial
element of the buyerseller relationship, Gronroos (1995)
argues that relationship marketing makes less sense if
consumers purchase infrequently in a retail sector. A
company can then better stick to transaction marketing to
attract the consumer once he makes one of his scarce
purchases (Day, 2000). Relationship instruments such as
loyalty programs provide thus highest benets in sectors
where consumers purchase with high frequency. Further-
more, the value of obtaining consumer-specic data with
loyalty cards is relatively low for a retailer in case of low
purchase frequency, because of the limited number of
transactions per customer.
Second, for a loyalty program to be successful, it is
essential that not only the retailer, but also its customers
adopt the loyalty program (Allaway et al., 2003; Noble and
Phillips, 2004). That is, consumers should subscribe for a
program membership and use their loyalty cards consis-
tently. Because numerous loyalty programs are available
nowadays, consumers are forced to make a selection
among the broad set of available loyalty cards. Customers
Loyalty Program
Adoption
Loyalty Program Effects
Customer
Knowledge
Customer
Loyalty
 ARTICLE IN PRESS
432 J. Leenheer, T.H.A. Bijmolt / Journal of Retailing and Consumer Services 15 (2008) 429442
are more likely to adopt a loyalty card if they anticipate
receiving positive reinforcements from it frequently (Noble
and Phillips, 2004). Positive reinforcements are automati-
cally created at a transaction, when a customer is identied
as a program member and receives program incentives and
rewards. A retail sector in which customers purchase with
high frequency has thus highest potential for developing
program loyalty (Bhattacharya and Sen, 2003; Yi and
Jeon, 2003). Overall, we hypothesize:
H2. Retail companies active in a sector in which con-
sumers purchase with high frequency are more likely to
adopt a loyalty program.
2.2. Competitive and demand characteristics
Competitive and demand characteristics refer to the
marketplace factors that companies face. These character-
istics differ between retailers within the same sector,
because retail companies are often active in specic local
areas (Ingene and Brown, 1987). Furthermore, depending
on their positioning and assortment breadth, retailers face
competition both from companies within the same sector
(intra-type competition) and from retailers in other sectors
that offer substitutes for parts of the retailers assortment
(inter-type competition), e.g., supermarkets from food
specialty stores (Ingene, 1983; Miller et al., 1999).
2.2.1. Competitive intensity
The competitive intensity in a market refers to the degree
to which different retailers try to attract each others
customers. Companies in competitive markets have been
found to be more innovative, because they face higher
demand uncertainty and must continuously search for new
ways to attract and keep customers (Gatignon and
Robertson, 1989). Because in a competitive market the
threat of losing customers is substantial, creating customer
loyalty is especially benecial. A loyalty program creates
competitive advantage by locking in present customers,
rather than attracting new customers. Therefore, we posit:
H3. Retail companies active in a market with higher
competitive intensity are more likely to adopt a loyalty
program.
2.2.2. Customer profitability diversity
Customer protability diversity refers to the variability
in protability among a retailers customers. An important
benet of loyalty programs is the opportunity to differ-
entiate between customers (Zeithaml et al., 2001). Loyalty
programs realize customer differentiation through two
mechanisms: (1) differentiation between loyalty program
members and non-members (Van Heerde and Bijmolt,
2005), (2) differentiation between loyalty program mem-
bers themselves, due to personalized program rewards (e.g.,
with help of points schedules). The potential to differenti-
ate creates the strongest relative advantage over mass
marketing when customer diversity is high (Sheth et al.,
2000). When customers vary substantially in protability, it
is irrational to invest in all of them equally. To optimize
customer equity a company should reward those who are
most protable to make them stay, and it should give
stimulating incentives to those who are not protable yet
(Berger et al., 2002; Rust et al., 2000). A loyalty program
can reward customers purchase behavior or it can select
protable customers and treat them with privileges and
additional service (Bell et al., 2002). Because a loyalty
program can help to spend marketing budgets more
efciently if customers differ substantially in protability,
we hypothesize:
H4. Retail companies with a more diverse customer base
in terms of protability are more likely to adopt a loyalty
program.
2.3. Firm characteristics
For a successful implementation of relationship market-
ing, a company needs appropriate resources and compe-
tencies (Day and Van den Bulte, 2002). Following Day
(2000), we propose three resources that compose the
marketing-relation capability: customer orientation, tech-
nological knowledge and skills, and centralization (captur-
ing integration and alignment of processes). We also
discuss the expected impact of rm size, a concept often
included in studies on management decision making to
control for scale issues.
2.3.1. Customer orientation
Having the appropriate orientation, compromising the
relevant values, behaviors, and mindsets, have been shown
critical to the success of relationship marketing initiatives
(Day and Van den Bulte, 2002; Reinartz et al., 2004).
Customer orientation reects the rms understanding of
its target buyers and its commitment to deliver superior
customer value to these customers continuously (Narver
and Slater, 1990). More customer-oriented companies
search more intensively for opportunities to satisfy
customer needs better (Frambach et al., 2003; Narver and
Slater, 1990). Loyalty program have clear parallels with
customer orientation, because they place customers rather
than products as the central unit of investment and
optimization. Furthermore, through differentiated offers
loyalty programs can improve customer understanding and
create higher customer value through differentiated offers.
Therefore, we posit:
H5. Retail companies that are more customer oriented are
more likely to adopt a loyalty program.
2.3.2. Technological skills
Technological skills refer to the use of sophisticated
technologies and the development of new product and
marketing ideas. Loyalty programs reveal customer data-
bases, but companies often underuse available information
sources or even hardly use them at all (Reinartz et al., 2004;
 ARTICLE IN PRESS
J. Leenheer, T.H.A. Bijmolt / Journal of Retailing and Consumer Services 15 (2008) 429442
Verhoef et al., 2003). Appropriate technological skills to
manage and model customer information are critical (Day,
2000; Hogan et al., 2002). Day and Van den Bulte (2002)
nd that companies need at least a minimal competency
level in handling data and deriving useful information from
them to successfully use CRM technologies. Furthermore,
most loyalty programs have very simple designs, mainly
providing price discounts or simple saving programs
(Dowling and Uncles, 1997). A more sophisticated design
(e.g., progressive saving schedules, elite clubs, targeted
actions, and direct mails) provides better loyalty incentives,
but companies with limited technological skills have
difculty developing such a design. Companies that lack
sufcient technological skills will thus benet from loyalty
programs potential only to limited extent, and we
hypothesize:
H6. Retail companies with better technological skills are
more likely to adopt a loyalty program.
2.3.3. Centralization
In centralized retail companies, the decision-making
authority is concentrated at the head ofce. Relationship
marketing requires a change in focus of the entire
organization, which concerns a change in mindset rather
than a change in rules (Berry, 1995; Gronroos, 1999).
Sorenson and Srensen (2001) nd that managers in
centralized organizations tend to learn through optimizing
existing routines (exploiting), whereas managers or fran-
chisers are more likely to learn through exploring new
routines and innovations. Therefore, decentralized compa-
nies are better able to get strategic commitment from the
local outlets to support a successful loyalty program
adoption (Damanpour, 1991; Frambach et al., 1998),
by motivating customers on loyalty card adoption,
stimulating consistent card usage at the checkouts, and
preventing misusage such as loyalty card exchanges
between customers
Furthermore companies are more likely to be decen-
tralized in case of market heterogeneity and local
differences, because it is under these circumstances
suboptimal to control outlets on central level (Combs
and Ketchen, 2003). At the same time, in heterogeneous
markets it is particular benecial to differentiate between
customers and to obtain customer and store level data
through a loyalty program (Montazemi, 1988). We thus
posit:
H7. Retail companies that are more centralized are less
likely to adopt a loyalty program.
2.3.4. Company size
Large companies are more likely to adopt innovations in
general (Frambach et al., 1998; Wierenga and Oude
Ophuis, 1997). They possess more resources to make
large-scale investments, and these investments are often
more protable because of scale advantages. The costs of
loyalty program adoption are partly xed, e.g., in setting
433
up a card registration and data warehouse system, which
favors the adoption of large-scale programs. Indeed it has
been found that large companies make use of database
marketing initiatives such as loyalty programs to commu-
nicate to specic consumer segments more often than
small companies (Coviello et al., 2000). Relationship
marketing initiatives of small retail rms rather take place
through investments in personal interactions. Therefore,
we hypothesize:
H8. Larger retail companies are more likely to adopt a
loyalty program.
2.4. Loyalty program effectiveness
We dene improvements in customer loyalty and
customer knowledge as the two key benets of loyalty
programs. Furthermore, we argue that customer knowl-
edge stimulates customer loyalty (see Fig. 1). Customer
knowledge has been recognized as an important tool to
enhance customer loyalty in mass markets (Coviello et al.,
2002; Hogan et al., 2002). When a retailer knows his
customers on segment or even individual level he can
provide better customer value and develop stronger
customer relationships. This can take place through e.g.,
micromarketing, direct mail targeting, optimization of
loyalty program design, assortment optimization, etc.
Furthermore, an interesting empirical question is to what
extent sector, competitive and demand, and rm char-
acteristics inuence loyalty program effectiveness. We
expect that these factors serve as a selection mechanism
based on expected benets and costs during the adoption
stage. If selection is appropriate the success of the program
is hardly affected by these factors, and will depend mainly
on implementation and usage factors (Alavi and Joa-
chimsthaler, 1992). Wierenga and Oude Ophuis (1997) for
example found that market and organizational factors do
not inuence the effectiveness of management decision
support systems. An analysis of loyalty program effective-
ness will thus also shine light on the appropriate use of
sector, competitive and demand, and rm characteristics as
criteria for loyalty program adoption.
3. Research method
To test our hypotheses, we conduct a study among retail
companies active in 15 different retail sectors. We use two
data sources: expert judgements (measurement of sector
characteristics) and survey data (measurement of compe-
titive and demand characteristics, rm characteristics, and
loyalty program adoption and effectiveness).
3.1. Expert judgements: sample and measures
Because an appropriate assessment on sector character-
istics requires an overall perspective on the sectors, we
opted for the measurement of these characteristics by 10
 ARTICLE IN PRESS
434 J. Leenheer, T.H.A. Bijmolt / Journal of Retailing and Consumer Services 15 (2008) 429442

retail experts. We used ve academics active in retail Table 1

marketing and ve practitioners with experience in Sample description
different retail sectors (as manager, market researcher, or Sector Number of Loyalty program Assortment Purchase
consultant). Expert judgements have been widely used in respondents adoption (%) homogeneity frequency
business research, and have proved a valid method to
obtain information (Bunn and Wright, 1991). Supermarkets 17 65 4.0 High
Food 7 14 1.9 High
To measure the sector characteristics assortment homo-
specialty
geneity and purchase frequency, each expert rated assort- Apparel 44 35 1.6 High
ment homogeneity and purchase frequency for each of the Shoes 15 40 2.5 Low
15 sectors. For the measurement of assortment homo- Sports 9 44 3.0 Low
geneity we closely followed the measure used by Voss and Drugs store 5 80 3.8 High
Optics 6 33 2.9 Low
Seiders (2003). The experts were asked to rate on a seven- Consumer 13 23 3.7 Low
point scale to what extent the assortments between the electronics
players in sector j differed. Because this measure actually Photographer 6 50 3.2 Low
captures assortment heterogeneity, we then reversed the DIY 12 33 4.0 Low
scores. To measure purchase frequency the experts were Department 7 14 2.3 High
store
asked to indicate how often an average consumer
Living 20 10 1.8 Low
purchases something in sector j. We used two response Gasoline 10 100 4.5 High
categories (o10/410 purchases per year), so that we Toys 5 20 3.8 Low
obtained a categorical variable with two levels (dummy Books and 4 0 2.7 High
variable). To gauge the reliability of the experts assess- music
ment, we examined the degree to which the experts agreed Total sample 180 37 3.0
in their evaluations (Hughes and Garrett, 1990). The
interjudge reliability was sufciently high for both purchase
frequency (interjudge agreement 88.7%) and assortment respondents (slowest 25%) with the rest of the sample on
homogeneity (a 0.83). all constructs in our framework (Armstrong and Overton,
1977). No signicant differences appeared for any of the
3.2. Survey: sample constructs (all p-values40.20). Table 1 shows the response
rate per sector and the sector characteristics.
The sampling frame was formed by a commercial
database that contains all retail chains with at least seven 3.3. Survey: measures
outlets or 100 employees in the Netherlands. From this
database, we excluded companies that register customers First, the questionnaire was pre-tested among three
and purchases automatically and for who loyalty cards do academics, three research consultants, and three retail
not yield new customer information (e.g., video rentals), managers, each of which is strongly involved in retailing
and companies strongly limited in their marketing actions and loyalty program projects. The competitive and
because of government regulation (e.g., pharmacies). All demand, and rm characteristics were mostly measured
companies in the remaining 15 retail sectors were contacted with multi-item seven-point Likert scales. The specic item
by phone to obtain the name and e-mail address of the formulation and scale reliabilities can be found in
person responsible for the companys marketing policy. Appendix A. As the reliability was sufciently high for
This also enabled us to remove companies that had gone all scales (a40.75), we obtained values for each construct
bankrupt or that appeared not to operate in a business-to- by averaging the corresponding items. For measuring
consumer market. The nal sampling frame consisted of competitive intensity (a 0.79), we used the scale devel-
418 retail companies. They received a questionnaire in oped by Jaworski and Kohli (1993). Customer protability
March 2003, and could choose to complete it by regular diversity was measured with a single-item scale that
mail or e-mail. A reminder was issued after two weeks. As measures the extent to which companies perceive their
an incentive, we offered all respondents a report with the customer base as diverse in terms of protability. The scale
study ndings. for customer orientation (a 0.85) was derived from
We received 180 complete questionnaires, for a response Narver and Slater (1990). For technological skills
rate of 43.1%. This response rate is very high for this type (a 0.79) we based ourselves on the scale of Gatignon
of research, which indicates that loyalty programs are an and Xuereb (1997). The retailers were rst instructed that
important topic to retailers. In the sample, 67 companies technology was referring to the use of retail computeriza-
operated a loyalty program (37%), which is only margin- tion devices, such as inventory management systems,
ally higher than in the sampling frame (33%). For 34% of electronic scanners, infrared trafc counters, etc. The scale
the companies, the (commercial) director completed the for centralization (a 0.78) was adapted from Jaworski
questionnaire, and in most other cases a marketing and Kohli (1993), but reformulated to measure specically
manager. To test for non-response bias, we compared late the hierarchical relation between retail outlets and the head
 ARTICLE IN PRESS
J. Leenheer, T.H.A. Bijmolt / Journal of Retailing and Consumer Services 15 (2008) 429442 435

ofce. Company size was measured as the number of
outlets of the retail company.
Retail companies were asked to indicate whether they
use a loyalty program (see Appendix A). According to the
denition used in this survey a loyalty program consists of:
an explicit membership decision, registration and identi-
cation at every purchase decision, and special membership
benets such as frequency rewards and privileges. Retail
companies with a loyalty program were asked to report on
its effectiveness. To measure the effects of loyalty programs
on customer loyalty, we closely followed the framework of
Oliver (1999). Oliver (1999) argued that customer loyalty
consists of four components: cognitive loyalty, affective
loyalty, conative loyalty, and action loyalty. We used a
scale of four items, each of which measures the perceived
effect of the loyalty program on one of the loyalty
components (a 0.76). The customer knowledge scale
reects the degree to which the loyalty program improves
knowledge about needs and wishes of individual customers
and customer segments, in this way decreasing the distance
to customers as traditionally seen in mass markets
(a 0.84). Using perceived measures is common for
management research, to measure, for example, relation-
ship quality (Jap, 2001; Kumar et al., 1992) or market
performance (Li and Calantone, 1998). A potential
problem with self-reports is that respondents may have a
tendency to give social wishful answers and overrate their
own performance (Day and Van den Bulte, 2002). We
should therefore pay limited attention to the absolute value
of the reported loyalty program effectiveness. However, we
do not suspect the existence of relative biases, which makes
the self-reported measures suitable to analyze differences
between companies in loyalty program effectiveness.
Table 2 presents descriptive statistics for the dependent
and independent variables in our framework. All correla-
tions between the independent variables are rather low;
that means smaller than 0.33. Multicollinearity is not a
problem in our analyses, as indicated by the fact that all
variance-ination-factors are below 2.
4. Results
4.1. Loyalty program adoption
To assess the drivers of loyalty program adoption by
retailers, we estimate a random effects probit model
(Greene, 2000), because each retailer belongs to a specic
retail sector. If part of the unexplained variance is due to
unobserved sector characteristics, the assumption of
independent error terms is violated. The random effects
model accounts for this by estimating an error term on
sector-level j (uj) and one on company-level i (eij).
The model estimates are presented in Table 3. The model
has a pseudo R2 of 0.328 (Franses and Paap, 2001, p. 64)
and predicts 71.67% of the cases correctly (cut-off value of
0.50). Because a probit model is non-linear in nature,
coefcient estimates give limited insight in effect sizes.
Therefore, we computed the probability of loyalty program
adoption when all variables are xed on average sample
value, with only the signicant explanatory variable of
interest being varied over its entire range. Fig. 2 provides a
graphical presentation of the effect sizes of three contin-
uous explanatory variables, namely assortment homoge-
neity, customer orientation, and protability diversity.
The results show that both sector characteristics affect
loyalty program adoption in the expected direction.

Table 2
Descriptive statistics

Variables Mean (standard Cronbachs a Correlations

deviation)
1 2 3 4 5 6 7 8 9 10 11

Dependent variables
1. Loyalty program adoptiona 0.37 (0.49) n.a. 1.00 n.a. n.a. 0.22 0.16 0.12 0.17 0.16 0.02 0.11 0.10
2. Customer knowledgeb 4.32 (1.28) 0.76 n.a. 1.00 0.38 0.23 0.14 0.07 0.15 0.02 0.18 0.09 0.05
3. Customer loyaltyb 5.21 (0.85) 0.84 n.a. 0.38 1.00 0.08 0.05 0.06 0.03 0.13 0.19 0.22 0.12

Sector characteristics
4. Assortment homogeneity 4.28 (0.93) n.a. 0.22 0.23 0.08 1.00 0.33 0.25 0.24 0.03 0.18 0.15 0.24
5. Purchase frequencya 0.52 (0.50) n.a. 0.16 0.14 0.05 0.33 1.00 0.01 0.06 0.07 0.15 0.09 0.19
Competitive and demand characteristics
6. Competitive intensity 4.83 (1.28) 0.79 0.12 0.07 0.06 0.25 0.01 1.00 0.08 0.03 0.02 0.12 0.04
7. Customer protability diversity 4.88 (1.6) n.a. 0.17 0.15 0.03 0.24 0.06 0.08 1.00 0.05 0.12 0.17 0.23
Firm characteristics
8. Customer orientation 5.81 (0.92) 0.85 0.16 0.02 0.13 0.03 0.07 0.03 0.05 1.00 0.01 0.19 0.14
9. Technological skills 4.14 (1.31) 0.89 0.02 0.18 0.19 0.18 0.15 0.02 0.12 0.18 1.00 0.09 0.03
10. Centralization 4.16 (1.49) 0.78 0.11 0.09 0.22 0.15 0.09 0.12 0.17 0.19 0.09 1.00 0.03
11. Size 91.71 (131.9) n.a. 0.10 0.05 0.12 0.24 0.19 0.04 0.23 0.14 0.03 0.03 1.00
a
As this variable is binary the column correlations refers to Spearmans r.
b
This variable is measured only for the subset of companies that have adopted a loyalty program.
 ARTICLE IN PRESS
436 J. Leenheer, T.H.A. Bijmolt / Journal of Retailing and Consumer Services 15 (2008) 429442

Table 3
Loyalty program adoption (random effects probit model)

Explanatory variable Hypothesis and expected sign Coefcient z-Value p-Valuea

Constant 1.055 0.71 0.240

Sector characteristics
Assortment homogeneity H1: + 0.478 2.27 0.011
Purchase frequency H2: + 0.599 1.72 0.042
Competitive and demand characteristics H3: +
Competitive intensity H4: + 0.120 1.32 0.094
Customer protability diversity H5: + 0.111 1.54 0.062
Firm characteristics H6: +
Customer orientation H7: 0.295 2.06 0.019
Technological skills H8: + 0.004 0.05 0.496
Centralization 0.104 1.32 0.093
Size 0.001 0.65 0.262
r 0.172

Log likelihood: 101.627

Pseudo R2: 0.328
Percentage correctly predicted: 71.67%
***
po0.01.
 po0.10.
 po0.05.
a
One-sided tests.

0.9 competitive intensity, though only marginally signicant

Assortment

0.8
Homogeneity (H3 supported, p 0.10). As hypothesized, customer
Profitability protability diversity stimulates loyalty program adoption
Differences
0.7 (H4 supported, p 0.06). The maximum change in this
Customer
Orientation variable would change the probability of adoption by 21%
P (LP adoption)

0.6
points.
0.5
For the rm characteristics, we nd mixed evidence for
0.4 the hypothesized relations. Customer orientation positively
0.3
inuences loyalty program adoption (H5 supported,
p 0.02). The effect on adoption is considerable, namely
0.2 43% points. Furthermore, centralized companies are less
0.1 likely to adopt a loyalty program, and the effect is
marginally signicant (H7 supported, p 0.10). Finally,
0
1 2 3 4 5 6 7 the other two rm characteristics, technological skills, and
Scale Values company size have no signicant effect on loyalty program
adoption (H6 and H8 rejected).
Fig. 2. The effects of assortment homogeneity, customer orientation, and
customer protability diversity on loyalty program adoption. 4.2. Loyalty program effectiveness

Assortment homogeneity (p 0.01) and purchase fre-
quency (p 0.04) stimulate loyalty program adoption
(H1 and H2 supported). The largest effect comes from
assortment homogeneity. Dependent on this variable the
probability of loyalty program adoption can differ 73%
points between sectors (see Fig. 2). Loyalty programs
appear more often in sectors with an average consumer
purchase frequency higher than 10 times a year: the
probability of loyalty program is 21% points higher for
those sectors than for sectors with a low purchase
frequency, namely 46 versus 25%.
Empirical evidence also exists for the proposed relations
between the competitive and demand characteristics and
loyalty program adoption. A positive effect was found for
Next, we study the perceived effectiveness of loyalty
programs using only those companies in the sample with a
loyalty program (67 companies). We perform two random-
effects regression analyses, with perceived effects on,
respectively, customer knowledge and customer loyalty as
the dependent variables. As independent variables we
include the sector, competitive and demand, and rm
characteristics, and in the equation for customer loyalty
also customer knowledge. A statistical problem with a
regression analysis on the effectiveness of adopted pro-
grams is the selection bias. The regression parameters
will be biased if some (partly unobserved) factors that
explain loyalty program adoption also explain effectiveness
(Verbeek, 2000, p. 208). To correct for this we use the
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J. Leenheer, T.H.A. Bijmolt / Journal of Retailing and Consumer Services 15 (2008) 429442 437

Table 4
Determinants of loyalty program effectiveness (Random-Effects Regression Model with Heckman Correction)

Variable Loyalty program effects

Customer knowledge Customer loyalty

a
Coefcient t-Value p-Value Coefcient t-Value p-Valuea

Constant 9.757 1.26 0.21 0.952 0.20 0.84

Sector characteristics
Assortment homogeneity 1.752 1.56 0.12 1.052 1.56 0.12
Purchase frequency 1.414 1.01 0.31 0.914 1.09 0.28
Competitive and demand characteristics
Competitive intensity 0.314 0.93 0.35 0.198 0.97 0.33
Customer protability diversity 0.279 0.97 0.33 0.174 1.00 0.32
Firm characteristics
Customer orientation 0.976 1.33 0.18 0.686 1.55 0.12
Technological skills 0.295 2.01 0.04 0.033 0.36 0.72
Centralization 0.453 1.71 0.09 0.313 1.92 0.05
Size 0.003 1.34 0.18 0.001 0.57 0.57
Customer knowledge
Heckmans correction term 4.820 1.28 0.20 0.265 3.34 0.001
r 0.051 3.071 1.35 0.18
Model t R2 0.186 R2 0.255
Within sectors: 0.177 Within sectors: 0.210
Between sectors: 0.179 Between sectors: 0.551
 po0.10.
po0.05.
po0.01.
a
Two-sided tests.

Heckman two-step procedure (Tobit2 model), and include
the so-called Heckman-correction term (or inverse Mills
ratio) as an additional independent variable. The results of
the regression analyses are presented in Table 4.
As expected, none of the sector, competitive and demand
characteristics inuences loyalty program effectiveness. As
some of these factors do affect loyalty program adoption,
this nding indicates that retail companies are basing their
loyalty program adoption decision appropriately. With
respect to the rm characteristics, again many factors do
not signicantly affect customer knowledge or customer
loyalty. However, technological skills have a positive
inuence on customer knowledge (po0.05). Technological
skills could be a necessary condition for other factors to
have an impact on customer knowledge. Therefore, we
tested the interaction effect of technological skills with each
of the other explanatory variables. However, none of these
interaction effects was signicant at the 0.05-level.
Furthermore, we nd that centralization affects customer
knowledge generated positively but customer loyalty
negatively. Finally, customer knowledge obtained through
loyalty program data enhances customer loyalty (po0.01)
as expected.
5. Conclusions
Retail loyalty programs are widely used, but the
retailers perceptions on this marketing instrument have
received scant attention in the literature. Therefore, we
investigate which sector, competitive and demand, and rm
factors inuence loyalty program adoption and effective-
ness. The formulated hypotheses are tested with a survey
among 180 retail companies, of which 37% have a loyalty
program. We nd that assortment homogeneity, purchase
frequency, competitive intensity, customer protability
differences, customer orientation, and centralization affect
loyalty program adoption. However, the investigated
characteristics hardly inuence loyalty program effective-
ness, which is in line with the managerial decision making
literature (Alavi and Joachimsthaler, 1992; Wierenga and
Oude Ophuis, 1997). Only technological skills and cen-
tralization enhance customer knowledge; centralization
negatively affects customer loyalty.
Some sectors are intrinsically more suitable for relation-
ship marketing or for loyalty programs specically. In line
with the theoretical work of Zhang et al. (2000), we nd
that loyalty programs appear more often in sectors with
assortments that are relatively similar across retailers.
Furthermore, loyalty programs are used relatively often in
sectors where customers purchase with high frequency.
Existing literature has indeed focused on loyalty program
effects in retail sectors with relatively homogeneous
assortments and high purchase frequency, such as super-
markets (Bell and Lal, 2002; Leenheer et al., 2007; Magi,
2003), internet grocery (Lewis, 2004), and specialty stores
(Yi and Jeon, 2003). However, loyalty programs can still be
 ARTICLE IN PRESS
438 J. Leenheer, T.H.A. Bijmolt / Journal of Retailing and Consumer Services 15 (2008) 429442
successful for individual retailers in other sectors. For
example, the Dutch upscale department store Bijenkorf
operates a successful loyalty program in a heterogeneous
sector, in which customers typically purchase at relatively
low frequencies. Program members pay a yearly fee in
exchange for targeted promotions, saving programs, and
special events congruent with the chains upscale image
(such as classical concerts).
The reason that loyalty programs like those of Bijenkorf
are successful must be found in the rms market position.
Coviello et al. (2000) nd clear differences in relationship
marketing practices between sectors, but show that
differences within a sector are considerable too. First of
all, companies are more likely to adopt loyalty programs
when their customers differ strongly in terms of prot-
ability. Customer diversity offers potential for a customer-
centered approach, in which loyalty programs t well
(Sheth et al., 2000). An upscale department store (like
Bijenkorf) is typically characterized by customer differ-
ences in relationship intensity (Reynolds and Beatty, 1999).
Furthermore, in a market in which competitive forces
are intense a stronger need exists to be innovative in order
not to lose existing customers (Gatignon and Robertson,
1989). Then, the adoption of a loyalty program supports
and structures management effort to enhance customer
retention.
A retailers loyalty program adoption is also inuenced
by its rm characteristics. We show that customer
orientation puts a company in a better position to take
advantage of loyalty programs benets. This is in line with
previous research that showed that customer orientation
enhances the adoption of database marketing (Verhoef and
Hoekstra, 1999). Technological skills do not play a role in
the decision to adopt a loyalty program. Less technological
skilled companies can probably adopt simpler systems.
However, it appears that they are less successful in
obtaining customer knowledge. Retailers may thus over-
estimate the value that frequent purchase information can
provide them, and nd it difcult to use the information in
a meaningful manner. Overall, decentralized companies are
more likely to adopt loyalty programs, but both centralized
and decentralized companies can gain from loyalty
programs. Centralized companies realize better customer
knowledge from their programs, but decentralized compa-
nies are more likely to improve customer loyalty.
In contrast with innovation literature (see Camison-
Zornoza et al., 2004 for a recent meta-analytic overview),
we nd no support for a positive relation between company
size and loyalty program adoption. Camison-Zornoza et al.
(2004) concluded that the type of innovation and the
measurement of rm size are only very weak moderators of
the sizeinnovation relationship. Hence, these factors can
hardly or not at all explain the effect size found in our
study. In addition, they found that the relationship
between rm size and innovation adoption is strongly
affected by the type of organization: the relationship is
particularly strong for service companies compared to
manufacturing organizations. This enlarges the contra-
diction with our nding. The absence of a signicant,
positive effect in our study could be due to a range
restriction of the rm size variable (Hunter and Schmidt,
2004; Sackett and Yang, 2000). Limiting the sample to
retail organizations with at least seven outlets or 100
employees may have a severe negative impact on the size of
the relationship observed. In particular, scale disadvan-
tages might apply only for very small retailers, which are
not in our sampling frame. Finally, loyalty programs may
be an attractive alternative for mass-communication
through newspapers and television, for which small
companies face even larger scale disadvantages.
We nd a strong positive effect of customer knowledge
on customer loyalty. Data analysis is crucial if a rm is to
understand its customers. Many companies introduce
loyalty programs to obtain customer-specic purchase
data. However, some companies hardly use this informa-
tion and do not improve their customer knowledge.
Increased customer knowledge enables implementation of
targeted actions that enhance loyalty, such as direct
mailings, and the loyalty program thereby indirectly
stimulates customer loyalty.
5.1. Managerial implications
Companies that consider a loyalty program adoption
should rst of all determine whether the sector in which
they are operating is intrinsically suitable for this instru-
ment. At least assortment homogeneity and purchasing
frequency should be taken into account. If the sector is less
suitable for loyalty programs, a company must realize that
appropriate competitive, demand, and rm characteristics
should compensate for this. In competitive markets, there
is more to gain from a loyalty program. However, the same
holds for your competitors, and existing research shows
that loyalty programs get less effective if a large number of
competitors use them as well (Leenheer et al., 2007; Magi,
2003). If your customers are already involved in several
other programs, they may be reluctant to adopt another
new loyalty card (Noble and Phillips, 2004). Furthermore,
a company with a diverse customer base can benet highly
from loyalty programs opportunities for customer differ-
entiation. Instead of treating all loyalty cardholders
similarly, a retailer could better target promotions and
rewards to specic customer segments. Segmentation can
be based on protability, but also category expenditures,
cross-category buying, previous brand choices, etc. For
more advanced reward systems supporting such segmenta-
tions, a company should properly analyze its loyalty
program data. In this way, improvements in customer
knowledge will increase the effectiveness of marketing
effort and thereby also enhance customer loyalty.
Furthermore, when taking decisions regarding the
loyalty program, a company should evaluate its own
resources. Loyalty programs are less likely to be adopted
by retailers that are product rather than customer oriented.
 ARTICLE IN PRESS
J. Leenheer, T.H.A. Bijmolt / Journal of Retailing and Consumer Services 15 (2008) 429442
In customer-oriented companies, the loyalty program can
be an integrated component of all marketing efforts. If
technological skills are lacking, companies are not able to
use loyalty programs to full extent. Firms should not
collect data without any future intended purpose, but
carefully plan their customer knowledge management. In
addition, sufcient resources should be placed towards
obtaining better customer knowledge (Damanpour, 1991).
In centralized companies it is more difcult to convince
individual outlets and employees. Companies should set
therefore the right incentive structure to optimize their
cooperation (Day and Van den Bulte, 2002). Though large
rms benet from scale advantages, loyalty programs can
also be a proper investment for small rms. When taking
the adoption decision, a company should consider the
relative, rather than the absolute, advantage of loyalty
program usage. That is, it must trade-off between the
different strategic options available (e.g., communication
through loyalty programs versus television commercials),
preferably by taking into account their impact on customer
equity (Rust et al., 2004).
5.2. Limitations and future research
Our study focuses on the retail sector, but loyalty
programs also appear widely in other industries, such as
airlines, lodging (Bell et al., 2002), and nancial services
(Verhoef et al., 2001). Given differences in market structure
and product type, the drivers of loyalty program adoption
and effectiveness may differ. For example, in the airline
industry customer differences relate strongly to the
distinction between business and private customers. De-
spite this limitation of our sample, we postulate that factors
like product homogeneity have caused high levels of
adoption in, for example, the airline industry also.
A loyalty program aims to attract and stimulate loyal
customers, assuming that they are the most protable
customer group for the retailer. However, frequent
customers are not necessarily protable, because they
may show cherry picking behavior. Furthermore, loyalty
programs themselves may attract cherry pickers instead of
loyal customers. Unfortunately no information was avail-
able on customer protability to check for these possibi-
lities. However, it is important for a company to know
which customers are most protable, to know whether
protable customers show loyalty behavior, in order to
decide whether a loyalty program is a suitable relational
marketing instrument.
Table A1
Variable
Sector characteristics
Assortment homogeneity
Voss and Seiders (2003)
Purchase frequency
439
Self-reports have been frequently used in business
research, but the psychometric properties of such measure-
ments may affect the ndings of a study (Harrison and
McLaughlin, 1996; Podsakoff and Organ, 1986). As we
mostly apply self-reports and our conclusions are mostly
based on relative numbers, comparing variables and
companies, the bias will be limited in our case. Contrary
to previous studies on loyalty programs, we examine a wide
range of retail sectors, which causes insurmountable
problems for obtaining and analyzing purchase or other
behavioral data.
The costs of rewarding members and analyzing data will
differ between various loyalty program designs and
between companies. To make a balanced decision on
loyalty program adoption and choice on loyalty program
design, a company should account for these cost differ-
ences. When studying the adoption and effectiveness of
loyalty programs, we did not explicitly consider the costs
component. However, the respondents in our study will
most probably have taken costs into account when making
their decisions and when lling-in the self-reports through
our questionnaire.
We found a substantial effect of customer knowledge on
customer loyalty. Further research can study the process of
generating customer knowledge by means of loyalty
programs or other procedures. Furthermore, it will be
interesting to explore in detail how information on
behavior of individual customers can be utilized for
marketing decisions (Rossi et al., 1996). Finally, extant
research and also this study mostly treat all loyalty
programs the same, whereas large variation exists in
design of the programs. Future research should examine
whether design factors have an impact on adoption by
retailers and customers and on the effectiveness of loyalty
programs.
Acknowledgments
A previous version of the paper appeared as MSI-report
03-121. The authors thank Inge Geyskens, Els Gijsbrechts,
and Peter Verhoef for very constructive and insightful
comments.
Appendix A. Scale operationalization
The specic item formulation and scale reliabilities can
be found in Table A1.
Operationalization (items)
The assortments of the different retailers in this sector are:
Very similaryvery different (seven-point scale)
How often does an average customer purchases something in this retail sector?
 ARTICLE IN PRESS
440 J. Leenheer, T.H.A. Bijmolt / Journal of Retailing and Consumer Services 15 (2008) 429442

Table A1 (continued )

Variable Operationalization (items)

 p10 times a year (n 86)

 410 times a year (n 94)

Competitive and demand characteristics

Customer protability diversity Our customers differ strongly in protability
Competitive intensity 1. Competition in our industry is cut-throat
a 0.79 2. In our industry one competes often with price promotions and other marketing
Adapted from Jaworski and Kohli (1993) actions
3. Price competition is a hallmark of our industry

Firm characteristics
Customer orientation 1. We are very committed to our customers
a 0.85 2. Customer satisfaction is an important objective when determining our strategy
Adapted from Narver and Slater (1990) 3. The creation of customer value plays a central role in our strategy
4. We thoroughly study the needs of our customers

Technological skills 1. Our company is one of the rst to adopt new technologies
a 0.89 2. We have more technological knowledge than the competition
Adapted from Gatignon and Xuereb (1997) 3. Compared to the competition we make use of more advanced technologies

Centralization 1. Also for minor decisions, individual outlets have to consult the head ofce
a 0.78 2. Individual outlets can take only limited actions without approval of the head
Adapted from Jaworski and Kohli (1993) ofce.
3. In general, important decisions are announced only to the individual outlets
after the nal decision has been taken by the head ofce

Company size Total number of outlets

Loyalty program adoption and effectiveness
Loyalty program adoption Does your company have a loyalty program according to the description below?
Loyalty program: customers can choose to subscribe as a member of the loyalty
program and receive a loyalty card. A member must identify at every purchase
with its loyalty card after which purchases and eventually saving points are
registered. The loyalty program provides benets to the customer such as
frequency rewards, special discounts, mailings, and privileges, etc.
Customer loyalty 1. Customers are convinced better of the companies benets
a 0.76 2. Customers feel a stronger tie with our company
Adapted from Oliver (1999) 3. Customers are less prone to buy at competitors
4. Customer loyalty in terms of buying is higher

Customer knowledge 1. We better understand customers needs and wishes

a 0.84 2. The distance between our customers and us has decreased
3. We can better distinguish between different customer groups

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