Loyal customers are desirable because they buy more often and in greater quantities, and they often bring back their friends, acting as unpaid advocates for the organization. Because of this, programs designed to encourage customer loyalty are in widespread use in supermarkets, airlines, hotel chains and many other commercial organizations. Loyalty programs tend to follow a similar pattern, tracking the spending habits of the consumer and rewarding her purchasing behavior. However, loyalty programs must be implemented with care to avoid some common ethical pitfalls.
Loyalty programs depend on the collection of customer information, which is used to personalize marketing campaigns, recommendations and discounts. However, the company's need to understand the customer must be balanced against the individual's need for privacy. As different customers place a different value on privacy, the organization collecting the information must fully disclose what information is collected and how it will be used so the customer's informed consent can be secured.
Loyalty programs are, almost by definition, discriminatory: They must discriminate against disloyal customers. However, as loyalty programs seek to increase retention of profitable customers, they may accidentally reward the wealthy and discriminate against the poor or otherwise lead to situations in which non-qualified customers perceive the denial of equal treatment as discrimination. In some cases, discrimination can make financial sense, as some customer segments are more costly to serve than others.
Loyalty programs that reward decision makers may run into ethical issues when the decision maker is separate from the payer. For example, a business traveler in a reimbursed business trip may elect to stay in a particular hotel that will reward him with a free leisure stay. Although the loyalty program will achieve its goal and foster repeat visits from the decision maker, it may be perceived as unethical and related to the original concept of "kickback."
What Loyalty Is
The actual nature of loyalty is at the core of both the ethics and the pragmatics of loyalty programs. When loyalty is equated with increased spending, loyalty programs may discriminate against the poor in favor of the wealthy, while simultaneously degenerating into a bombardment of coupons and special offers. Loyalty programs based on this dynamic risk being both unethical and ineffective, as it's easier for customers to side with whoever gives them the biggest coupon. Programs based on trust and long-term relationships, on the other hand, are more likely to generate actual loyalty.
- "International Journal of Service Industry Management"; Customer Frustration in Loyalty Programs; Bernd Stauss et al; 2005
- "Bloomberg Businessweek"; The Problem with Loyalty Programs; Steve McKee; May 2007
- "Journal of the Academy of Marketing Science"; Implications of Loyalty Program Membership and Service Experiences for Customer Retention and Value; Ruth N. Bolton et al; 2000
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