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Working Paper

Feeling Superior: The Impact of Loyalty Program Structure on Customers’ Perceptions of Status

Joseph Nunes and Xavier Drèze, 2008 [08-102]

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Companies are increasingly using loyalty programs to retain customers. They group customers into distinct classes based on their purchase history, creating status hierarchies in which customers who are more loyal receive different and better experiences. They enable customers to exhibit their status via priority lines, special luggage tags, and lounges or other spaces for premier customers. The tradeoff facing any company that stratifies its customers in this way is between the number of customers it makes elite and the customers’ perception of status.

The authors focus on assessing the impact of different hierarchical structures on perceptions of status. They define status as a person’s rank on a socially relevant and recognized dimension; status motivates human behavior because people are prone to compare themselves with others. Their research focuses on two basic characteristics: (1) the number of tiers and (2) the relative size of each tier, and investigates the impact of different and changing structures.

From a managerial perspective, the authors shed light on the number of tiers a loyalty program should include and the impact of changes to its structure. A three-tier program (for example, gold, silver, and no status) is more satisfying to all involved than a two-tier program (gold and no status). They show that the size of the gold tier can be increased without affecting the status perceptions of those in the top tier by adding a silver tier. Thus, a firm can increase the total number of customers it recognizes in a loyalty program in two ways: by expanding the top tier and adding a second tier. In addition, the evidence suggests that adding a third elite tier benefits perceptions of status for those in the second tier, while not affecting those in the top tier.

About the authors
Joseph C. Nunes is Associate Professor of Marketing, Marshall School of Business, University of Southern California, Los Angeles. Xavier Drèze is Assistant Professor of Marketing, Wharton School, University of Pennsylvania. Both authors contributed equally.

Included in the following collections:
MSI Reports 2008
Executive Director's Letter 08-001

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