Competing Loyalty Programs: Impact of Market Saturation, Market Share, and Category Expandability

Abstract

Loyalty programs have become an important component of firms’ relationship management strategies. There are now some industries in which numerous rival loyalty programs are offered, inducing intense competition among these programs. However, existing research on loyalty programs has often studied such programs in a non-competitive setting and has often focused on a single program in isolation. Addressing this gap, this research examines the effect of a firm's competitive positioning and market saturation on the performance of the firm's loyalty program. Based on the analysis of firm- and individual-level data from the airline industry, the results indicate that larger firms tend to benefit more from their loyalty program offerings than smaller firms. Moreover, when the product category demand is rigid, the impact of an individual loyalty program decreases as the marketplace becomes more saturated with competing programs. However, when the product category is highly expandable, the saturation effect disappears. Under such situations, loyalty programs can help an industry gain competitive advantage over substitute offerings outside the industry, and multiple programs can effectively coexist even under a high level of market saturation.