Customer loyalty programs are attempts to bond customers to a company

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.

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1. 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


2. The passage mentions each of the following as a potential reason for customers' divided loyalty EXCEPT

A. A particular brand may be the only one available

B. A particular brand may be offered at a discount

C. Customers will often buy multiple brands out of a desire for variety

D. Customers will often buy a unfamiliar brand when it is new on the market

E. Customers will often buy certain brands for certain occasions


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3. According to the passage, advocates of the customer loyalty programs claim which of the following about highly loyal customers?

A. They often expect price discounts a reward for their loyalty to the product

B. They can be served at lower expense to a company than nonloyal customers

C. They tend to be light but predictable buyers of the product or service in question

D. They are unlikely to try out new brands or products that appear on the market

E. They are difficult to differentiate statistically from other types of repeat customers


4. The passage suggests that companies that invoke the "80/20" principle in customer loyalty programs believe which of the following?

A. A well designed customer loyalty program can increase the number of company's loyal customers by as much as 80 percent.

B. About 20 percent of any given company's most profitable customers are likely to be its competitors' most profitable customers as well.

C. It is unreasonable to expect more than 20 percent of customers to be 100 percent loyal to any particular brand of the product.

D. Even "loyal" customers cannot reasonably be expected to stick to one particular brand of product more than 80% of the time.

E. A relatively small number of loyal customers is responsible for about 80% of the company's profits.


5. The second paragraph functions primarily to

A. propose solutions to certain problems inherent in customer loyalty programs.

B. emphasize certain risks inherent in customer loyalty programs.

C. address certain contentions put forth by advocates of customer loyalty programs.

D. defend certain specific aspects of customer loyalty programs against criticism.

E. reconcile competing view points regarding the efficacy of customer loyalty program.


6. The author of the passage suggests that which of the following is most likely to be true of a customer who is exclusively loyal to a particular brand of product?

A. The customer probably began buying that brand of product only within the past year.

B. The customer is probably among the most profitable customers for the company that manufactures that brand of product.

C. The customer is probably not a heavy consumer of that particular type of product.

D. The customer is probably a loyal customer when purchasing other types of products as well.

E. The customer probably sampled numerous brands of that type of product before becoming loyal to a particular brand.