MGT 215 Module 5 Loyalty Programs and Retention Example

Ten Sandwiches and a Free One: Should a Neighborhood Sandwich Chain Rebuild Its Loyalty Program?

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Business Administration Program, Aspen University

MGT 215: Customer Relationship Management

Instructor Name

Month Day, Year

Ten Sandwiches and a Free One: Should a Neighborhood Sandwich Chain Rebuild Its Loyalty Program?

Third Ward Sandwich Company, a composite business, operates twelve sandwich shops across Milwaukee, Wisconsin, with about $9.6 million in annual sales and an average ticket of $11.40. For eight years it has offered a paper punch card: buy ten sandwiches and get one free. Managers estimate that about 30% of transactions involve a card, but no one knows who the cardholders are, because the cards record nothing. A new national chain with an app-based points program opened four locations nearby last year, and Third Ward's managers want an app of their own. This paper evaluates whether a new program would improve customer retention and what design would work best.

What the Current Program Does

The punch card is cheap and familiar. It costs nothing to run beyond printing, and customers understand it at once. But it collects no data, so the chain cannot tell whether cardholders visit more often than others, and cards are easily lost, which means many customers never reach a reward. Staff report that a small number of regulars hold most completed cards; occasional customers often have a card with two or three punches buried in a wallet.

Do Loyalty Programs Change Behavior

Dowling and Uncles (1997) argued that loyalty programs are often less effective than managers expect. In competitive markets, they found, programs tend to attract customers who already buy the brand heavily, so rewards go to purchases that would have happened anyway, and competitors quickly copy any successful program, leaving no advantage. They suggested programs work best when they support the product's value, when rewards relate directly to the product and when they are hard to imitate. The national chain's points program suggests that matching it point for point would gain little.

Who Responds

Liu (2007) studied members of a convenience store chain's loyalty program over two years and found that customers who were heavy buyers when they joined did not increase their purchasing, though they collected the most rewards. Light and moderate buyers, by contrast, bought more over time and became more loyal to the store. The finding matters for Third Ward: a program that mainly attracts its regulars would give away sandwiches without changing much, while one that draws in occasional customers could raise visits.

How Card Design Matters

Kivetz et al. (2006) studied a university café's reward card, which offered a free coffee after ten purchases. Customers bought coffee more frequently as they got closer to the reward, a goal-gradient effect. In a related test, customers given a twelve-stamp card with two stamps already filled completed it faster than customers given a ten-stamp card with none, even though both required ten purchases. The feeling of progress, not only the reward, drives behavior.

Three Options Compared

What Rewards Will Cost

A free sandwich costs Third Ward about $3.90 in food and packaging. Under a buy-ten-get-one design, ten paid sandwiches bring in about $114, so the reward costs about 3.4% of member sales. If a head start of two stamps is added, the first reward comes after eight purchases for new members, raising the cost of that first reward slightly. If membership grows so that 40% of transactions are by members, reward costs would reach about $130,000 a year at current sales.

Responding to the National Chain

The managers' wish for an app comes partly from fear of the new competitor. Dowling and Uncles' point about imitation suggests that a race of points and bonuses would favor the larger chain, which can afford richer rewards. Third Ward's advantages lie elsewhere: bread baked each morning, owners who know regulars by name and shops on neighborhood corners rather than highway exits. A loyalty program should support those strengths, for example by letting members choose a seasonal special as their reward or vote on next month's sandwich, which the national chain cannot easily copy. The program is one part of retention, not a replacement for the reasons customers come in the first place.

Recommendation

Third Ward should adopt a digital stamp card linked to customers' phone numbers through its existing point-of-sale system, without requiring an app. New members will receive two stamps when they join, drawing on Kivetz and colleagues' finding. The reward will be a sandwich, not a discount, following Dowling and Uncles' advice that rewards should relate to the product. Marketing will focus on occasional customers, for example through sign-up at the register for anyone not yet enrolled, consistent with Liu's evidence. A small bonus, such as a free soup on a member's birthday, will add warmth without high cost.

Handling Member Information

Linking stamps to phone numbers creates customer records for the first time, and with them an obligation. Members will be told what is collected, which is their visits and orders, and that it will not be sold. Texts will be limited to reward reminders and no more than two offers a month, and members can opt out of messages while keeping their stamps. Store managers will see visit counts but not phone numbers.

Measuring Retention

The chain will compare members' visit frequency in the six months after joining with their frequency before, using point-of-sale records for those who paid by card, and with similar customers who did not join. It will also track the share of members who earn a first reward, the share who return within 30 days of redeeming one and whether visits by occasional customers rise.

Conclusion

Third Ward's punch card is cheap but invisible, and an expensive app would likely copy a competitor without changing behavior. Research suggests loyalty programs help most when they reward the product itself, feel easy to complete and attract occasional rather than already loyal buyers. A digital stamp card with a head start, costing about 3.4% of member sales in rewards, fits those findings and gives the chain the data it now lacks.

References

Dowling, G. R., & Uncles, M. (1997). Do customer loyalty programs really work? Sloan Management Review, 38(4), 71-82.

Kivetz, R., Urminsky, O., & Zheng, Y. (2006). The goal-gradient hypothesis resurrected: Purchase acceleration, illusionary goal progress, and customer retention. Journal of Marketing Research, 43(1), 39-58. https://doi.org/10.1509/jmkr.43.1.39

Liu, Y. (2007). The long-term impact of loyalty programs on consumer purchase behavior and loyalty. Journal of Marketing, 71(4), 19-35. https://doi.org/10.1509/jmkg.71.4.019