Effect of program type and reward timing on customer loyalty: The role of the sunk cost effect

Abstract

We examined the effect on customer loyalty of the type of loyalty program (paid vs. free) and timing of rewards (immediate vs. delayed). To test the research objectives we recruited 142 Korean college students and used a 2 x 2 full-factorial, randomized experimental design. Results suggested that the membership fee in paid loyalty programs acted as a sunk cost, which, compared to free loyalty programs, led to greater loyalty to the provider. An immediate (vs. delayed) reward was generally preferred; however, owing to the sunk cost effect, this depended to some extent on the type of loyalty program. In a paid loyalty program, immediate rewards were effective in increasing customer loyalty, whereas customers in free loyalty programs focused more on receiving the reward regardless of its timing. Our findings contribute to the literature by providing useful information for the design of an effective loyalty program scheme.