Loyalty program has become one of the most popular retention strategies used by retailers to increase customer loyalty in mature retail markets. Few researchers (Gomez et al. 2006) have studied loyalty programs as a means to intensify the relationships and to stimulate customer loyalty. In fact, the Journal of Retailing devoted a special issue to customer loyalty to stimulate research on pertinent and current retailers' related topics such as loyalty programs and store loyalty (Meyer-Waarden 2007). Over the past few years, loyalty programs, i.e., loyalty cards, store cards, or frequency programs, have become a key component of Customer Relationship Management (CRM), serving a critical role in developing relationships, stimulating product and service usage, and retaining customers. Based on the realization that it is much less expensive for a business to retain its existing customers than it is to acquire new ones, most companies are adopting loyalty programs to retain its existing customer base. Marketers have implemented loyalty programs in a wide variety of industries (Blattberg, Deighton 1996). In fact, the effect of loyalty programs have been studied within the context of various industry settings such as automotive industry (Stausse et al. 2001), packaged goods (Roehm et al. 2002), financial services (Bolton et al. 2000), airlines (Long, Schiffman 2000), retail stores (Noordhoff et al. 2004), telecommunications (Roos et al. 2005), or casinos (Palmer 2003).
The growth of loyalty programs around the world is remarkable. McKinsey (2001) reported that about half of the ten largest U.S retailers have launched loyalty programs, and the rate is similar among U.K. and Dutch retailers (Cigliano et al. 2000). In its efforts to boost the burgeoning tourism industry, the Malaysian government offers consistent encouragement and environment to foreign retailers including department and superstores operators. Consequently, the rise and expansion of retailers in Malaysia has contributed to a high competition among retailers leading to the growth of loyalty programs, which have become a part of structured marketing efforts used to build store traffic, increase basket size, and create deeper relationship ties with customers. Accordingly, research by consulting firm Frost & Sullivan revealed that the loyalty program business in Malaysia is currently worth MYR 2.4 billion and is projected to grow to MYR 3.5 billion by 2010 (Ganesan 2006). Due to its popularity, extensive findings demonstrate the rationale for adopting a loyalty program (Kim et al. 2001) and provide empirical evidence for its effectiveness (Bridson et al. 2008; Omar et al. 2007).
Despite its popularity, many researchers have questioned whether loyalty programs actually lead to customer loyalty or whether customer loyalty is due to some other factor (Capizzi, Ferguson 2005). The effectiveness of a loyalty program is likely to depend on the fairness as well as the value of the program. Critics of loyalty programs argue that perceived fairness is important in determining the length and quality of a relationship (Bolton et al. 2000). Parker and Worthington (2000) posit that when cardholders begin to calculate the equitability of the loyalty program and feel that it was unfair and/or perceive that a competitive program is of a higher value, it may affect their loyalty to the retailer. Several empirical studies suggest that equity is one of the significant factors influencing satisfaction in social interactions (i.e. buyer-seller) that subsequently influence the formation of long-term relationships and increase favorable behavioral consequences (Olsen, Johnson 2003). However, to the best of the authors' knowledge, prior studies did not examine the impact of perceived equity and perceived value on satisfaction within the context of a retail loyalty program. This is a critical gap in the literature, given that loyalty programs are popular among retailers in retaining their customers globally. …