On the Profitability of Loyalty

This paper aims to enhance our understanding of customer loyalty and its implications on firm profits. Factors such as favorable brand attitudes and switching costs may drive customer loyalty, which is often considered a strong indicator of a firm’s profitability. However, empirical findings on the profitability of customer loyalty are inconsistent, and a comprehensive framework to analyze the connection between customer loyalty and firm profits is still lacking. This paper fills this gap by proposing an analytical framework that characterizes how repeat-purchase loyalty is generated from consumer choice in a dynamic competition environment. It also examines the impact of brand preference and switching costs on firm profits and customer loyalty. Our findings suggest that strong brand preference can either increase or decrease customer loyalty, depending on the stability of consumer preferences over time, and when it increases loyalty, such loyalty is profitable for firms. Conversely, if customer loyalty is primarily driven by habitual buyers who are simply avoiding switching costs, this type of loyalty is not profitable for firms.

History: Anthony Dukes served as the senior editor for this article.

Supplemental Material: The online appendix is available at https://doi.org/10.1287/mksc.2022.0109.