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This paper sets out to present a practical approach to develop an effective customer loyalty program by incorporating competition and heterogeneity in customers' preferences, and by avoiding the pitfalls associated with different types of loyalty programs.

To illustrate the approach, the paper presents a case study of T&T Supermarkets in Canada to show how a retailer can develop a cost‐effective customer loyalty program to retain and reward loyal customers so as to increase shopping frequency and shopping expenditure. The approach consists of four major steps, which are explained in detail.

Most T&T shoppers split their shopping trips at T&T (for Asian groceries and other specialty items) and a major competitor (for Western items). This creates a unique opportunity for T&T to develop a loyalty program that is intended to entice its loyal shoppers to increase their shopping frequency and expenditure at T&T. A “hybrid” reward structure was recommended to address the fact that there are two major segments of customers who prefer different types of loyalty rewards.

In addition to avoiding some common pitfalls of various loyalty programs, this paper presents a practical approach to develop an effective customer loyalty program by incorporating competition and heterogeneity in customers' preferences.

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