Chapter Eight
Designing Loyalty Programs
Satisfaction-Loyalty-Profit Chain
Product Performance
Service Performance Employee Performance
Customer Satisfaction
Retention /
Loyalty
Revenue / Profit
Source: Strengthening the satisfaction-profit chain, Eugene W Anderson, Vikas Mittal. Journal of Service Research, Nov 2000. Vol 3, Iss.2, p 107
Results of Customer Satisfaction-Profit Link Studies
Direct link suggests, that as customers experience greater satisfaction with a firms offering, profits rise Improving customer satisfaction comes at a cost and once the cost of enhancing satisfaction is factored in, offering excessive satisfaction doesnt pay Marginal gains in satisfaction decrease, while the marginal expenses to achieve the growth in satisfaction increase There is an optimum satisfaction level for any firm, beyond which increasing satisfaction does not pay
The link between Satisfaction and Retention (contd.)
Link between satisfaction and retention :
Dissatisfaction has a greater impact on retention than satisfaction
Even if the level of satisfaction is high, retention is not guaranteed If customers are dissatisfied, other products become more enticing The link is nonlinear in that the impact of satisfaction on retention is greater at the extremes
How Competitive Environment affects Satisfaction-Loyalty Relationship: Example
In the very competitive automotive industry,
Very high levels of satisfaction are necessary for a customer to repurchase the same brand again
The link between Loyalty and Profits
Reichhelds hypotheses
Long term customers spend more per period over time
Cost less to serve per period over time
Have greater propensity to generate word-of-mouth
Does not hold true in a non-contractual relationship
Revenue stream must be balanced by the cost of constantly sustaining the relationship and by fending off competitive attacks
Efforts at increasing customer satisfaction and retention not only consume a firms resources but are subject to diminishing returns
Lifetime Duration-Profitability Association
Reinartz and Kumar: Across the different firms, there is a segment of customers that is loyal but not very profitable (due to excessive resource allocation) there is a segment that generates very high profits although it has only a short tenure Since these short-term customers can be very profitable, it is clear that loyalty is not the only path to profitability
Types of Loyalty
Behavioral loyalty: the observed action that customers have demonstrated towards a particular product or service
Attitudinal loyalty: the perceptions and attitudes that a customer has towards a particular product or service
Building True Loyalty
Encompasses both attitudinal and behavioral components of loyalty
Difficult in the case of a low involvement category e.g.: grocery shopping
CRM at Work: Supermarkets - Difficulty in Building True Loyalty
Despite spending hundreds of millions of pounds on price-cutting campaigns and loyalty card schemes, supermarkets have only persuaded a small minority of shoppers to stay loyal According to a report from Mintel Research:
Only 15% of all grocery shoppers are completely loyal to the store where they do their main grocery shopping 29% use one other store 22% use two others
Men are more likely than women to be loyal to a single store
46% of men shop in just one or two main stores
Loyalty Programs
A marketing process that generates rewards to customers based on their repeat purchasing Consumers who enter a loyalty program are expected to transact more with the focal company, giving up the free choice they have otherwise In exchange for concentrating their purchases with the focal firm, they accumulate assets (for example, points) Points are exchanged for products and services, typically but not necessarily associated with the focal firm
Key Objectives of Loyalty Programs
Building true (attitudinal & behavioral) loyalty Efficiency profits Effectiveness profits Value alignment
Efficiency Profits
Profits that result from a change in customers buying behavior due to the loyalty program
Change in buying behavior can be measured, in:
Basket size Purchase frequency acceleration Price sensitivity
Retention
Lifetime duration
Measured in terms of the immediate profit consequences as compared to profit consequences without loyalty programs net of the LP cost
Effectiveness Profits
Measured in terms of the long-term profit consequences realized through better learning about customer preferences over time
Allows sustainable value creation for customers through customization of products or communication
Most likely to generate sustainable competitive advantage since it produces the highest profits in the long run The strategy of using a LP to learn about customer preferences may result in impressive gains for both customers and organizations Customers get more of what they truly want, and firms are safe in terms of not having to engage in a costly mass marketing exercise
Value Alignment
Goal of aligning the cost to serve a particular customer with the value he/she brings to the firm Allows firms to serve their most valuable customers in the best manner
The goal of value alignment is particularly critical when there is great
heterogeneity in the customers value and in the cost to serve the customer Example: the airline business, the hospitality industry and the financial services industry
Design Characteristics of Loyalty Programs
Reward structure
Hard vs. soft rewards
Product proposition support (Choice of rewards)
Aspirational value of reward Rate of rewards Tiering of rewards
Timing of rewards
Sponsorship (existence of partner network, network externalities)
Within sector vs. across sector LP
Ownership (focal firm vs. other firm)
Reward Structure
Hard vs. soft rewards
Financial or tangible rewards (hard rewards) and those based on psychological or emotional benefits (soft rewards)
Hard rewards: price reductions, promotions, free products and preferred treatment Soft rewards: psychological benefit of having special status in addition to receiving preferred customer service
Reward Structure (contd.)
Product proposition support
Reward directly supports the firms product proposition
Allows LP member to redeem points for products that are completely unrelated to the focal firms offering
Reward Structure (contd.)
Aspirational value of reward
Consumers prefer hedonic goods as opposed to utilitarian goods when receiving a gift or a LP reward
Reward Structure (contd.)
Rate of rewards
Ratio of reward value (in monetary terms) over transaction volume (in monetary terms) How much a consumer is getting in return for concentrating his or her purchases
Tiering of rewards
Rewards based on asset accumulation response function - how assets or rewards are accumulated as a function of spending behavior
Reward Structure (contd.)
Timing of Rewards
Determined by minimum redemption rules, type of reward given out, and reward rate Longer the timing to build up to a certain reward level, the greater the breakage (the amount of rewards that are never redeemed) Lock-in effect - firm creates redemption rules that favor long accumulation periods, thereby impacting customer retention Customers build up assets that function as switching cost
LPs Based on Sponsorship
Within sector/across sector
