2009

Submitted by:
Anoop Kumar
3/20/2009

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Impact of Loyalty programs on Consumer
Purchase behavior and design for an effective
loyalty card
Business Research Methodology
Batch 200 ! 2010
Submitted to:
"# Bhard$a%
End Term project report
Submitted in partial fulfillment for the
course requirement of Business Research
Methodology, Term III
CONTENTS
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Declaration 3
c!no"ledgement 4
Assumption used and scope o' the study
()ecuti*e Summary !
+ntroduction
I" #efining Loyalty
II" Loyalty programs basics
III" $enefits of Loyalty Programs
I%" Loyalty Program costs
&
,urrent -oyalty "rogram landscape '4
-iterature re*ie$ '!
Research .ypothesis 22
Methodology 22
/indings 0Analysis and ()plication 24
1esigning a -oyalty program 30
Suggested 'eatures o' a contemporary loyalty "rogram 3
Scope 'or 'urther research 3(
,oncluding Remar2s 3&
Appendices 39
Sources 43


1eclaration
)e* the undersigned* student managers +first year, at I-. /agpur*
hereby declare that the opinions* analysis and implications contained in this
report have been predominantly dra0n from our research on the sub1ect2
+mpact o' -oyalty "rograms on ,onsumer "urchase Beha*ior and
design 'or a contemporary -oyalty "rogram and the accuracy of this
report is sub1ect to the authenticity of the data provided by our respondents"
3ther secondary sources of data* opinions and pro1ections include maga4ine
articles* 1ournals* 5esearch papers and 0ebsites" .he accuracy of this data
could not be verified" .here may be significant variations in opinions across
countries and its people* conse6uently* readers7 discretion is advised"
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"lace: I-. /agpur
1ate2 30
th
-arch 2009
8noop 9umar +0&:50'2,
Ac2no$ledgement
)e e;press our sincere gratitude to <mriti = %erma ma7am* our $5-
course instructor* for giving us the opportunity and freedom to 0or> on a
contemporary and relevant topic" )e believe that the >no0ledge and
e;perience gained during the preparation of this report 0ould be beneficial
to us as future managers" )e are than>ful to her for giving us periodic
guidance and encouragement to e;cel in all that 0e do in our careers"
)e 0ould also li>e to than> the I-./7s Library and I. staff for providing
us 0ith all the resources needed for successful completion of this report"
)e e;tend our heartfelt gratitude to0ards all our friends and family 0ho
too> the time and effort to fill our 6uestionnaire* not to forget all the
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strangers 0ho accepted our re6uest and gave us their vie0s regarding
loyalty cards"
.he ac>no0ledgement 0ould not be complete 0ithout a vote of than>s to
our criti6ue group? <aurabh @ain* <he>har Parashar* <hreyaa 5 5an1an* %inay
Chha1er and <aurabh $harad0a1" .heir genuine and insightful comments at
the right times* guided and helped us improve upon the content and feel of
our 6uestionnaire and its analysis"
5han2 you all6666
Assumptions and scope o' the research
.he Limitations of our study are as follo0s2
'" .he results could be s>e0ed because of a small sample si4e of '2' only"
2" 3nly the apparel industry is studied under this survey"
3" .he scope of the research is limited to the city of /agpur only"
4" People 0ho have loyalty cards are assumed to be active loyalty program
members"
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)e have underta>en this research pro1ect to find out the impact of loyalty cards on
consumer purchase behavior" #emographic and geographic constraints have limited
the findings and implications of this study" .he data 0as collected from primary
sources* mainly from the consumers of /agpur city" -ost of the other respondents
0ere contacted through online 6uestionnaires" 8lthough efforts 0ere made to
collect data from respondents belonging to various age groups* large numbers of
respondents 0ere students in the age group of 22 to 2A hence the results could be
largely applicable to this age group"
()ecuti*e Summary
In his thought provo>ing boo>* .he Loyalty Bffect* author /rederic2 /# Reichheld
0rites
Loyalty is one of the great engines of business success.
Loyalty programs are initiated by businesses 0ith t0o main goals" .he primary goal
for most loyalty programs is the ac6uisition of information relating to their
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customersC spending habits* 0hile the secondary goal is to actively cultivate loyalty
amongst customers to ensure they continue patroni4ing the business" )hile some
companies do reverse these priorities* the above hierarchy holds true for most"
Loyalty programs may offer benefits in a number of different 0ays" -any loyalty
programs offer a sustained discount +such as '0D, for a period of time ? perhaps a
year* perhaps for the life of the business" 3thers offer a discount once certain
criteria have been met E for e;ample* a 20D discount on a single purchase once a
customer has spent F200 at the business" <till others offer points 0hich may then
be redeemed for products 0hich may or may not be directly related to the business"
Loyalty cards are the most common form of loyalty programs found throughout the
0orld today" In the Gnited <tates* almost seventy?five percent of consumers o0n at
least one loyalty card* 0ith over a third of all shoppers o0ning t0o or more" -a1or
supermar>et chains* such as <afe0ay and 8lbertsons* nearly all have loyalty cards*
also >no0n as re0ards cards or benefit cards" .hese supermar>et loyalty programs
usually operate by offering a discount on certain products* usually mar>ed
throughout the store* to those 0ho have a loyalty card" In e;change for this
discount* customers are giving the store access to itemi4ed receipts of their buying
habits in the store* allo0ing the business to better cater to their needs and build
product purchasing and discounting to help retain their most profitable customers"
Loyalty programs have gained in popularity immensely in the past fifteen years* in
no small part due to the development of a culture of entitlement* in 0hich
consumers feel that they deserve special treatment" $usinesses have capitali4ed on
this 0hen designing their loyalty programs* often offering benefits that cost little*
but carry 0ith them an assumed prestige* such as access to faster?moving lines or
special par>ing spaces"
<o 0e did this research 0ith the aim to find that HIIs there any impact on the
customer7s loyalty by these loyalty programsJ" .here 0ere many other 6uestions
0hich 0ere to be ans0ered such as K)hat are the factors affecting customer7s
loyalty7* KIs loyalty greater than loyalty card or vice versa7* K#oes loyalty programs
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really 0or>s7 etc" )e did a survey to find relationship bet0een loyalty programs and
customer loyalty"
.he outcomes of the research sho0ed that there are many factors of a loyalty
program 0hich has an impact on customer loyalty" .hese factors include discounts*
special offers* preferential treatment etc" <ince customer loyalty is highly
dependent on each buyer7s individual perception* hence these are some factors
0hich have greater influence on 0ider consumer base" 8cceptability of a loyalty
program by the consumer population has been a ma1or issue" :ence these factors if
included in the loyalty program may increase its degree of success"
Gltimately* the success of loyalty programs depends on ho0 0ell the business uses
the data it gathers to further refine its policies and loyalty programs" -any
businesses find little profit in the use of loyalty programs* 0hile others* such as
e$ay* attribute much of their financial success to a 0ell?e;ecuted use of such
programs"
+95R:1;,5+:9
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Loyalty programs are every0here in business" Customers interact 0ith them
multiple times almost every dayE0hether shopping at a grocery store* buying a
cup of coffee* flying on an airline* staying at a hotel* or paying a cell phone bill" In
other 0ords* companies have become convinced that it is possible to buy
customers7 loyalty" #o loyalty programs really 0or>* or are these companies 1ust
0asting their moneyL Can a loyalty program change ho0 people behave and get
them to spend more money 0ith that companyL Can loyalty programs reduce the
li>elihood that customers 0ill move their business to a competitorL
.his report attempts to ans0er these 6uestions and ta>es a detailed loo> at the
current environment for loyalty programs and the strategies businesses are using in
implementing these programs" In addition* the paper presents a series of best
practices that can create meaningful competitive advantages for companies that
offer loyalty programs +that is* Ihost companiesJ,* their partners* and their
customers"
1(/+9+9< -:=A-5=
$efore e;amining ho0 loyalty programs 0or>* it is important to define e;actly
0hat is meant by loyalty in the conte;t of business development and retention"
<everal broad definitions e;ist* including the follo0ing2
M I.he commitment of customers to a particular brand or companyJ
M I.he e;tent to 0hich your customers continue 0ith >ey loyalty behavior 0hen
competitors offer more attractive prices* products* and/or servicesJ
M INaithful to any person or thing conceived of as deserving fidelity""" characteri4ed
by or sho0ing faithfulnessJ
Nor this report* loyalty is defined as follo0s2 ILoyalty is a positive belief*
generated over the course of multiple interactions* in the value that a company and
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its products and/or services provide* 0hich leads to continued interactions and
purchases over time"J
Loyalty should not be confused 0ith customer satisfaction" 8lthough loyalty is built
on satisfaction* organi4ations can have satisfaction 0ithout loyalty" Customer
satisfaction is an Iopinion measureJ about company performance and ho0
customers feel their needs 0ere met in past interactions or by past purchases*
0hereas customer loyalty is a results measure that includes e;pectations of future
behavior"
Nor e;ample* ( percent of consumer 0ireless customers are IsatisfiedJ 0ith their
current service* but (2 percent 0ould be 0illing to s0itch to a competing provider"
.hus* 0hen designing a re0ards program to build loyalty* it is critical to thin>
about ho0 to encourage true long?term customer loyalty and not 1ust fleeting
customer satisfaction"
-:=A-5= "R:<RAM BAS+,S
Companies typically have several goals 0hen launching loyalty programs* all of
0hich are focused on generating greater profits from the program7s members"
.hese goals include
M Improving >no0ledge of the customer
M Leveraging that >no0ledge to increase the sales of undersold and/or
highly profitable products/services
M Increasing customer retention and purchase fre6uency
.he most common type of loyalty program begins 0hen a customer enrolls" Nrom
that point for0ard* the organi4ation accurately trac>s information about that
Imember*J captures the member7s purchases* credits points to the member based
on the rules stored in a loyalty Iengine*J categori4es the member in tiers or groups
based on the member7s value to the organi4ation* and enables the member to
redeem points for products or services 0hen various point levels are attained" .he
specific types of behavior that are trac>ed and re0arded are uni6ue to each
industry/company and are typically lin>ed to the organi4ation7s profitability drivers"
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B(9(/+5S :/ -:=A-5= "R:<RAMS
<reater ,ustomer Kno$ledge
8 loyalty program enables a company to gain detailed >no0ledge about its
customer base 0ith the customer7s consentA customers actually 0ant to provide
transaction and detailed profile information to ensure that they receive the full
benefits of being a member of the program" In some mar>et segmentsEsuch as
business?to?businessEcompanies already possess significant >no0ledge about their
customers" 8s a result* these firms 0ill not see customer >no0ledge as an important
component of a loyalty program7s value" :o0ever* for most business?to?consumer
companies* gaining this level of intimate customer >no0ledge is a critical benefit of
a loyalty program" In such $2C industries* loyalty programs enable companies to
match their faceless customer purchase data +0hat 0as bought* 0hen* at 0hat
store, 0ith specific customer profile information* 0hich can then be used to create
targeted mar>eting promotions or redesign services around high?value customers7
needs"
+ncreased ,ustomer Retention
8 0ell?honed loyalty program improves customer retention rates* by increasing a
member7s Is0itching costs*J 0hich are costs a member 0ould bear in order to
s0itch to a competing provider" .hese costs can include decreased service and the
time and resources re6uired to build a ne0 relationship" .he higher a member7s
s0itching costs* the more li>ely that member is to remain loyal"
-ost loyalty programs today do not create high enough s0itching costs for
members" Nor e;ample* airline industry fre6uent?flier programs all provide virtually
the same product +a seat* perhaps 0ith a fe0 e;tra inches of legroom, and the
same membership benefits +separate customer service number* priority boarding*
priority upgrades* and bonus miles," If gold?tier members on one airline 0ant to
s0itch to a competitor because the competitor 1ust added nonstop service on their
favorite routes* all they have to do is fa; the competitor their last fre6uent?flier
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statement* and they 0ill immediately be made gold members of the competitor7s
fre6uent?flier program" $ecause the products and services these t0o airlines and
their loyalty programs provide are virtually identical* the members can s0itch to a
competing carrier at virtually no cost to themselves"
:o0ever* if the first loyalty program offered a uni6ue set of benefits that the
competing carrier could not easily duplicate* it 0ould be much less tempting for
members to s0itch" Companies use their loyalty programs to create these s0itching
costs* by
M Leveraging in?depth member profile and transaction data to create uni6ue offers
and product/services that a competitor* 0hich does not >no0 as much about the
member* cannot match
M Providing targeted service consistently across all channels
$y using the personali4ed data provided by their loyalty program* companies can
create a 0in?0in relationship 0ith their members that cannot easily be replicated by
their competitors"
1i''erentiated Ser*ice and Brand (>uity
-ost companies do not 0ant to compete on price" Bven those 0hose business
models are initially predicated upon providing the lo0est?cost service +for e;ample*
lo0?cost carriers such as <outh0est 8irlines and @et$lue 8ir0ays, often find that
they must focus on providing value beyond price as they mature* their costs rise*
and ne0 upstarts beat them on price"
In addition* for companies that have not traditionally competed on price but
suddenly find that their products are becoming commodities* brand e6uity is often
determined by the additional value these companies can provide beyond products
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alone" .oday* companies in a number of industries are in this position" B;amples
include airlines that have reduced their offering to basically a seat 0ith no food or
frills* Ibig bo;J retail stores that have depersonali4ed the shopping e;perience* and
0ireless firms 0hose net0or>s have no0 reached parity"
Companies can create this additional value by moving a0ay from generic* one
product?meets?all?re6uirement products to targeted products and services that
address their customers7 uni6ue needs" 8 loyalty program provides this detailed
information on transactions* demographics* and personal preferences re6uired to
successfully identify the uni6ue groups among a company7s customer base and
then design products or services that meet those segmented members7 needs" Nor
e;ample* retailers can use their loyalty data to ensure that the products desired by
high?value customers are al0ays in stoc>* are easy to find and reach* and are
prominently displayed"
It is critical to note that customers are typically 0illing to pay for those products and
services that do a better 1ob of meeting their underserved needs" Nor e;ample* &3
percent of hotel guests say that personali4ed service and attention to their needs
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provides value" It is Ivalue*J rather than price* that defines a good deal for these
customers" $rand e6uity* 0hich is achieved by providing highly valued* 0ell
differentiated products and services* is the cornerstone of loyalty" It is the additional
value that customers believe a company provides relative to its competitors that
encourages loyalty to the host company and ma>es customers potentially 0illing to
pay more for its products and services"
+mpro*ed "ro'itability
8ll of the benefits discussed to this point lead to a loyalty program7s >ey goal and
most important metric of success2 improved profitability" Oreater profits are a result
of
M Profitable customer retention
M :igher prices paid for uni6ue products/services
M Increased average purchase si4e
M #ecreased mar>eting and systems costs
M #ecreased unsold e;pired inventory
Increasing customer
retention significantly
improves a company7s
profitability" 8ccording to
Nrederic> 5eichheld of $ain
P Company* a percent
increase in customer
retention results in a 2
percent to '00 percent
increase in profitability"
.here are several sources
of these additional profits*
0hich 5eichheld brea>s
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do0n into price premium* referrals* cost savings* revenue gro0th* and ac6uisition
cost"
-:=A-5= "R:<RAM ,:S5S
#espite their many benefits* loyalty programs can be e;pensive to develop and
maintain" .he costs associated 0ith loyalty programs generally fall into t0o
categories2 program costs and system costs"
M Program costs are nontechnical e;penses related to administering the program7s
points* re0ards* and services"
M <ystem costs are those invested in the technical infrastructure to support the
loyalty program"
8lthough some costs are directly attributable to the programEfor e;ample* loyalty
program management soft0areEthere are other costs a company 0ould li>ely incur
even 0ithout a loyalty program* such as mar>eting soft0are and hosting a )eb site"
:o0ever* even these costs can be increased due to factors such as integrating the
mar>eting soft0are 0ith loyalty soft0are or providing additional loyalty?related
functionality on the company )eb site"

8 company7s program costs 0ill vary significantly* depending on the re0ards that
are provided" Nor e;ample* airlines and hotels* 0hich are high?fi;ed?cost* lo0
variable?cost businesses* 0ill have lo0er program costs" .his is because airlines can
allo0 members to use points to redeem only those seats that 0ould other0ise go
unsold" .he cost to fly additional people 0ho purchased their tic>ets 0ith points is
trivial" Nurther* although members can use airline points to purchase products 0ith
any of the airline7s partners +hotels* car rental agencies* and selected retailers,*
people place such a high value on airline seats that nonairline flight redemptions
account for only appro;imately 3 percent of all airline loyalty program redemptions"
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3ther companies* such as retailers* in 0hich every product redeemed for points
must be paid for by the company 0ith cash* 0ill have higher program costs" Nor
e;ample* depending upon the program7s re0ards and generosity* a retailer7s loyalty
program can cost bet0een 2 percent and '0 percent of a customer7s total
e;penditures"
, ;RR(95 -:=A-5= "R:<RAM -A91S,A"(
.he first mileage?based loyalty program 0as launched by 8merican 8irlines more
than 23 years ago +-ay '9&'," .oday* loyalty programs are ubi6uitous" .here are
more than one billion people 0orld0ide enrolled in loyalty programs* and in some
industries such as airlines and hotels* loyalty programs have become one of the
most critical means by 0hich companies manage their customer relationships"
M -ore than '2 million people 0orld0ide are enrolled in airline loyalty
programs"
M 8bout (! percent of all G"<" grocery retailers 0ith 0 or more stores have a
loyalty program"
M 8lmost 0 percent of the top G"9" retailers have loyalty programs"
M 8bout ( percent of 8mericans belong to at least one loyalty program"
M <hoppers stop claims more than !0D of sales from loyalty members"
M <ubhi>sha claims &0D of sales comes from loyalty members"
Loyalty programs are considered to be one of the most effective relationship
mar>eting tool across the industry" Loyalty programs are offered not only by the
-$37s but it is also offered by saloons* casinos* hypermar>ets etc" -$37s +multi
brand outlets, li>e <hoppers <top* )estside* Pantaloons* Lifestyle* Olobus* Indiabulls
megastore +pyramids, in India have active loyalty programs in our research
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category +apparel industry," Let us loo> at the benefits given by current loyalty
programs2
Shoppers Stop
Bene'its
,lassic
moments
Sil*er edge <olden glo$
/irst citi?enship / ? ?
/irst citi?en re$ard
points @on net
purchaseA
' re0ard point for
every purchase of
5s" '00
' re0ard point
for every
purchase of 5s"
0
' re0ard point for
every purchase of
5s" 34
()tra re$ard points on
pre'erred brands
? 'D 2D
Associate card yes +5s" '00,
yes +up to 22 5s
'00,
=es 2 free +3rd25s
'00,
Regular updates =es =es =es
()clusi*e cash
countersB
=es =es
B;clusive golden
glo0 cash counter
/ree "ar2ingB =esQ =esQ
=esR ?5eserved
par>ing on a first
come first serve
basis
Calet par2ingB =esS =esS =esS
/ree 'irst update ? ? =es
.ome deli*ery o'
alterations
? ? =es
:ut!store o''ers =es yes =es
()clusi*e pre*ie$s!
merchandise Dsale
=es =es =es
Calidity ' =ear ' =ear ' =ear
;pgradation TU 5s"'0000 TU 5s"40000 TU 5s"40000
R conditions apply
QPar>ing charges reimbursable against purchase at shoppers stop only
S 8vailable at select stores
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,onsolidated list o' the bene'its o''er:
"articulars
Shoppe
rs stop
"antalo
ons
Eestsi
de
<lob
us
Redeemable re$ard points = = = =
;pdates = 9 = =
()clusi*e cash counter = 9 9 =
/ree par2ing = 9 9 9
Calet par2ing = 9 9 9
.ome deli*ery o' altered goods = 9 = =
()clusi*e sale = = = =
Special occasion
discounts@birthdayFanni*ersary
A
9 9 = =
()clusi*e billing counter during
sale
9 = 9 9
Reser*ed par2ing 9 9 9 =
R/ote2 .he benefits are offered by different retailers at different levels +i"e" silver*
gold* platinum card,"
.he main benefits that retailers are focusing today are discounts on the basis of
accumulated points* the points are offered on the basis of the net shopping credited
in their card at the end of a pre decided period" .he discounts are not offered
directly e;cept for fe0 occasions" .his implies that they are offering deferred
benefits"
-+5(RA5;R( R(C+(E
1i*erse "er'ormances o' -oyalty "rograms
Prior research has documented mi;ed outcomes of loyalty programs operating in
the same mar>ets" Nor e;ample* -eyer?)aarden and $enavent +200!, compare a
consumer panel7s observed purchases at seven grocery stores 0ith #irichlet
predictions and find e;cessive loyalty attributable to loyalty programs for only three
stores" .he loyalty programs that Leenheer and colleagues +200(, study also varied
on their share?of?0allet impact and profitability" 8 natural 6uestion from these
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mi;ed findings is 0hy loyalty programs e;hibit diverse performance" 8lthough this
phenomenon may not be surprising* a systematic understanding of the factors
contributing to diverse loyalty program performances is important because it can
aid in managers7 assessment of 0hether a loyalty program is appropriate in a
certain conte;t and can help identify 0ays of improving the effectiveness of such
programs +$olton* 9annan* and $ramlett 2000,"
In studying loyalty program performance* it is important to recogni4e that loyalty
programs do not operate as separate entities in an isolated environment" .heir
success depends not only on the programs themselves but also on other facilitating
or inhibiting factors present in the environment" <pecifically* 0e propose three sets
of factors that represent the main mar>et entities involved2 the focal loyalty
program* the consumers +i"e"* target mar>et,* and rival programs and firms +i"e"*
competition," Nigure ' lists the factors and sample studies 0ithin each set" 3f these*
programrelated factors e;plain a firm7s internal strategies that can contribute to the
success of a loyalty program* 0hereas consumer and competition factors represent
things in the e;ternal environment that are e6ually important to loyalty program
performance" )e argue that it is the 1oint force of all these factors that determines
the eventual outcome of a loyalty program" .his line of thin>ing resembles other
studies of mar>eting strategy* in 0hich the initiation and outcomes of mar>eting
strategies are affected by both the internal environment of the firm and e;ternal
mar>et and industry environments +%aradara1an and @ayachandran '999,"
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/igure 1
#ompeting $oyalty %rograms& Impact of Mar!et Saturation, Mar!et Share and #ategory
E'pandability& (ournal of Mar!eting )ol* +, -(anuary .//01, 0,23/4
$efore 0e turn to the literature* ho0ever* it is important to note that loyalty
program performance can be measured in multiple 0ays" /unes and #rV4e +200!,
suggest that loyalty programs can serve different goals* such as retaining
customers* increasing spending* and gaining customer insights" .herefore* each
program should have its o0n uni6ue set of success measures depending on its
intended goals" Nor cross?comparison purposes* ho0ever* it is also useful to
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e;amine some standard measures" Prior research has used consumer level
outcomes* such as purchase fre6uency* transaction si4e* and share of 0allet* as 0ell
as firm?level factors* such as store sales and traffic" 8lthough all these measures are
useful* because each measure may be driven by different underlying mechanisms*
caution should be ta>en before directly comparing some of the e;isting studies"
()isting Research on -oyalty "rogram "er'ormance
%rogram5related factors:
Program?related factors include both program design and management" Nrom the
design perspective* a loyalty program needs three >ey specifications2 +',
participation re6uirements* +2, point structure* and +3, re0ards" .he first element
pertains to the convenience and cost of participation" Participation modes can be
differentiated by voluntary versus automatic enrollment and free versus fee?based
membership" Programs also differ in terms of ho0 convenient it is for consumers to
participate +37$rien and @ones '99," Nor e;ample* some programs automatically
accumulate points* 0hereas others re6uire more effort from consumers* such as
manual code entry re6uired by -y Co>e 5e0ards" 37$rien and @ones +'99, suggest
that the convenience of participation can affect the appeal of a loyalty program" <o
far* ho0ever* the effects of participation re6uirements have not received much
empirical e;amination"
.he second aspect of a loyalty program* point structure* involves ho0 re0ard points
are issued* 0hat the point thresholds are for redeeming re0ards* and 0hether a
tiered structure is used" 5egarding the issuing of re0ard points* %an 3sselaer* 8lba*
and -anchanda +2004, find that though point threshold stays the same* the 0ay
points are issued over each purchase +ascending points versus same points per
purchase, affects consumers7choices" .his suggests that point issuance is not a
nuisance to consumers and shouldnot be determined arbitrarily" Point threshold is
another important aspect of point structure* and it has been tied in to program
relevance +37$rien and @ones '99," If the point threshold for a free re0ard is too
high* it 0ill be considered unobtainable for the average consumers and thus 0ill be
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dismissed as irrelevant" .he final aspect of point structure involves tiered structures
+e"g"* gold and platinum memberships based on spending levels," .a>ing this tiered
structure into account* 9opalle and colleagues +200(, find that program tiers create
a point pressure effect on purchases by both price?conscious and service?oriented
consumers* 0hereas the fre6uency re0ard itself creates such an effect only for
price?conscious consumers"
.he third design element* choice and availability of re0ards* has received the most
e;tensive attention in e;isting studies" .his design element includes re0ard value
and cost* actual re0ards offered* and their compatibility 0ith the focal brand" Nor
e;ample* 37$rien and @ones +'99, suggest re0ard ratio* variety of re0ard
redemption options* and aspirational value of re0ards as important considerations"
9ivet4 and <imonson +2002, test the aspirational value aspect in an e;perimental
setting and find its effects to be moderated by effort re6uirement" 8 lu;ury re0ard
is preferred 0hen effort re6uirement is high* 0hereas a less aspirational necessity
re0ard is preferred 0hen effort re6uirement is lo0" 8 fe0 studies have considered
the congruence bet0een re0ards offered and the focal brand and find that* in
general* brand?congruent re0ards are more effective than incongruent re0ards*
though this effect is moderated by factors such as consumer involvement and
promotional reactance +9ivet4 200A 5oehm* Pullins* and 5oehm 2002A =i and @eon
2003," Nocusing more from a firm strategy perspective* 9im* <hi* and <rinivasan
+200', use game theory to identify the optimal conditions for offering cash versus
free products as re0ards" .hey find that the former is better if there are fe0 price?
sensitive heavy buyers* 0hereas the latter is more effective 0hen the heavy buyer
group is large or not very price sensitive"
In addition to program design factors* research has sho0n the impact of program
management on the success of a loyalty program" Nor e;ample* from a survey of
'&0 retailers* Leenheer and $i1molt +200&, conclude that the success of a loyalty
program is affected by the effort spent on capturing and analy4ing consumer
intelligence derived from the program" It may be surmised that the success of a
2& | P a g e
loyalty program also depends on organi4ational support of the program and the
amount of resources dedicated to program management* but these organi4ational
factors have not been sub1ect to empirical testing"
#onsumer characteristics:
8lthough proper program design and management are critical* it is consumers7
reactions to a loyalty program that ultimately determine program success" Ne0er
studies have e;amined the impact of consumer characteristics on loyalty program
effects" Consumer characteristics can be crudely classified into firm specific
attitudinal and behavioral factors versus traits and characteristics that carry across
firms" In the former category* Lal and $ell +2003, and Liu +200(, e;amine the
moderating effect of consumers7 usage levels" Contrary to traditional 0isdom of
loyalty programs as a defense mechanism mainly for heavy buyers* these studies
find the biggest increase in spending and purchase fre6uency among light buyers"
.his is attributed to loyalty programs7 ability to eliminate cherry?pic>ing +Lal and
$ell 2003, and to encourage cross?selling +Liu 200(," )ithin this category of studies*
9ivet4 and <imonson +2003, also e;amine the effect of perceived effort advantage"
5ather than treating point threshold as a program design factor* as 0e discussed
previously* 9ivet4 and <imonson find that it is not the effort re6uired per se but the
perceived effort advantage a consumer has over other consumers that affects his or
her li>elihood of 1oining a program" .his perceived effort advantage again can be
driven by consumers7 usage levels" :o0ever* note that this effort advantage effect
may drive program 1oining decisions but may not carry over to 0hat consumers do
after they have 1oined a program"
8dditional studies have segmented consumers according to their generic traits or
characteristics* such as socio?demographics +Leenheer et al" 200(,* shopping
orientation +-Wgi 2003,* future orientation +9opalle and /eslin 2003,* variety
see>ing +Xhang* 9rishna* and #har 2000,* and price sensitivity +9im* <hi* and
<rinivasan 200'A 9opalle et al" 200(," :o0ever* fe0 of these factors have received
empirical support" .his may be attributed to the over generali4ed nature of these
23 | P a g e
variables" <o far* t0o factors* future orientation and price sensitivity* have received
some support" $ecause loyalty programs re0ard consumers7 current behavior at
some point in the future* it is not surprising that such programs are found to be
more appealing to consumers 0ho do not heavily discount future benefits +9opalle
and /eslin 2003," Corroborating this vie0* Le0is +2004, finds that treating
consumers as dynamically oriented better e;plains their purchase decisions in the
presence of a loyalty program" .he second factor* price sensitivity* has been found
to moderate consumers7 reactions to program design elements +9opalle et al"
200(,"
3verall* e;isting studies of consumer?related factors appear to suggest that firm?
specific behavior and attitudes are better predictors of consumer reaction to a
loyalty program" :o0ever* further research is needed to identify and test other
consumer traits before a final conclusion can be dra0n" )e also note that though
consumer?related factors have been mainly used to e;plain differential responses to
the same loyalty program* they can also contribute to the diverse performances
across programs by considering the varying composition of program members"
B;amples of this approach can be found in t0o game?theoretic models related to
loyalty programs +9im* <hi* and <rinivasan 200'A Xhang* 9rishna* and #har 2000,* in
0hich individual characteristics* such as variety see>ing and price sensitivity* are
translated into mar>et characteristics"
#ompetition5related factors#
3ne problem 0ith considering only program? and consumer?related factors is that it
puts the program?offering firm and consumers in an isolated setting" In reality*
ho0ever* most loyalty programs face competition from rival programs that offer
similar benefits* and enrollment in multiple programs is common" In the retail
industry* for e;ample* consumers hold an average of three loyalty program cards
+-eyer?)aarden 200(," .his has led to the suggestion that firms need to Ita>e into
account cardholders7 Kcard portfolios7 0hen evaluating the effectiveness of loyalty
programsJ +-Wgi 2003* p" '04," :o0ever* research on this type of influence is the
24 | P a g e
scarcest* as is apparent in the shortest list of published studies in this set sho0n in
Nigure '" 8 ma1ority of e;isting studies have e;amined a single loyalty program in
isolation" 8mong the fe0 studies that have considered simultaneously the
performances of multiple loyalty programs +e"g"* Leenheer et al" 200(A -eyer?
)aarden and $enavent 200!,* most treat the programs as parallel strategies and
do not e;plain the inter? action among those programs"
3nly four published studies have considered loyalty programs in a competitive
setting" .0o of these studies +-Wgi 2003A -eyer?)aarden 200(, find that
consumers7 holding loyalty program cards from competing chains reduces the share
of 0allet and customer lifetime for the focal chain" :o0ever* they do not consider
the direct effect of competition on program performance* nor do they identify the
reasons for competitive influence" .0o earlier studies offer more specific
e;amination of loyalty program competition and study the effect of firm?level
factors" /a>o +'992, analy4es travel records from three firms in the Philadelphia
and $altimore metropolitan areas" .he results sho0 that the value of a fre6uent?flier
program increases 0ith the airline7s share in a traveler7s main airport* suggesting
the influence of a firm7s mar>et position on the success of its loyalty program" 8long
similar lines* 9opalle and /eslin +2003, model loyalty program competition and
demonstrate that free re0ards offered by firms charging higher prices are valued
more by consumers" :o0ever* this proposition is not empirically tested and is li>ely
to be constrained by model assumptions about mar>et conditions and consumer
behavior"
Summary
)ith limited research on loyalty programs* it is still unclear to 0hat e;tent loyalty
programs are effective and* more important* 0hat induces the success and failure
of different programs" 8lthough some studies have e;amined the moderating
effects of program and consumer characteristics* e;isting research tends to put a
loyalty program in a vacuum that is void of impact from rival firms and programs"
27 | P a g e
.his omission of competitive influence is undesirableA prior research has sho0n that
myopic profit ma;imi4ation 0ithout considering competition can lead to suboptimal
firm decisions +e"g"* Carpenter et al" '9&&," It also counters the mar>etplace reality
of loyalty program proliferation 0ithin many industries" Yuestions still remain as to
0hether competitive loyalty programs in such industries really cancel one another7s
effects out* creating a 4ero?sum game* or 0hether some firms may en1oy
asymmetric advantages 0ith their loyalty programs due to their competitive
positioning" 8ns0ers to these 6uestions are critical to a complete understanding of
loyalty programs" Incorporating competition 0ill also offer more useful decision
support to loyalty program managers and to firms that are pondering the
establishment of a ne0 loyalty program in the presence of e;isting rival programs"
R(S(AR,. .=":5.(S+S
.he main ob1ective of this study 0as to study the impact of loyalty program on the
consumer purchase behavior and thus also to bring out the 0ays consumers
perceive a loyalty program to be" .he study is also conducted to determine the
factors 0hich consumers appreciate in a loyalty program the most and 0hich they
don7t" .hus according to the findings of the study the research aims to design a
contemporary loyalty program"
.he follo0ing hypotheses are developed to test the study2
'" <tore purchase fre6uency is higher for loyalty program members vis?a?vis non?
loyalty program members"
2" Loyalty precedes loyalty cards"
3" #iscount is significant features for a loyalty program
4" <ignificance of loyalty card on consumer purchase behavior
M(5.:1:-:<=
8 sample design is a definite plan for obtaining a sample from a given population" It
refers to the techni6ue or the procedure the researcher 0ould adopt in selecting
items from the sample" <ince the population si4e is infinite sample si4e for the study
28 | P a g e
0as ta>en as '2' respondents" .he research includes data collection only from
primary sources"
8ll the respondents 0ere '! years or older" .he respondents included both loyalty
program members as 0ell as non members" /on members 0ere also included so as
to design a contemporary loyalty card 0hich 0ould suit the needs of the potential
customers" 8 mall intercept and 0eb based approach 0as selected for the purpose
of data collection" .he sampling method thus used 0as convenient non probability
sampling techni6ue" 8 6uestionnaire method approach 0as adopted"
5.( G;(S5+:99A+R(
.he 6uestionnaire 0as divided into t0o parts" In the first section* demographic
items 0ere included to obtain information regarding respondent7s age* gender*
education and income" .hese demographic variables helped to e;plain different
consumption behaviors of different types of consumers" In the second section* items
0ere as>ed regarding the concept of store loyalty cards and other factors that may
have an effect on customers7 store loyalty" .he respondents 0ere chosen from a
0ide range of income groups and ages" .he follo0ing parameters 0ere >ept in mind
0hile formulating the 6uestions2
'" Prepared 0ith layman7s level of understanding"
2" <hort and crisp 6uestions"
3" 5espondent friendly layout"
A copy o' the >uestionnaire is attached in the appendi)
S5A5+S5+,A- 5::-S
)hen all of the '2' surveys 0ere compiled* the data 0as coded and entered in
BZCBL" .he coded data 0as sorted and analy4ed by <P<< program" Chi?s6uare
analysis* Cross tabbing and descriptive analysis 0as used to e;amine the loyalty
card use and store loyalty variables"
2 | P a g e
/+91+9<S0 A9A-=S+S A91 +M"-+,A5+:9S
)e test our different hypothesis 0ith three different research designs
.1: Store purchase 're>uency $as higher 'or loyalty program members
than 'or non members#
Nor testing of this hypothesis store purchase fre6uency 0as measured by t0o
variables2 the fre6uency of their visit to the shop and the amount of money they
spent 0hen they visit such shops" 8ll the respondents 0hether a loyalty program
member or non member 0ere considered for this study" 8s per the findings of this
research 0e sa0 that among '2' respondents '09 0ere valid data and among
these distributions of respondents 0ere as follo0s2
8ll the respondents 0ho had more than one loyalty card 0ere classified as members
and the ones 0ho had 4ero cards 0ere non members"
Nor the fre6uency of visit 0e could observe the follo0ing2
29 | P a g e
8ll the respondents 0ho shopped for once in a 0ee>* once in a month or
t0ice in a month 0ere classified as high fre6uency shoppers 0hile the ones
0ho shopped for once every t0o months or once every ! months 0ere
classified as lo0 fre6uent shoppers"
Nor the amount spent each visit the follo0ing data 0as collected2
.he amount of less than 00 and 0ithin 00?2000 0as classified under lo0
fre6uency and above 2000 0as high fre6uency" .o test the relationship bet0een
these variables <P<< 0as used and cross tabbing 0as conducted on the variables"
.he cross tabbing results 0ere further confirmed by Chi <6uare test"
.he contingency table 0hich 0as generated 0ith the help of <P<< sho0ed that the
most fre6uent visitors 0ere the loyalty program members and there is a significant
relationship bet0een these t0o variables" .he Pearson Chi <6uare coefficient value
is 0"003 0hich 0as less than 0"0 0hich proves that the variables are significantly
related"
.he similar test 0as conducted for amount spent each visit and membership" .he
Pearson Chi <6uare coefficient value is 0"'4! 0hich 0as more than 0"0 0hich
proves that the variables are not significantly related"
.2: -oyalty precedes loyalty cards#
.hrough this hypothesis 0e 0anted to test 0hat is more important for a consumer ?
the loyalty for a store or loyalty card of a store" If a consumer is loyal to0ards a
particular store but if he is offered a loyalty card of a different store so 0ill he
change his shopping preference or continue being loyal to the same store"
&0 | P a g e
5esponse for the 6uestion li>e K)ill you shop in your favorite store even if you don7t
have loyalty card of the sameJ and I#o you tend to increase your purchase from a
particular store even if you don7t have a loyalty card of the sameJ 0ere tabulated in
e;cel" Cross tabbing 0as done on the t0o variables and no significant relationship
0as found bet0een the t0o variables"
.&: 1iscounts are signi'icant 'eatures 'or a loyalty program#
3ne of the ma1or aims of our study 0as to design an ideal loyalty card program" Nor
this 0e tested various features li>e discounts* special offers* preferential treatment
etc"* in order to measure their relative impact on consumers" )e did this mainly so
that 0e could find out 0hich feature 0as most important for the consumers and
0hich feature 0ould appeal to them most 0hile purchasing a loyalty card"
8ccordingly* that feature could be included in our ideal loyalty card program 0hich
could be of use to retailers" Nor this 0e as>ed the consumers a 6uestion li>e I=ou
0ould 0ant a loyalty card of a particular store because they offer2J
'" #iscounts
2" <pecial 3ffers
3" Gpdates +/e0 arrivals etc",
4" Preferential treatment
" <tatus <ymbol
)e as>ed them to rate the above features on a Li>ert scale 0ith strongly agree
being coded as * agree being coded as 4* neutral being coded as 3* disagree being
2 and strongly disagree being '" .he results 0e obtained are sho0n in the follo0ing
bar graph"
&1 | P a g e
Gsing the above codes* 0e also calculated the means of all the features* 0hich 0ere
as follo0s2
Neature #iscounts <pecial offer Gpdates Preferential
.reatment
<tatus <ymbol
-ean 4"''00 4*0092 3"4((' 3"!422 2"&&0(
Nrom the above table it is clear that discounts have a highest mean 0hich sho0s
that it is the most preferred feature moreover that can also be pictorially seen in
the bar chart" .hus 0e concluded that discounts are the most important features of
a loyalty card program"
.3: Signi'icance o' loyalty card on consumer purchase beha*ior
3ur last hypothesis 0as to find out if loyalty cards had any significant impact on
consumer purchase behavior" Nor this 0e as>ed them their opinion on various
6uestions* the responses to 0hich are sho0n belo02
Guestions $ere as 'ollo$s:
'" I 0ould shop in any store that suits me regardless of 0hether they have a
loyalty scheme
2" I shop 0herever I get better discounts
3" I usually get better discounts from in?store promotions than loyalty schemes
4" I thin> a loyalty scheme is 0orth0hile
" I have saved substantially due to loyalty program
!" I have loyalty cards 0hich I donCt use
(" It ta>es too long to get anything 0orth0hile
&2 | P a g e
&" I am nervous about ho0 the organi4ation uses the personal information I give
9" I buy products if they earn me e;tra points
'0"I spend less in stores 0here I don7t have a card
''"I 0ouldn7t change 0here I shop for the sa>e of a loyalty scheme
'2"I buy products due to promotions surrounding them
Nrom the above the implications dra0n 0ere as follo0s2
Consumers do not tend to increase their purchase from a particular store 1ust
because they have loyalty card of the same"
Consumers shop in stores 0hich provide better discounts* regardless of
0hether they have loyalty card of the same
1 (S+<9+9< A -:=A-5= "R:<RAM
.he popularity of loyalty programs has led numerous companies to offer loyalty
programs that simply mimic the program offered by the leader in their industry"
5ather than providing a competitive advantage* this strategy simply creates a
competitive stalemate 0hile driving up e;penses due to the cost of maintaining the
loyalty program"
.he >ey point is that a company must design its loyalty program to create
competitive advantage today and in the future" In addition* 0hen choosing a system
to support a loyalty program it is important to select a system that provides the
fle;ibility to cost?effectively ma>e changes as re6uired"
)hat follo0s is a high?level* step?by?step process for designing a successful loyalty
program" .his ensures that an organi4ation7s technology investments 0ill be made
to support business goals* minimi4ing the chance that technology limitations 0ill
later dictate business strategy"
Step 1: +denti'y desired business outcomes
&& | P a g e
8 loyalty program7s goal is obvious to improve profitability" :o0ever* companies
generally need to also establish additional* more specific goals for their loyalty
program* such as the follo0ing2
M Increase sales revenue
M Increase the rate of inventory turnover
M Improve the service provided to the most valuable members
M Identify the least valuable members and then either improve their profitability
or implement a strategy for removing them from the customer base
Clearly articulating specific goals helps ensure that the actions and mind?sets of
everyone 0ho contributes ideas to the program are aligned"
Step 2: +denti'y Key "ro'itability 1ri*ers
8t heart* loyalty programs re0ard changes in customer behaviour" .he specific
actions targeted should be the ones that are most li>ely to increase a customer7s
profitability* 0hich 0ill vary by both industry and company"
It is critical to identify not only the profitability drivers but also the underlying
factors that drive people7s behaviour as it relates to each of these drivers" Nor
e;ample* 0hat criteria do consumers use 0hen deciding 0hether to purchase add?
on featuresL .hese are the actions that could be built in to the loyalty program7s
incentive structure to encourage more? profitable behaviour"
/ote that a change in strategy often re6uires re?e;amining profitability levers" Nor
e;ample* if a company decides to target a ne0 customer segment* this group 0ill
li>ely have at least some profitability drivers that are different from those of the
current customer base" .he loyalty program7s incentives 0ould need to be adapted
to meet these changing re6uirements"
Step &: 1esign an +ntegrated Mar2eting Strategy
&3 | P a g e
#eveloping and implementing an effective loyalty mar>eting strategy is critical to
generating a positive return from a loyalty program* because mar>eting promotions
0ill be the primary lever used to get members to change their behaviour and
purchase undersold and/or more profitable products or to use more?cost?effective
customer service and purchasing channels" Companies generally have t0o types of
mar>eting programs2
M ProactiveEtargeted at improving customer profitability
M 5eactiveEproviding incentives for customers to purchase undersold products
"roacti*e ,ampaigns
.he goal of a proactive mar>eting strategy is to increase members7 long?term
profitability by e;ecuting a series of actions that shift a member from a less
profitable to a more profitable customer segment" )hen creating the campaigns to
implement this strategy* many companies use data mining capabilities to identify
0hat types of promotions +specifically* 0hich re0ards, are most li>ely to cause the
desired changes in customer behaviour" Cutting?edge companies not only define
member segments and model ho0 those segments are e;pected to respond to an
individual promotion or series of promotions but they also manage the changes in
Bnsuring Customer Loyalty2 #esigning /e;t?Oeneration Loyalty Program" .hese
campaigns are based on ho0 customers respond to a series of promotions* 0here
the goal of each promotion is to move members through a series of tiers so that
they are eventually raised from a lo0er?profitability to a higher?profitability tier"
.he best?performing companies recogni4e that a member7s loyalty is based not on a
single transaction but on a se6uence of transactions 0ith a company and that all of
these interactions need to be managed as a cohesive 0hole"
)hen creating a proactive mar>eting strategy* leading firms optimi4e their
mar>eting spending by defining 0hich promotions to offer to different groups*
based on their company7s budget* ris> tolerance* and desired payoff" .his
optimi4ation should be done across the entire loyalty mar>eting portfolio* not 1ust
for an individual promotion"
&4 | P a g e
8 proactive loyalty mar>eting strategy should identify and target members 0hose
value to the business appears to be dropping or 0ho are li>ely to churn" 5ather than
0aiting for a member to leave and then instituting a 0in?bac> campaign* the
characteristics of customers 0ho are li>ely to defect need to be identified" 8 series
of customer retention mar>eting actions can then be done to >eep valued
customers from leaving" Nor e;ample* mar>eting campaigns can be timed according
to the most recent transactions made by customers rather than to the historical
time bet0een transactions +for instance* offers can be e?mailed to people 0ho have
not made a purchase in '" times their average time lag," .hese actions are
generally less costly and more effective than trying to 0in bac> customers once
they have left"
Reacti*e ,ampaigns
5eactive campaigns are focused on improving short?term profitability by getting
members to purchase undersold products" In general* a reactive campaign 0ill
involve several stages2
'" #etermining the target +product/service/mar>et segment, for a promotion
2" Identifying customers +individually via segmentation or by using predefined
segments, that may be interested in a specific product
3" Identifying 0hich promotion 0ill most cost?effectively change the targeted
customers7 behaviour and ho0 this promotion should be presented to these
members to ma;imi4e their response rate
4" Creating the loyalty Ipromotion"J +8 loyalty promotion tells the loyalty engine
ho0 many points to credit or debit a member for purchasing or redeeming a
specified item",
" Creating the overall mar>eting Icampaign"J
!" Creating the mar>eting Ioffers"J
(" B;ecuting the campaign
&7 | P a g e
&" 8naly4ing promotion* campaign* and offer effectiveness and identifying
lessons learned for improving future promotions and campaigns"
Step 3: 1esign the +ncenti*e Structure
Loyalty programs are designed to change members7 behaviour by providing a 0eb
of overlapping incentive structures" 8 company must design and manage each
structure* as 0ell as the relationship bet0een the different incentives* in order to
ensure that members are motivated to behave in the desired manner" Popular
incentive areas include
M $onuses and re0ards
M Purchase accrual rules
M /on?purchase accrual rules
M 5edemption rules
M Promotions
M Product offering
Bonuses and re$ards:
Companies encourage changes in members7 behavior by offering customers
re0ards or bonuses for behaving in a desired manner" .here are accrual re0ards
+0here the member receives something for ma>ing a purchase or completing an
action,* redemption a0ards +0here the member receives discounts or even free
products or services* generally by redeeming points or using a voucher,* and
service a0ards +0here the member receives speciali4ed services," Nor a loyalty
program to be successful* these re0ards must be aligned to encourage members
to ta>e actions that ma>e them increasingly valuable to the host company"
)hen choosing re0ards* companies should optimi4e the use of accrual*
&8 | P a g e
redemption* and prioriti4ed service a0ards* based on 0hat member7s value and
the company7s cost structure"
"urchase Accrual Rules
-embers typically earn points by purchasing products from the host company"
.he rules that govern ho0 many points a member earns are called Ipurchase
accrual rules"J
Loyalty systems need to meet t0o re6uirements to support purchase accrual
rules2
M Point allocation rules should be fle;ible enough to map to profitability drivers"
M .he system must allo0 a company to easily change the point accrual rules for
purchases"
9on!purchase Accrual Rules
In addition to providing incentives for specific purchases* companies 0ant to
encourage members to ta>e valuable non?purchase actions such as referring ne0
members* updating their profiles online* or using the company7s )eb site rather
than its call center to process redemptions" .he loyalty system should allo0 the
host company ma;imum fle;ibility in designing 0hich non?purchase actions it
0ants to encourage"
Redemption Rules
3nce members have earned their points or vouchers* the loyalty program must
provide attractive 0ays for these re0ards to be used" .his is governed by
redemption rules" .he >ey to a successful redemption policy is that the offering
must match the profitability of the actions that 0ere ta>en to earn the points or
vouchers" -ost companies try to do this by giving a0ay fe0er points for less
profitable purchases and more points for more profitable purchases"
8 0ell?designed loyalty program should include a method to ensure that the
most?profitable members receive the appropriate level of service 0hen
redeeming re0ards" .he redemption and accrual rules should focus on >ey
& | P a g e
profitability drivers and be fle;ible enough to allo0 for continual ad1ustments and
refinements" Nurther* a balance must be struc> bet0een short? and long?term
re0ards"
"romotions
Companies use promotions to provide added incentives for members 0ho
perform a specific action 0ithin a specified time frame" 8 promotion generally has
a set of re6uirements and one or more re0ards for members meeting those
re6uirements* such as bonus points or free vouchers"
Loyalty programs of all types feature some combination of the follo0ing
promotions2
M Selected membersE only selected members +for e;ample* only silver?tier
members* people in a specified customer segment* or members on a list that
0as created 1ust for this promotion, 0ill receive the bonus re0ard"
M /lat bonusE the member receives a fi;ed re0ard +such as '*000 bonus points
or a free upgrade voucher,"
M "ercentage bonusE the bonus is based on the base accrual points the
member earned for purchasing the product" Nor e;ample* if a hotel is offering
"roduct :''ering
5ather than simply using a loyalty program to encourage members to buy 0hat is
already being produced* the most?successful loyalty programs also use the data
collected to redesign the actual products and services the company provides" .hese
firms identify 0hich products and features are desired by different customer
segments and then redesign the products to meet those needs or* if the products
are already available* to ensure that they are al0ays in stoc>"
5edesigning a product/service offering can yield a significant competitive
advantage* because competitors 0ill not have access to the same data and* thus*
0ill not be able to adapt their o0n products"
&9 | P a g e
Step 4: /inal product
.he loyalty program based on this features should be designed considering the
companies goal and long term strategy" .he product should be designed in such a
0ay that it is fle;ible enough to adapt the changing customer preferences" .he
current re6uirements for designing a loyalty program based on our research
findings 0ill be discussed in the ne;t section Isuggested features of a contemporary
loyalty programJ"
S ;<<(S5(1 /(A5;R(S :/ A ,:95(M"(RAR= -:=A-5= "R:<RAM
8s per the research conducted 0e listed the current offerings and tried to identify
0hat customers actually 0ant vis?[?vis current schemes" .he follo0ing are the
features or services that our respondents indicated as the most preferred ones"
H "re'erred 'eatures 'or loyalty card
#iscounts
<pecial offers
Preferential treatment
Gpdates +/e0 arrival,
H "re'erred 'eatures 'or shopping
Product
8mbience
#iscounts P <ervices
Convenience
Location P Price
.he above listed features clearly indicates that Indian consumer is gro0ing more
matured* they are demanding non?material benefits more compared to material
benefits demanded previously" .he consumer today is demanding higher level of
service than products" 5etailers need to focus on delivering +selling, e;perience
along 0ith products" .hey should ma>e the card holders feel more important"
30 | P a g e
.he most important result that came out from our study 0as that customers do
demand discounts but they 0ant discounts that are redeemable easily and at their
ease" .hus the program should be designed such that it gives customer benefits
that are redeemable easily and 6uic>ly"
3ur study also indicated that customers find it difficult to carry different loyalty
cards every time they go for shopping" .hus it is essential to offer more convenient
0ay to use the loyalty card" )e have indicated fe0 options that can be adopted*
such as2
:ne card 'or all2 I?mint is a very good e;ample 0hich is offering this
solution in the light of one card for all" .hey partner 0ith various
organi4ations and use same card for all the transactions underta>en by all
the partners" .his strategy can be applied and a card for the apparel industry
can be designed 0hich 0ould ease the burden of carrying many cards at the
same time"
,ode based usage2 .he second option is to remove the card system and
allot the customers special codes" .his 0ould 1ust re6uire the customers to
remember the code every time they go for shopping"
+ntegrate it $ith the credit card2 .he best possible option is to integrate
the loyalty card 0ith the credit card" Customers al0ays carry their respective
credit card for shopping this 0ill ensure that customer is not re6uired to
ma>e any additional effort to avail the benefits of a loyalty program and at
the same time retailers can design a special credit card integrated 0ith their
mar>eting strategy" .his is a 0in?0in situation for customers* retailers and
also ban>ers"
S,:"( /:R /;5;R( R(S(AR,.:
31 | P a g e
Todays successful businesses distinguish themselves from their competition by focusing on
customer retention, incremental spending and extraordinary service. In an increasingly
competitive business climate it is critical to understand who is buying your products and
services so that CRM rograms can be tailored to !eep your best and most profitable
customers coming bac! for more.
.he limitation of this research 0as that it 0as strictly limited to apparel industry"
.here have been visible findings in this research 0hich can be e;tended to the
other business sectors 0hich pursue loyalty program techni6ue to build and
maintain their customer base" .here are various sectors other than apparels 0hich
underta>e loyalty schemes2
8irlines Industry
Petroleum industry
Commercial $an>s
Blectronic Industry
I. industry
8lso some aspects influencing customer loyalty li>e dependency of loyalty on the
culture of the country* in?depth study of the demand for special treatments by the
customers holding loyalty card etc" are left untouched in this research due to time
constraints 0hich can further be e;plored"
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,:9,-;1+9< R(MARKS:
Naced 0ith intense price competition* retailers are challenged to ensure that their
programs offer both value and other customer benefits" <ome industry e;ecutives
believe retailers should focus less on promoting high?volume products and more on
understanding 0hat their best customers 0ant E even if they 0ant slo0?moving
products that the retailer might be tempted to stop carrying" .he more targeted
approach may result in less use of mass?mar>et advertising"
5etailers are e;ploring ho0 to leverage technology such as predictive soft0are to
uncover subtle buying patterns and identify customers 0ho may be li>ely to buy in
categories they have never bought in before" -any are ma>ing greater use of the
Internet to promote their loyalty program through accessible and informative )eb
sites and targeted e?mail"
Bven 0hile harnessing technology* gro0ing numbers of retailers are stepping up
efforts to reconnect 0ith consumers and to meet their changing needs on a more
IlocalJ level" In the past* store o0ners >ne0 their shoppers 0ell and could easily
anticipate needs" .oday* 0e use computers and data to help do the same" .hese
include using loyalty programs to support community initiatives* encouraging staff
to get to >no0 customers personally* and other0ise ma>ing cardholders feel that
the store values their business and respects their right to limit access to their
personal information"
8s customer loyalty being one of the most important factors for the business
today* loyalty programs* if 0ell designed and implemented* can help the
business gain competitive edge and can hence increase profitability"
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A ppendi) 1
Guestionnaire:
"ersonal +n'ormation
9ame: #####################################################################################################
#######################
'" Oender
-ale Nemale
2# 8ge
'!?22 23?29 30?3! -ore than
3(
&# )hat is your professionL
<tud
ents
<elf
employe
d
<alaried Profess
ional
3thers +Please
specify,
3# Namily7s monthly incomeL
\5s"&*000 5s"&000?
'*000
5s"'!*000?
2*000
T5s"2*000
-oyalty card >uestion:
'" )here do you shop fre6uentlyL
<hoppers <top
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Pantaloons
Olobus
Lifestyle
)estside
India $ulls -ega <tore +Pyramids,
3thers2 """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""
'"Prioriti4e those features that ma>e you revisit the above selected storeL
/eatures 1 2 & 3 4
"rice
Ser*ice
-oyalty
cards

Ambience
,on*enienc
e

A'ter sales
ser*ice

1iscounts
"roduct
-ocation
3thers +please mention,2
3" :o0 fre6uently do you shop from the above storesL
3nes in a 0ee>
.0ice in month
3nce in a month
3nce every 2 months
3nce every ! months
3thers +please
specify, 2 """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""
4" )hat is the average amount you spend each time you go for shoppingL
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\ 5s"00
5s"00?2000
5s"2000?000
T5s"000
" 8re you a0are about the loyalty programmesL
=es
/o
Interested in >no0ing
!" :o0 many loyalty cards do you haveL
'
2?4
T 4
none
(" If you have chosen InoneJ above* could you share your opinion about loyalty
cardsL
/ever heard about it
)aste of time
)aste of money
B;cess of personal information sharing
3thers +Please
<pecify,2 """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""
&" )ill you shop in your favourite store even if you don7t have loyalty card of the
sameL
=es
/o
Can7t say
9" #o you tend to increase your purchase from a particular store if you have loyalty
card of the sameL
=es
/o
Can7t say
'0" )hat is your opinion about retailers7 loyalty programmeL
$eneficial in terms of offers* gifts etc"
Yuic>/easy access to promotional information
)aste of time
37 | P a g e
B;cess <haring of personal information
1un> mails
Inconvenience in carrying cards
3ther7s Please
<pecify2 """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""
''" #o you thin> you share lot of personal information in order to get a stores
loyalty cardsL
=es
/o
'2" 8t the billing counter* if you 0ere told that shopping for additional +5s"300?00,
can get you loyalty card* 0ould you avail that optionL
=es
/o
h'3" =ou 0ould 0ant a loyalty card of a particular store because they offer2
1 2 & 3 4
#iscounts
<pecial
offers

Gpdates+ne
0 arrivals,

Preferential
treatment

<tatus
<ymbol

'4"
=our opinion Agree 1isagr
ee
I have loyalty cards 0hich I donCt use
It ta>es too long to get anything 0orth0hile
I 0ould shop in any store that suits me regardless of
0hether they have a loyalty scheme

38 | P a g e
I <ave a lot of money by using my loyalty vouchers
I shop 0herever I get better discounts
I usually get better discounts from in?store promotions than
loyalty schemes

I am nervous about ho0 the organisation uses the personal
information I give

I buy products if they earn me e;tra points
I am sceptical about the usage of personal information
I thin> a loyalty scheme is 0orth0hile and I am 0illing to
give my personal details

I spend less in stores 0here I don7t have a card
I am member of loyalty scheme but have no intention of
using my loyalty card

I 0ouldn7t change 0here I shop for the sa>e of a loyalty
scheme

I have saved substantially due to loyalty programmes
I buy products due to promotions surrounding them
'" I have stopped using loyalty cards
because"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" """""""""""""""""
"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""
"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""
"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""
""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""
'!" )hat according to you is an ideal loyalty card/ProgramL
"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""
"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""
"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""
"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""
"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""
"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""
""""""""""""
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Sources
Yuping Liu & Rong Yang 6#ompeting $oyalty %rograms& Impact of Mar!et
Saturation, Mar!et Share and #ategory E'pandability7, Journal of Marketing
Vol. 73 (January 2009), 93!0",
Ensuring #ustomer $oyalty& Designing 8e't59eneration $oyalty %rograms,
an #ra$le %&ite 'aper( )e*ruary 200+,
$oyalty %rograms and their Impact on Repeat5%urchase $oyalty %atterns& a
replication and e'tension, ,yron -&arp an. /nne -&arp0 Marketing -$ien$e
1entre, 2ni3er4ity of -out& /u4tralia
Yuping Liu (2007), 5The $ong5Term Impact of $oyalty %rograms on #onsumer
%urchase Beha:ior and $oyalty;* Journal of Marketing6 #$to*er 2007.
7rgin, 'arilti, #84a$9a$ (2007), 5Impact of $oyalty #ards on #ustomers7 Store
$oyalty:. ;nternational ,u4ine44 & 7$ono9i$4 Re4ear$& Journal6 )e* 2007.
%aar.en, ,ena3ent, <$oyalty %rograms and their Impact on Repeat %urchase
Beha:ior;*
,olton, Rut&, <annan, ,ra9lett (2000), <Implication of $oyalty %rogram
Membership and Ser:ice E'perience for #ustomer Retention and )alue,;
Journal of t&e /$a.e9y of Marketing -$ien$e4, 2".
===.google.$o9
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