Durreesamin Journal (ISSN: 2204 - 9827)

March Vol 2 Issue 1, Year 2016

Assessing the Influence of Loyalty Program on Customer Loyalty and

Customer Retention: A Conceptual Paper
Zuraini Abdullah Zawawi
Mafuzah Mohamad

zzuraini@uniten.edu.my
mafuzah@uniten.edu.my
Universiti Tenaga Nasional
College of Business Management and Accounting
Muadzam Shah, Pahang, Malaysia

ABSTRACT

This paper proposed to study the relationship between loyalty program with customer
satisfaction and customer retention. The data will be collected among final year students in
Private Higher Educational Institution in Pahang, Malaysia. Reliability test using Cronbach
Alpha and the correlation between variables will be tested using Pearson Correlation coefficient.
Generally, this study aims to add several theoretical contributions to the loyalty program
literatures, and provides some contribution to an organization in helping them to retain their
customer and therefore sustain in the industry.

KEYWORDS: Loyalty Program; Customer Retention; Customer Satisfaction;

1 INTRODUCTION

In building customer loyalty, it is very rampant for employer to offer reward or loyalty
programs (O’Brien & Jones 1995; Cigliano, Georgiadis, Pleasance & Whalley, 2000; Uncles,
Dowling & Hammond, 2003; Keh & Lee, 2006). This is evident by the increasing number of
companies that offer loyalty programs in retaining their customer. (Kumar & Reinartz 2006;
Shugan 2005; Yi & Jeon 2003; Lin & Wang, 2006). Recently, an increasing number of
academics also begun to show interest in loyalty programs (Kumar & Shah 2004; Mägi 2003;
Kivetz & Simonson 2002; Butcher, Sparks, & O'Callaghan, 2001).

In marketing, loyalty has always been an important construct especially in customer

relationship management (Ball, Coelho & Machas, 2004; Soderlund, 2006). Loyalty program
often associated with stimulating encouragement where company often offer interesting benefits
to their customer for repetitive transaction which induces customers to retain with similar
company (Lewis, 2004). Among of the benefits offered is customer membership clubs, or
loyalty programs and this has become prevailing in retailing industries, (Sopanen, 1996).

Loyalty induced positive attitudes and behaviors such as repetitive support and purchases,
and positive recommendations which may influence other actual or potential customers. A loyal
customer is important asset for company particularly when it decreases the need to seek new

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March Vol 2 Issue 1, Year 2016

customers. In fact, it is an indication that the company products and services are meeting the
needs of customer and their expectation (Rowley and Dawes, 1999).

2 PROBLEM STATEMENT

In the area of globalization, with the current economic crisis, it is crucial for all company to
be very competitive by offering and enhancing their loyalty program in keeping their customer
from switching to the other competitors (Ho, Huang, Huang, Rosten, & Tang, 2009). Customer
loyalty is vital to service business performance as loyal customer will generate stable profit,
balanced cash flow and enhanced company revenue’s (Aaker, 1991a). At the same time, business
all around the world is exposed to endless changes and risk due to the emergence of countless
competitors (Mahajar &Yunus, 2010).

In a similar vein, reward or loyalty program help in motivating customers to decide whether
to retain with the same company in reaching to the point of getting reward as promised. In fact,
an effective reward program can actually encourage customers to make repetitive buying
decisions. In addition, many authors (Boulding, Ajay, Richard & Valarie, 1993; Lemon, White,
& Winer 2002) found consistent findings in the literature that expectations of the future can
affect consumers’ current decisions on purchasing.

3 LITERATURE REVIEW

3.1 LOYALTY PROGRAM

Authors (Dick & Basu 1994; Oliver 1997; Ganesh, Arnold, & Reynolds, 2000), defined
loyalty as a combination of commitment to the relationship and behaviours. It has been argued
that customers perceived reward programs loyalty in many ways (Dowling & Uncles 1997).
Butscher, (2002, stated that customer loyalty program’s is intended to build a relationship with
the customer that turns them into long-term loyal customers, who preferably will obtain their
lifetime demand for specific product or service from the company offering loyalty program.

Loyalty program offers inducements and reward to its members aiming of keeping and
securing them. It could connect customers with a company or brand, and bring positive impact in
the relationships between customers and firms or brands by various incentives offered. (Lacey,
2003; Yi & Jeon, 2003; Leenheer, Van Heerde, Bijmolt & Smidtsd , 2007; Omar, Aziz & Nazri,
2011a). Yi and Jeon (2003) contended that loyalty program is a marketing action intended to
offer reward incentives for profitable loyal consumers. Bolton, Kannan, and Bramlett (2000)
stated that, when customers involve in the loyalty programs, the perceived benefits they receive
will lead to their loyalty.

Lewis, (2004) stressed that specific loyalty program will induce consumer from single to
multiple purchase. It simply means that if customer interested with the loyalty program offered,
they are likely to repeat their purchases and thus it will make them retain with the same
company. Unfortunately, there is limited and contradictory published empirical work on the
value of loyalty programs. Some scholars argued that behavioural loyalty is not a sole indictor of
loyalty since loyalty itself is has several dimension (Kumar & Shah 2004).

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3.2 CUSTOMER SATISFACTION

“Customer satisfaction is a response (emotional or cognitive), pertains to a particular

focus (expectations, product, consumption experience), and occurs at a particular
moment in time (after experience or consumption).”
(Sureshchandar et. al, 2002, p. 23)
Many researchers (Oliver, 1981; Brady & Robertson, 2001; Lovelock, Patterson &
Walker, 2001) conceptualized customer satisfaction as an individual’s feeling of pleasure or
dissatisfaction related to product outcomes as to their expectations. Customer is satisfied when
they are aware of less price offered, or less influenced by other competitors or being offered to
buy additional products or services (Zineldin, 2000). In a similar vein, Lemon et. al, (2002: p.1)
contended that, customer satisfaction is “the assessment of the pre-purchasing expectations from
the product, with the results reached after the act of purchasing.”
Lewis (2004) stressed that customer satisfaction is greater when resources from similar
categories are exchanged compared to different categories (Brinberg & Wood 1983; Foa & Foa
1976, 1980; Foa, Tornblom & Converse (1993). If one customer satisfied, it may lead to other
benefits from word of mouth of that customer (Urbany, Dickson & Kalapurakal, 1996).
However, how customers develop loyalty to a particular store and how that loyalty can be
maintained are unresolved issues. An understanding of current customers' loyalty intentions and
their factors is an important to provided constructive solutions in retailing business. Conversely
what matters to customers is not known to retailing industry.

3.3 CUSTOMER RETENTION

Customer retention is apparently an important tools in any organization that applying

relationship marketing (Gronroos, 1991; Coviello, Brodie, Danaher & Johnston, 2002). The
exact meaning and measurement of customer retention can vary between industries and
firms (Aspinall et. al., 2001). Gerpott. Rams and Schindler (2001) defined retention as the
continuity of the business relations between the customer and company while Blattberg, Getz
and Thomas (2001) stated that customer retention happen when customer makes a repetitive
purchase over a period of time.
Increased of customer retention lead to crucial effects to the company namely; it can
contribute to the company income gradually and this is crucial in economic down turn, and loyal
customer will keep on contribute to the company on long term run. Existing customers also tend
to purchase more than new customers (Rose, 1990). In addition, (Peters, 1988), in his survey
found that the costs to retain customers are about 80% lower than the costs to acquire new
customers.

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3.4 THE RELATIONSHIP BETWEEN LOYALTY PROGRAM WITH CUSTOMER

SATISFACTION AND CUSTOMER RETENTION

Clarke (2001) contended that consumer loyalty is truly close to the cost. McIlroy and
Barnett (2000) expressed that a vital idea to consider when building up a client commitment is
consumer loyalty. It was examine that loyalty program with monetary compensation contributed
greatly in retaining customer (Verhoef, 2003). Authors (Anderson and Sullivan, 1993; Fornell,
1992) found a positive correlation between loyalty program and customer satisfaction.

Numerous studies (Anderson, Fornell, & Lehmann, 1994; Boulding et al., 1993; Fornell,
1992; Jones, Mothersbaugh, & Beatty, 2000) showed a positive relationship between satisfaction
and retention. Interestingly, Dufer and Moulins, (1989), Mittal and Kamakura, (2001) and
Reichheld, (1993) found that satisfied customers will not demonstrate extra ordinary repurchase
behaviour. It indicated that satisfaction is not linked to a total of purchases made by customer.

Based on previous discussion, the following hypotheses were proposed;

H1: There is a significant relationship between Loyalty Program and Customer Satisfaction.
H2: There is a significant relationship between Loyalty Program and Customer Retention

4 RESEARCH FRAMEWORK

Customer
Satisfaction
Loyalty
Program
Customer
Retention

(Inamullah, 2012)

5 METHODOLOGY

For this preliminary research study, a questionnaire based survey method will be used. The
survey form will be distributed to all final year degree program of a Private Higher Education
institution in East Coast area at Pahang, Malaysia. The five Likert scale ranging from 1 to 5,
where 1=Strongly Disagree, 2=Disagree, 3=Neutral, 4=Agree and 5=Strongly Agree will be used
to measure the influence between reward program with customer satisfaction and customer
retention. The questionnaires will be segregated into four sections namely; section A for
demographic profile of the respondents, section B is on loyalty program while section C and D

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March Vol 2 Issue 1, Year 2016

will highlight on customers satisfaction and retention and all questions in this research will be
adopted from;

Study variables Sources Likert Scale

Loyalty Program The Logic Group-Loyalty Report, 2010 Five Likert scale ranging
Customer Satisfaction Faizan et.al, 2011 from 1 to 5,
Siddiqui et.al, 2011 1=Strongly Disagree
Huang and Wonglorsaichon, 2=Disagree
Customer Retention Siddiqui et.al, 2011 3=Neutral,
4=Agree
5=Strongly Agree

6 CONCLUSION

Previous study suggested that loyalty program is an effective tool in increasing company
income from loyal customers. Even though loyalty programs are a common marketing
instrument, empirical examinations of their effectiveness are limited (Drèze and Hoch 1998;
Sharp and Sharp 1997).

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