CHAPTER II

REVIEW OF RELATED LITERATURE AND STUDIES

According to Martin H. Bosworth, when you're stacking up grocery items at the checkout

line, you're probably not worried about whether your supermarket chain is compiling a profile of

you based on what you buy, and storing that information for its own use. After all, who cares if

you buy one brand of tissues over another, or favor name-brand microwave pizzas over store

brands?

Supermarket chains care. So does CVS. So much so that they use discount cards (referred

to as "membership" or "loyalty" cards) to offer you what seem like great bargains. They use the

cards to keep tabs on what you purchase, how often you shop, and what your buying preferences

are.

And, just as data brokers like Choice Point collect personal data and use it to build an

aggregate "profile" of individual consumers, supermarket chains use their stored data to target

buyers with "special" offers and "preferred" advertisements from their marketing partners.

This is not a uniquely American phenomenon. Everywhere a supermarket, pharmacy, or

department store can be found, anywhere in the world, you can assume there's a "discount

rewards" program in place to provide customers with benefits that go "beyond mere shopping,"

as one writer put it in the May 29th edition of the Hindu Business Journal.
"You need to be a compulsive shopper to make the best of the loyalty cards. If you visit the store

just once a year or like to comparison shop, these cards may not have much to offer," the article

noted.

The recent news that CVS Extra Care card users' information was exposed on the

company's Web site illustrates the risks that loyalty card programs entail. The question then

becomes, what is more important -- saving money or protecting your privacy?

According to a 2004 poll conducted by Boston University's College of Communication, 86

percent of American shoppers use some form of store card or discount card, "and the majority of

them say the benefits of the card are worth giving up some privacy." A Canadian Broadcasting

Corporation (CBC) article in 2004 stated that 76 percent of Canadian consumers belong to at

least one loyalty program. A British advertising column boasted that loyalty card programs had

achieved "85% consumer penetration" in the U.K. circa March 2005.

Loyalty card users enjoy discounted prices, special coupon offers, and rebates or "points"

towards airline tickets or shopping sprees, much like credit cards. In addition, many loyalty card

programs offer tangible benefits such as CVS's plan to designate pharmaceuticals purchased with

their card as qualifying for medical Flexible Spending Accounts (FSA's), or the Upromise plan,

which allocates portions of money spent using participating stores' loyalty cards to your

children's 529 college savings account.

According to Elena Cedrola, loyalty programmes are an important tool with which retail

companies manage relationships. While the last 15 years have seen a broad dissemination of

loyalty programmes in new sectors and new countries, since the early 2000s, both in the

academic and managerial world, the power of loyalty programmes to stimulate retention and
support loyalty, has been brought into question. The purpose of this paper is to focus on

these elements, analyzing data collected on a sample of loyalty cardholders.

According to (Frow & Payne, 2009) the CRM is the strategic management of the

relationship with the customers, based on the appropriate use of technology. The implementation

of CRM has allowed companies to store various information about their customers, which has

been used as a way to meet their individual needs and succeed in establishing more interactive

and mutually beneficial relationships (win-win) between the organizations and their customers.

According to (Nguyen & Mutum, 2012), the CRM combines marketing techniques with

information technologies with the aim to maintain and establish a relationship with the customer

supported by an in-depth use of databases. As such, and so that the implementation of CRM is

successful, it is essential to establish a good relationship between the organization and its

customers, based on a constant exchange of information

According to (Kim et al., 2012), the goals an organization intends to achieve with the

implementation of CRM are: to build and establish a relationship with the customer in a long-

term perspective; to develop and maintain an individualized relationship based on customer

satisfaction, and succeed in increasing their retention. Over the years this tool has proven to be a

key element with regard to increasing a company’s profitability, as it helps to identify which

clients of the organization contribute the most to that growth.

 According to (Dorotic et al., 2012) and (Henderson et al., 2011) these programs include a

wide range of marketing actions, while literature describes loyalty programs in different ways.

We can highlight several – reward programs, shopping programs, frequency reward programs,

and loyalty cards –, but it is important to note that a company can offer different loyalty

programs, at the same time, without the launching of one program causing the failure of another

(if the existing loyalty program is of quality, then it is quite likely that it will remain in the

market (Demoulin & Zidda, 2008). In view of this, and although in marketing literature there are

various definitions of the concept of loyalty programs, the common and central point to them all

relates to the fact that the main goal of these programs is to reward and encourage the customers

to adopt a loyal behaviour towards the organization (Dorotic et al., 2012); (Bridson et al., 2008);

(Morrisson & Huppertz, 2010), by making repeated purchases ((Demoulin & Zidda, 2008);

(Gandomi & Zolfaghari, 2013).

According to (Rese et al., 2013), this issue can be more easily understood with the

following example: a customer wants to purchase a product that is available both in company A

and company B. However, company A has a customer loyalty program, unlike company B who

does not offer any program. The critical situation occurs when the product offered by company B

is more advantageous than the one from company A, but the benefit from the customer’s

participation in company A's loyalty program outweighs the offer from company B, which

motivates the client to choose to buy the product from company A.

According to (Meyer-Waarden, 2008), the implementation of a loyalty card program has

a key goal that is extremely important for the organizations, as it allows them to select, identify
and target the more important customers, so that they can subsequently make a better distribution

of the available resources. So, through loyalty cards the companies have the opportunity to

individualize their customers based on the marketing mix policy, since in this way they can, for

example, identify those customers more sensitive to the price changes of a certain

product/service.

According to the economic factors, we can state the fact that loyalty programs are

recognized as value given to the customers in the form of rewards. Associated with the economic

factors there is also the concept of switching costs, since if customers choose the

products/services of another company then they are losing value ((Morrisson & Huppertz, 2010);

(Leenheer et al., 2007). With regard to the psychological factors it is important to highlight the

fact that, in general, customers value and appreciate the rewards given to them, since loyalty

programs transmit the feeling to the customers that they are being recognized and valued when

compared to other customers. This may lead to the feeling that they are a special client, and as

such this can trigger and encourage the consumer to adopt a more loyal behaviour towards the

organization.

According to (Peppers .D, & Rogers. M 2004), the whole point of a relationship is to

keep your customers, and simultaneously grow new customers. So what is customer loyalty?

Those who’ve tried to answer that question have approached it from two different directions:

attitudinal (what Barnes calls “emotional”) and behavioral (what Barnes calls “functional”).

Although each of these two definitions of loyalty is valid, they have different implications and

lead to very different prescriptions for businesses. The attitudinal definition of loyalty implies
that loyalty is a state of mind. Customers are loyal to a brand or a company if they have a

positive, preferential attitude toward it. They like the company, its products, or its brands, and

they therefore prefer to buy from it, rather than from the company’s competitors. In purely

commercial terms, the attitudinal definition of customer loyalty would mean that someone who is

willing to pay a premium for Brand A over Brand B, even when the products they represent are

virtually equivalent, is loyal to Brand A. But the emphasis is on willingness, rather than on actual

behavior, per se. In terms of attitudes, then, increasing a customer’s loyalty is virtually

equivalent to increasing the customer’s preference for the brand. It is closely tied to product

quality and customer satisfaction. Any company wanting to increase loyalty, in attitudinal terms,

will concentrate on improving its product, its image, or other elements of the customer

experience, relative to its competitors. The behavioral definition of loyalty would mean that

someone is willing to pay a premium for Brand A over Brand B, even without respect to the

attitudes or preferences that underlie that conduct. By this definition, customers are loyal to a

company if they buy from it and then continue to buy from it. Loyalty is concerned with

repurchase activity, regardless of any internally held attitudes or preferences. In the behavioral

definition, loyalty is not the cause, but the result of brand preference. A company wanting to

increase customer loyalty will focus on whatever tactics will in fact increase the amount of

repurchase behavior— tactics that can easily include, without being limited to, raising

consumers’ general preference for the brand or their level of satisfaction with it.

According to (McIlroy, A. and Barnett, S. (2000), Customer loyalty could be termed a

“customer’s commitment to do business with a particular organization, purchasing their goods

and services repeatedly, and recommending the services and products to friends and associates”.

It is a term which is neither easy to gain nor maintain, rather it is vulnerable, where “even if its
customers are satisfied with the service they will continue to defect if they believe they can get

better value, convenience or quality elsewhere”.

According to (Grönroos, C. (1990), Marketing is to establish, maintain, and enhance

relationships with customers and other partners, at a profit, so that the objectives of the parties

involved are met. This is achieved by a mutual exchange and fulfillment of promises. Such

relationships are usually but not necessarily always long-term. Establishing a relationship, for

example with a customer, can be divided into two parts: to attract the customer and to build the

relationship with that customer so that the economic goals of that relationship are achieved.

A loyalty card program is an incentive plan that allows a retail business to gather data

about its customers. Customers are offered product discounts, coupons, points toward

merchandise or some other reward in exchange for their voluntary participation in the program.

A secondary goal of a loyalty card program is to build repeat business by offering participating

customers something that isn’t available to non-participating customers.

Loyalty cards often resemble plastic credit cards but they can also be keychain fobs or

stickers. Typically a loyalty card has a barcode or magnetic stripe that’s scanned at the point of

sale (POS). The card identifies the customer and sends information about what the customer

bought to a database. The information in the database is used to help the retailer understand and

influence his customers’ buying habits. According to research carried out by Boston University’s

College of Communication, eighty-six percent of American shoppers are listed in a loyalty

database; a majority of survey respondents said receiving the card was worth giving up some

measure of privacy.
Loyalty schemes are necessary for the retailers because it helps them in attracting the customers

and when they came to them they try to retain them by offering their services on discounted rates

and by offering them further discounts and services.