IRACST- International Journal of Research in Management & Technology (IJRMT), ISSN: 2249-9563

Vol. 2 No.2, April 2012

 

A conceptual model for exploring impact of loyalty programs

on consumer purchase behavior: with special reference to
Indian apparel retailers
Author’s Name: Dr. Ruchi Jain
Author’s Name: Sakshi Singhal
Department: Amity School of Business
Name of Organization: Amity University, Uttar Pradesh, India

ABSTRACT by finding out key factors which impact the consumer

loyalty and their purchase behavior.
A loyalty program is an important element of customer
relationship management for firms related to the Key Words: Loyalty programs, Consumer purchase
retailing sector, apparels, airlines, and hotel industry. behavior, Rewards, Loyalty Cards, Customer
As there is proliferation of loyalty programs over the satisfaction, Customer loyalty
wide range of categories, this is little research that also
focuses on loyalty programs and measurement of its 1. INTRODUCTION

impact on consumer purchase behavior. The need of

1.1 CONCEPT OF LOYALTY PROGRAMS
measuring the impact of loyalty programs is that loyalty
programs acts as incentive schemes which benefits
“Loyalty Programs” can be defined as a program that
consumers based on the repeated purchases made by
allows consumers to accumulate free rewards when they
them. The loyalty program encourages the consumers to
make repeated purchases with a firm and therefore
make decisions more dynamically while making repeated
encourages the consumers to be loyal to the firm. In
purchases with the firm. The loyalty programs provides
marketing terms, a loyalty card is a plastic or paper card,
rewards on cumulative purchasing which enhances
which is quite similar to the other financial cards in
customer retention and encourages them to make
visibility and that, identifies the card holder as a member
repeated purchases by proving incentives which is
in a loyalty program. Loyalty Cards typically have a
beneficial to them. In this project, impact of loyalty
barcode or magstripe that can be easily scanned when it
programs on the consumer purchase behavior is
is swapped at the particular stores. Loyalty cards can be
analyzed by studying the benefits of loyalty programs for
in the form of small key ring cards which are often used
the customers as well as for the company, by studying
for convenience in carrying and ease of access for the
the different type of loyalty programs offered by the
consumers. Loyalty programs are predominantly run by
apparel sector players like globus, lifestyle, pantaloon,
retailers and the service industry.
shoppers’ stop and Westside. The impact of loyalty
programs is studied Companies typically have several goals when launching
loyalty programs, all of
which are focused on generating greater profits from the

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program’s
These goals include
• Improving knowledge of the customer
• Leveraging that knowledge to increase the sales of
undersold and/or highly profitable products/services
• Increasing customer retention and purchase frequency
Loyalty cards are the easiest and cheapest way of
running the loyalty programs. This type of loyalty
programs is more applicable in organized retail sector. It
is special type of scan able card which can be swiped at
the time of purchase. Loyalty cards are durable and
cheap. A loyalty card is a mechanism for identifying and
rewarding the loyal customers in a way to make them
feel special and rewarded. The various types of cards
are: Point cards, multi retailer cards, co-branded cards,
store cards etc. The customers are awarded with points
according to their purchase on each transaction under
loyalty card scheme. The points collected can be further
used as rewards which can redeemed at future purchases
as discounts, gifts etc.
The retailer or group of retail shop may issue a loyalty
card to a consumer which can be used as identification to
the retailer. By presenting the card, the consumer or
purchaser is typically entitled to either a discount on the
current purchase, or an allotment of points that can be
used for future purchases. It is largely influenced by
consumer’s evaluative response of the value perceived of
an offer-a loyalty program.
The card issuer or the retailer requests the customers
seeking the issuance of a loyalty card to provide some
amount of identifying or demographic data, such as
name and address which is always confidential to the
firm and non-disclosure by the stores. The stores might
use the consumer’s data as part of its marketing research.
These cards can be used to determine, for example,
                                                                            
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members. consumers’ birthday date so that they can influence them
to shop from their stores by giving them discounts on
their birthday.
1.2 FIVE TYPES OF LOYALTY PROGRAMS
1. Rewards: Award points for purchases. Points can be
exchanged for rewards. This type of loyalty program is
used when a company wants to capture new consumers
and differentiate the brand from the competitors.
Examples: Titan as titan users accumulates points of
their purchase and can exchange it for a discount or for a
gift like Rs. 25 is equal to the 1 point. American Express
card users accumulate points they can then use for gifts,
travel, or transfer to an airline Frequent Flyer program.
2. Rebate: Award a gift coupon redeemable for the next
purchase, whenever the consumer reaches a certain
spending or shopping level. When companies have a
wide range of products then this reward program can be
used to motivate new incremental purchases.
3. Appreciation: Offer a rebate, not the cash then the
result will be incremental visits and sales. In this type,
consumers are offered with the appreciation reward of
the same company.
Airlines, hotels, phone companies use this to accumulate
points for additional services within their own brand like
Seat upgrades, free tickets, hotel stays at different
locations, etc.
4. Partnership: Reward the consumer’s accumulated
purchases with a partner’s products or services.
Example: Tata’s Westside, as they offer a discount if
consumers make payment above Rs. 2500 with ICICI
debit card.
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5. Affinity: An affinity program offers special
communications, value added benefits and bonuses and
recognition as a valued consumer. This is used where
rewards are no longer needed to cultivate a long term
relationship, just as a reminder to learn more about
companies’ other products and services.

Examples: Bank’s Debit cards, gold and silver debit

cards.

1.3 CONSUMER PURCHASE BEHAVIOR

The actions that a person takes while purchasing and Pre-Purchase Behavior – the behavior that is reflected
after purchasing the particular brand or the product by the consumers during information search about a
includes the mental and social processes that follows product or a brand or a service like from where to buy,
some particular actions like:- which brand to buy is known as pre-purchase behavior.
Why should I choose this product or brand over the
Purchase behavior- the behavior that is reflected by the
other?
consumers at the time of purchase of a product or a
How should I make choices? service like why to buy, usage is known as purchase
behavior.
What value does this product or brand provides?
Post Purchase behavior- the behavior that is reflected
Consumer purchase behavior includes the purchase by the consumers after the purchase of a product or
decision process which consists of five stages by which a service from a particular brand which also includes the
consumer passes through in making choices while after sales services, reparability etc is known as post-
buying the particular product or the service. purchase behavior.

Consumers make many buying decisions every day. 2. REVIEW OF LITERATURE

Most large companies’ research consumer buying
decisions in great detail to answer questions about what
• Preeta H.Vyas and Piyush K.Sinha (December
consumers buy where they buy, how and how much they
2008 ) has concluded that as acquiring new
buy, when they buy, and why they buy. Marketers can
customers is getting costlier day by day,
study actual consumer purchases to find out what they
business organizations have offered
buy, where, and how much.
continuity/loyalty programmes to retain/reward

Figure-1 existing customers and maintain relationships.

The premise of CRM is that once a customer is
locked in, it will be advantageous to both the
organization as well as customer to maintain
relationships and would be a win-win situation

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for both. Consumers find it beneficial to join
such programmes to earn rewards for staying
loyal. Through loyalty programmes, firms can
potentially gain more repeat business, get
opportunity to cross-sell and obtain rich
customer data for future CRM efforts.
• Grahame R. Dowling and mark uncles(1997)
has concluded that in a bid to strengthen
relationships with their customers marketers are
showing renewed interest in customer loyalty
programs. Research on “normal” patterns of
loyalty in established competitive markets
suggests that in many cases it is hard to obtain
exceptional advantages through the launch of a
loyalty program. Also, competitive forces tend
quickly to erode any differential gains. A
loyalty program must enhance the overall
value-proposition of the product or service. This
in turn will help to motivate buyers to make the
next purchase of a product, and therefore
support other aspects of the firm’s offensive and
defensive marketing strategy.
• Lois O’Brien and Charles Jones (May-June
1995) has concluded that many of the rewards
and loyalty programs in the marketplace today
reveal a limited understanding of customer
needs and desires. From a customer’s
perspective, five elements determine
program’s value. They are cash value, choice of
redemption options, aspirational value,
relevance and convenience. Few programs
today offer all five, but companies that want to
play the rewards game should be sure their
value measures up to customer’s alternatives.
                                                                                          
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• Youjae Yi and Hoseong Jeon (2003) have
concluded that the results indicate that
processes underlying the effects of the loyalty
program on customer loyalty are different
depending on involvement. In the high-
involvement condition, direct rewards are
preferable to indirect rewards regardless of
reward timing. In the low-involvement
condition, immediate rewards are more
effective in building a program’s value than
delayed rewards. This means that delayed
rewards such as a mileage program can be
justified in the high-involvement condition as
long as they are linked with value-enhancing
rewards. In the low-involvement condition,
there may be a conflict of interest between the
customer and the program sponsor, because the
customer may be concerned with only the
reward schedule and not the reward type. In
cases of low involvement, immediate rewards
such as lotteries are recommended because
customers may purchase to receive incentives.
• Byron Sharp and Anne Sharp have mentioned
about the Comparison between price promotion
and loyalty programs in terms of loyalty. The
differing effects of a loyalty program and a
price promotion on repeat-purchase behavior in
the same market. The price promotion also
a generated excess loyalty but less than the
loyalty program. The price promotion generated
a greater, but temporary, market share gain.
• Yuping Lu (2007) has concluded that despite
the prevalent use of loyalty programs, there is
limited evidence on the long-term effects of
such programs, and their effectiveness is not
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well established. Using longitudinal data, the Figure-
study shows that consumers who were heavy 2
buyers at the beginning of a loyalty program
were most likely to claim their qualified
rewards, but the program did not prompt them
to change their purchase behavior. In contrast,
consumers whose initial purchase levels were
low or moderate gradually purchased more and
became more loyal to the firm. For light buyers,
the loyalty program broadened their relationship
with the firm into other business areas.

3. ANALYSIS AND DISCUSSION

Loyalty Programs are a unique business model, as they

provide significant benefits for all three stakeholders at
the same time; customers, program owner and program
partner. Customers can redeem points that were accrued
for everyday spending and will therefore experience a
discount. The program owner will either secure existing
business or will experience new and incremental
business. The same benefit goes to the partner of a
program. They will take advantage from a larger
customer base, making incremental business as well.

3.1 MONETARY PROGRAMS

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Cross marketing opportunities

All of the benefits discussed to this point lead to a

loyalty program’s key goal and most important metric of
success: improved profitability. Greater profits are a
result
of:
• Profitable customer retention
• Higher prices paid for unique products/services
• Increased average purchase size
• Decreased marketing and systems costs
• Decreased unsold expired inventory
3.2 BENEFITS OF LOYALTY PROGRAMS

Figure-3
Table-1

Benefits for Benefits for companies that

customers using offer Loyalty Program
Loyalty Program
Saving Money Identification of customers
(Enabling deeper relationship
marketing)
Risk is Reduced Identification of customer
behavior-who buys what,
when, where, how much, how
etc.
Convenience factor – Customer Tie-in
Ease of payment In this above graph, it shows that with the loyalty

Special Increased sales volume programs companies are able to differentiate its products

offers/discounts for and services over time with other competitors’ products

Card holders and services which is a benefit for a company to offer

Feeling of Belonging Damage to competitors loyalty programs to the consumers.

and Membership
3.3 LOYALTY PROGRAMS IN APPAREL
Possibility of receiving Differentiated products and
SECTOR
other financial services services from competitors
Member Magazines Switching barriers are created Today, the stores have started offering special discounts

Satisfaction from the Obtain rich customer data for to the consumers who join their loyalty programs. For

company future CRM efforts instance, Lifestyle has a loyalty program know as The
Inner Circle while Westside has Club West as their

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reward or loyalty program scheme. The pantaloon has program club West Circle
Green Card and Shopper’s stop offers First Citizen to
encourage the consumers for repeat purchases. Some
Redeemable Y Y Y Y
stores like Lifestyle, Westside, Pantaloon or Titan
reward
provide their loyalty or membership cards when the
points
customer buys for a total of Rs 2500 or above. Few
companies works in tie-ups with certain banks to Updates Y N Y Y

increase the effectiveness of loyalty programs like First

Exclusive Y N N Y
citizen Citibank Card and ICICI Bank’s Tie-ups with Big cash counter
Bazaar and also the Westside.
Free Y N N Y
In keeping with the Group’s tradition of making every
parking
shopping experience rewarding and memorable, The
Inner Circle – Landmark Group’s Loyalty program Valet Y N N N
allows members, to enjoy exclusive benefits and parking

privileges such as reward points and exciting offers. The

Home Y N Y Y
Inner Circle is today recognized amongst the leading delivery of
Loyalty Program in the country with an ever increasing altered
base of customers. The card is accepted across all goods
Landmark Group Stores in India including Lifestyle,
Special N N Y N
Home Centre by Lifestyle, Max Fashion, Splash,
occasion
Bossini, SPAR Hypermarket, Polynation Food Court,
discounts
Gloria Jean’s Coffees & The Yellow Chilli chain of
restaurants. Exclusive Y Y Y Y
sale
Figure-4
*NOTE: The benefits are offered by different retailers at
different levels (i.e. Gold, Silver or platinum)

3.4 FACTORS WHICH INFLUENCE LOYALTY

ARE:-

¾ Satisfaction that a consumer feels from prior

Table-2
purchase experience with a retail outlet
LIST OF THE BENEFITS OFFERED THROUGH motivating a consumer to come to the store
LOYALTY PROGRAMS:- again.

Particulars Shopper’s Pantaloons Westside Lifestyle

¾ Switching barriers gets created when once a

Stop consumer becomes a part of loyalty program

and if leaves it then all the accumulated points
Loyalty First Green card Club Inner
get lost.
citizen

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¾ An interpersonal relationship is developed with ¾ Consumers perceive two types of utilities-
the employees working in the particular store functional utility by looking at its price and
when a consumer visits the retail store performance or value perceived with the
frequently which helps in strengthening loyalty. dealing of the firm and Symbolic utility is
¾ Attractiveness of alternatives, it happens when certain segment of consumers stay loyal to the
there is opening of a new outlet closer to the premium brands as it helps in self concept
consumer then consumer get attracted to that projection, status or group identification.
store and he will look at the benefits of loyalty ¾ Consumers who are price sensitive looks for
programs of both the alternatives then only he price as a determinant attribute which leads to
will decide he should stay loyal or switch. loyalty.
¾ Once the consumers commit themselves to a
3.5 FOCUSING ON CONSUMER APPRAISAL store, a bond gets created which make them
insensitive to the price and competitor’s offers.
The key characteristics of successful loyalty programs
¾ The rewards which are psychological,
and has identified five key factors of performance which
economical and sociological in nature leads to
are value, choice, simplicity, aspiration and relevance.
greater trust and commitment and develop long
term relations.
Figure-5

3.7 IMPACT OF LOYALTY PROGRAMS ON

CONSUMER PURCHASE BEHAVIOR AND
INCREASED REVENUE PER CUSTOMER

Figure-6

Loyalty Programs need to offer a minimum value in

terms of a discount factor, to be considered as attractive.
Perception also plays a vital role in the customer
appraisal. Programs need to be simple and relevant to
many potential customers.

3.6 RELATIONSHIP BETWEEN LOYALTY AND

In the above figure, it is explained that consumer loyalty
CONSUMER BEHAVIOR:
and consumer profitability results from consumer
¾ Consumers show committed behavior towards purchase behavior. The consumer profitability has to
the loyalty as they perceive different benefits start with consumer purchase behavior; if the consumer
from being loyal. shows the positive behavior then it will lead to consumer

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satisfaction, trust and commitment. If the consumer is Figure-
satisfied then he will be committed to that organization 7
and will be loyal which will increase consumer
profitability of the organization.

3.8 INCREASED REVENUE PER CUSTOMER

9 Traditional marketing strategies often

incorporate discounting prices on products to
increase market share and revenues. However,
price reductions can easily be matched by Increasing customer retention significantly improves a
competitors, leading to a general deterioration company’s profitability and thus means the positive
of revenues across competing companies. impact of loyalty programs. According to Frederick
9 Frequently, there is little to no benefit to this Reichheld of Bain & Company, a 5 percent increase in
pricing game as market shares are often not customer retention results in a 25 percent to 100 percent
affected in a significant manner, yet each increase in profitability. There are several sources of
company takes in less money for its products or these additional profits, which Reichheld breaks down in
services thus resulting in lowered margins. price premium, referrals, Cost savings, revenue growth
9 To avoid a ruinous strategy for increasing or and acquisition cost.
maintaining market share, some industries have
introduced loyalty programs, which attempt to 4. CONCLUSION

increase market share by attracting repeat

Loyalty programs impact the consumer purchase
customers, knowing it is less expensive to retain
behavior in positive manner as it influences the
a customer than to gain a new one.
consumers to make repeated purchases as consumers
9 Loyalty Programs allow to directly link
find the different benefits i.e. direct and indirect or
additional sales to individual program members.
immediate and delayed attached with the brand. Loyalty
9 The program also allows for a variety of
programs helps in increasing customer retention which
correlative measures like enrolment rate, call
significantly improves a company’s profitability and thus
volume, activity rate, etc. These metrics serve
means the positive impact of loyalty programs.
as indications for acquisition, retention, income,
Consumers show committed behavior towards loyalty
price realization and marketing savings.
programs due to different types of benefits perceived by
them. In case of premium brands, certain segments stay
loyal to prestige brands as it helps self concept
projection, group identification and status. Rewards
which are economic, psychological and sociological in
nature lead to greater trust, commitment and
development of long term relations. Loyalty Programs
create an emotional bond leading to high & irreversible

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Vol. 2 No.2, April 2012
 
switching costs. Loyalty Programs impact customer y Customer relationship management, Emerging
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