Chapter Eight

Designing Loyalty Programs

Satisfaction-Loyalty-Profit Chain

Product Performance
Service Performance Employee Performance
Customer Satisfaction

Retention /
Loyalty

Revenue / Profit

Source: Strengthening the satisfaction-profit chain”, Eugene W Anderson, Vikas Mittal. Journal of Service Research, Nov 2000. Vol 3, Iss.2, p 107

beyond which increasing satisfaction does not pay . profits rise • Improving customer satisfaction comes at a cost and once the cost of enhancing satisfaction is factored in. while the marginal expenses to achieve the growth in satisfaction increase • There is an optimum satisfaction level for any firm.Results of Customer Satisfaction-Profit Link Studies • Direct link suggests. offering “excessive satisfaction” doesn‟t pay • Marginal gains in satisfaction decrease. that as customers experience greater satisfaction with a firm‟s offering.

retention is not guaranteed If customers are dissatisfied. other products become more enticing The link is nonlinear in that the impact of satisfaction on retention is greater at the extremes .The link between Satisfaction and Retention (contd.) • Link between satisfaction and retention : – Dissatisfaction has a greater impact on retention than satisfaction • • • Even if the level of satisfaction is high.

How Competitive Environment affects Satisfaction-Loyalty Relationship: Example • In the very competitive automotive industry. – Very high levels of satisfaction are necessary for a customer to repurchase the same brand again .

The link between Loyalty and Profits • Reichheld‟s hypotheses – Long term customers spend more per period over time – Cost less to serve per period over time – Have greater propensity to generate word-of-mouth • Does not hold true in a non-contractual relationship – Revenue stream must be balanced by the cost of constantly sustaining the relationship and by fending off competitive attacks – Efforts at increasing customer satisfaction and retention not only consume a firm‟s resources but are subject to diminishing returns .

it is clear that loyalty is not the only path to profitability .Lifetime Duration-Profitability Association • Reinartz and Kumar: Across the different firms. – there is a segment of customers that is loyal but not very profitable (due to excessive resource allocation) – there is a segment that generates very high profits although it has only a short tenure – Since these short-term customers can be very profitable.

Types of Loyalty • Behavioral loyalty: the observed action that customers have demonstrated towards a particular product or service • Attitudinal loyalty: the perceptions and attitudes that a customer has towards a particular product or service .

g.Building True Loyalty • Encompasses both attitudinal and behavioral components of loyalty • Difficult in the case of a low involvement category– e.: grocery shopping .

CRM at Work: Supermarkets . supermarkets have only persuaded a small minority of shoppers to stay loyal • According to a report from Mintel Research: – Only 15% of all grocery shoppers are completely loyal to the store where they do their main grocery shopping – 29% use one other store – 22% use two others – Men are more likely than women to be loyal to a single store – 46% of men shop in just one or two main stores .Difficulty in Building True Loyalty • Despite spending hundreds of millions of pounds on price-cutting campaigns and loyalty card schemes.

typically but not necessarily associated with the focal firm . giving up the free choice they have otherwise • In exchange for concentrating their purchases with the focal firm. they accumulate assets (for example. „points‟) • Points are exchanged for products and services.Loyalty Programs • A marketing process that generates rewards to customers based on their repeat purchasing • Consumers who enter a loyalty program are expected to transact more with the focal company.

Key Objectives of Loyalty Programs • Building true (attitudinal & behavioral) loyalty • Efficiency profits • Effectiveness profits • Value alignment .

Efficiency Profits • Profits that result from a change in customer‟s buying behavior due to the loyalty program • Change in buying behavior can be measured. in: • Basket size • Purchase frequency acceleration • Price sensitivity • Retention • Lifetime duration • Measured in terms of the immediate profit consequences as compared to profit consequences without loyalty programs – net of the LP cost .

Effectiveness Profits • Measured in terms of the long-term profit consequences realized through better learning about customer preferences over time • Allows sustainable value creation for customers through customization of products or communication • Most likely to generate sustainable competitive advantage since it produces the highest profits in the long run • The strategy of using a LP to learn about customer preferences may result in impressive gains for both customers and organizations • Customers get more of what they truly want. and firms are safe in terms of not having to engage in a costly mass marketing exercise .

Value Alignment • Goal of aligning the cost to serve a particular customer with the value he/she brings to the firm • Allows firms to serve their most valuable customers in the best manner • The goal of value alignment is particularly critical when there is great heterogeneity in the customer‟s value and in the cost to serve the customer Example: the airline business. the hospitality industry and the financial services industry .

soft rewards – – – – Product proposition support (Choice of rewards) Aspirational value of reward Rate of rewards Tiering of rewards – Timing of rewards • Sponsorship (existence of partner network. other firm) . network externalities) – – Within sector vs. across sector LP Ownership (focal firm vs.Design Characteristics of Loyalty Programs • – Reward structure Hard vs.

promotions. soft rewards – Financial or tangible rewards (hard rewards) and those based on psychological or emotional benefits (soft rewards) – Hard rewards: price reductions.Reward Structure • Hard vs. free products and preferred treatment – Soft rewards: psychological benefit of having special status in addition to receiving preferred customer service .

Reward Structure (contd.) • Product proposition support – Reward directly supports the firm‟s product proposition – Allows LP member to redeem points for products that are completely unrelated to the focal firm‟s offering .

Reward Structure (contd.) • Aspirational value of reward – Consumers prefer hedonic goods as opposed to utilitarian goods when receiving a gift or a LP reward .

how assets or rewards are accumulated as a function of spending behavior .) • Rate of rewards – Ratio of reward value (in monetary terms) over transaction volume (in monetary terms) – How much a consumer is getting in return for concentrating his or her purchases • Tiering of rewards – Rewards based on asset accumulation response function .Reward Structure (contd.

the greater the “breakage” (the amount of rewards that are never redeemed) – “Lock-in” effect . and reward rate – Longer the timing to build up to a certain reward level.firm creates redemption rules that favor long accumulation periods. thereby impacting customer retention – Customers build up assets that function as switching cost . type of reward given out.) • Timing of Rewards – Determined by minimum redemption rules.Reward Structure (contd.

LPs Based on Sponsorship • Within sector/across sector .