Success and Failure of Loyalty Programmes - Essay Example

 Assessment of the Success and Failure of Loyalty Programmes in Restaurants and Hotels Introduction In most businesses today, a large part of sales results from repeat purchase by customers. This fact is being increasingly recognised by enterprises and there is an effort to tap this propensity among consumers, by way of “Loyalty Programmes” to encourage purchase. With airlines introducing frequent flier privileges, credit card companies offering reward points to customers through discounts on specific purchase and retail stores offering redeemable gift coupons, loyalty programmes have deeply percolated the business thought process. This dissertation aims to understand how loyalty programmes are designed and if they have been of value to the hotel and restaurant business. It is also acknowledged that the idea of “gift coupons” and “rewards” is losing its meaning in the mind of consumers because it has become such a common offering. Therefore, whether a loyalty programmes continues to really help business in driving its profits remains to be examined and will be the focus of this dissertation. Hypothesis The hypothesis assumes that loyalty programmes are valuable to hotel and restaurant business since they help drive sales. Aim The aim of this dissertation is to find out whether the implementation of loyalty programmes succeed or fail in the hotel and restaurant business and identify ways to design loyalty programmes that will succeed. Objectives 1. Understand why loyalty programmes are important; 2. Obtain indepth understanding on how loyalty programmes are designed; 3. Undertake detailed review of literature to examine how loyalty programmes have been used in the service industry; 4. Examine the success and failure associated with loyalty programmes and the reasons for the same and; 5. Recommend how hotels and restaurants can use loyalty programmes to their benefit and the pitfalls that they can avoid Theoretical Base It is said that 80% of sales is derived through 20% of customers (Lake, 2006). This has led to a plethora of customer-focused programmes created with the help of customer relationship management tools, to increase company profitability (Brown, 2000; Kalakota and Robinson, 1999; Peppers and Rogers, 1997). Such initiatives, aim to achieve customer retention through the use of loyalty programmes. The motive behind loyalty programmes is to establish customer loyalty by rewarding a certain frequency of repeat purchase by customers. As pointed by Uncles et al (2002): “Loyalty programs are schemes offering delayed, accumulating economic benefits to consumers who buy the brand. Usually this takes the form of points that can be exchanged for gifts, free product, or aspirational rewards such as air miles. Airline frequent-flier programs have been a prototype for many of the schemes” (p.28).However, there is no consensus on the definition of loyalty exhibited by consumers (Jacoby and Chestnut, 1978; Dick and Basu, 1994; Oliver, 1999). While some claim that satisfaction is an indicator of loyalty, others debate this point. Reichheld (1994) points out that despite being “satisfied” or “very satisfied” many customers still defect. In the UK, Oglivy Loyalty Centre found out that 85 % of its automotive customers claimed to be satisfied but only 40 % made a repeat purchase, and 66 % of packaged goods customers who identified a favourite brand actually ended up buying “another brand” in the recent past (McKenzie, 1995). Gremler and Brown (1999) point out that Federal Express, Pizza Hut franchises, and Cadillac dealerships have been able to forecast the sales from loyal customers with more certainty. Research on loyalty programmes in the hospitality industry is limited. Oh’s (2000), work in this field, highlights that the concept of customer value is crucial for the hospitality industry. His study explains how perception of value by customers impacts pre and post dining decisions. According to National Restaurant Association (2005) repeat purchase is crucial for full service restaurant operators since it forms nearly two thirds of sales. A consumer survey shows that “13 % of American adults participate in frequent-diner programs at fullservice restaurants and that frequent-diner programs may help sway customers’ decisions about where to dine. Forty-eight percent of consumers surveyed said they would be more likely to patronize a fullservice restaurant if the restaurant offered a customer loyalty or reward program”. Restaurateurs had found it difficult to embrace the concept of guest loyalty purely because of the technological limitations that had existed in database administration. The consumer survey undertaken by National Restaurant Association’s 2004 also indicates that customers are very open to the idea of loyalty programmes: “Almost three out of 10 (29 percent) adults reported in the that they participate in a quickservice customer-loyalty program, with females and younger people somewhat more likely than average to participate”. There has been great emphasis on the importance of loyalty programmes in hotels to attract guests. Chattopadhyay (2003) points out that loyalty programme is a “significant marketing strategy to enhance business and compete with other hotels”. Priority Club Rewards is one of the biggest loyalty programme in the hotel industry. According to Priority Club (2006) “members have redeemed 50 billion points worth more than US$340 million over the past four years”. Data Collection A large part of data collection will be done through books, journals and internet sources to test the hypothesis and achieve the objectives of this dissertation. All data will be collected from date – date. Attempt to collect primary data from a sample of 10 businesses in the hospitality industry to examine their experience with loyalty programmes will also be made. The selection will be made on a random sampling basis, and every second hotel and restaurant name in a list of hotels/restaurants in the city of will be selected for survey. If the particular organization and its staff is unavailable or unwilling to respond, the next organization in the list will be selected. A survey will be conducted among the Operations/Marketing head of 5 hotels (two 3 star, 2 four star and one 5 star) and 5 restaurants in the city of . The questionnaire will comprise both open ended and close ended questions and will be personally administered. In case the hotels/ restaurants do not wish their identity to be disclosed, it will be kept confidential. In case an appointment cannot be made with the management in the hotels/restaurants during the time period of this study or they show unwillingness to share their experience, this dissertation will solely rely on the secondary data gathered through books,journals and internet sources. (For interviews, you need to be ready to conduct interview and send me responses. I will prepare the questionnaire for you, Okay?) Customer Loyalty and Why is it Important? There is no consensus on the definition of loyalty exhibited by consumers. Used loosely, as it usually is, the term ‘loyalty’ conjures up various notions of affection, fidelity or commitment. Thus very often, customer satisfaction tends to be used as a measure of customer loyalty since it is believed that a satisfied customer will make repeat purchases. But, studies indicate that the assumption that dissatisfied customers defect, and satisfied customers remain loyal is very simplistic. Despite being “satisfied” or “very satisfied” many customers still defect. In the UK, for example Oglivy Loyalty Centre found out that 85 % of its automotive customers claimed to be satisfied but only 40 % made a repeat purchase, and 66 % of packaged goods customers who identified a favourite brand actually ended up buying “another brand” in the recent past. So it appears that satisfaction may not always create loyalty as is generally thought. There are various explanations existing on what creates customer loyalty. These are discussed below: 1. Attitudinal Commitment: Studies indicate that there has to be an ‘attitudinal commitment’ and only then can loyalty to a brand exist So when customers consistently express or exhibit favourable attitude towards a brand purchased, customer loyalty to that brand is said to exist. In order to determine whether customer loyalty exists, one needs to ask the customer how much they like a brand, feel committed to it, if given a chance will they recommend it to others and if they feel more positively about it in relation to competing brands. The stronger is this attitude in consumer mind, the stronger is the potential for customers to make repeat purchase of the same brand turning them into loyal customers. Customer loyalty is : A deeply held commitment to rebuy or repatronize a preferred product/service consistently in the future, thereby causing repetitive same-brand or same brand-set purchasing despite situational influences and marketing efforts having the potential to cause switching behavior. This perspective has gained wide acceptance in advertising and brand equity, making the companies focus on strategies that strengthen customers’ positive feelings towards the brand. Research also shows that such a positioning helps build profitability for the company. point out that Federal Express, Pizza Hut franchises, and Cadillac dealerships have been able to forecast the sales from loyal customers with more certainty. They also showed by analyzing these cases that revenue from loyal customers grew considerably. Customers who reflect a positive attitude towards a brand are less vulnerable to any negative ideas than customers who do no feel positively about the brand. Loyalty is also seen as a committed and affect-laden partnership between consumers and brands. It is a partnership that can strengthen, if there is participation by members of a household and if consumption is related to community membership or identity. For example Skoal smokeless tobacco among some North American cowboys, loyalty to particular European soccer teams, the Beanie Babies craze, Jeep brand fests, and the classic case of Harley-Davidson bikers. 2. Behaviour driven approach- The second argument on customer loyalty states that positive attitude may not always result in customer loyalty when low risk, frequently purchased brands are involved or when impulse buying or variety is being sought. Researchers of this theory define loyalty as “an ongoing propensity to buy the brand, usually as one of several”. Purchase according to such proponents has more to do with buying pattern, and less to do with attitudes, commitment and motivations in buying behaviour. The contention of such researchers is that customers are neither completely loyal to a brand nor completely disloyal to a brand. Such researchers focus on the market as a whole than on individuals. According to them a customer buys a brand not because of some pre conceived positive notions about a brand, but just because it is easily available. They find it easy to switch from one brand to another in case the brand that they are used to buying is unavailable 3. Contingent factor approach: There are yet others, who argue that customer loyalty is neither attitude driven nor behaviour, driven but dependant on contingency variables like circumstances and buying situation. Some researchers use the term ‘spurious loyalty’, implying that pattern of buying is likely to result from the recurrence of contingent factors. So “if another product comes along that is for some reason easier to buy (e.g. it is cheaper or the original product is out of stock), the consumer will not hesitate to do so” (Solomon, 1996, p. 290). Their belief is that if contingency factors are removed, buying may change. The advocates of this theory concur that behaviour is insufficient as a measure of brand loyalty. As has been argued by Aasael (1992) “loyalty implies a commitment to a brand that may not be reflected by just measuring continuous behaviour” (p. 87). “Behavioural measures are insufficient to explain how and why brand loyalty is developed and/or modified… high repeat purchase may reflect situational constraints, such as brands stocked by retailers, whereas low repeat purchase may simply indicate different usage situations, variety seeking, or lack of brand preference within a buying unit”. In addition to these approaches to customer loyalty, researchers have also tried to arrive at what can create sustained loyalty. sustainable loyalty is achieved “when the company has developed and communicated a proposition that clearly has long-term benefits for the customer” (p. 97), and when the customer shows willingness to change his or her behaviour to stay loyal with the passage of time. Hence sustainable loyalty takes root when repeat patronage exists with a favourable attitude . How are Loyalty Programmes Designed? Loyalty programmes are designed depending on how companies categorize customer loyalty. For example, those who endorse the attitude approach, try to increase revenue by building emotional bond between the brand and the customer. Increasing customer loyalty through image-based or persuasive advertising and personal service (recovery) programs are commonly used for this purpose Those who believe that loyalty is driven by behaviour and that consumers exhibit split loyalty, work on the premise that advertising, marketing and PR campaign of the company is only perceived as publicity by customers. According to them customers are not persuaded to change their attitude and commitment to the brand, based on marketing efforts of the company (). Such customers may well participate in loyalty programmes but tend to be less influenced than customers falling in the attitude- relationship category (). So to target this group, a loyalty programme is launched more as a defensive mechanism in order to match competitors and does not aim to alter customer behaviour. Marketers who believe in the contingency approach, focus on matching usage situations and variety seeking propensities of the customers. They may spend more effort in trying to ensure zero stock out, extending opening hours, having 24-hour call centers, providing on-line access, etc. Offers can include price promotions and special offers to get a bite of the competitor’s share. Loyalty programmes of this nature are initiated by companies operating in markets with limited product/service differentiation – many of these can be seen as continuous promotional programs ( ….) list five factors that can establish the value of Loyalty Programme (cited by). These include: 1. cash value (reward as a proportion of spend) 2. choice of redemption options (range of rewards offered) 3. aspirational value (intensity of desire for reward by customer) 4. relevance (extent to which rewards can be achieved) 5. convenience (ease of participation in the programme) Retail Loyalty Programmes in the UK usually offer a rebate equivalent to 1 per cent of purchases (cash value), with rewards redeemable either in the form of discounts/vouchers and/or restaurant/hotel discounts and air miles (redemption of options value) (. It is possible that discounts per se may have little aspirational value for customers while holiday or air travel rewards may represent higher aspirational value. Loyalty Programmes, gain increased relevance when it is possible for customers to achieve the rewards they value. It is important to establish the objective of the loyalty programme to design one that best suits the purpose of the company. The objectives for the company, as pointed by () could be to reward customers, manipulate their behaviour or use the loyalty programme as a defensive measure against competition. This is discussed in greater details below. Reward loyal customers: In order to accomplish this, a combination of discounts and “rewards” can be offered. This can create an incentive for customers to make a purchase. The participation in such a programme can be high because most people like to get something for nothing (). Studies indicate that, if a customer already patronises a particular outlet, then he/she usually joins the programme (). “Knowing who the best customers are, what they buy, and how often provides a secret weapon”). Generate information to manipulate consumer behaviour – More often than not, loyalty programmes aim at manipulating consumer behaviour by offering incentives and coupons at individual levels, to motivate customers to try new products or brands, pay premium prices, and/or use the brand for increasingly diverse services. Defensive measure to combat a competing scheme: In practice the “decision to launch a programme is often motivated as much by fears of competitive parity as anything else, which companies rarely state publicly” (). This is shown in how quickly the frequent flyer programme was copied by airlines. Bibliography Abrams, R (2002) Strategies Creating Customer Loyalty [online]. Available from Accessed [28 April 2006]. Arnould, E.J., Price, L.L. and. Zinkhan,G.M. (2002) Consumers. NewYork: McGraw-Hill. Barrows, C. W., Latuuca, F. P., and Bosselmanc, R. H. (1989) Influence of restaurant reviews upon consumers. FIU Hospitality Review, 7(2), p. 84-92. 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