Problem definition - Research Paper Example

That is how loyalty marketing, not only in the hospitality industry but also in the whole business market, emerged as being necessary and ideal. Loyalty marketing is “the management process of identifying ‘best customers’ and utilizing customer data and insight to create, retain and grow profitable relationships.” (ICLPloyalty.com, 2011: p. 1). Loyalty marketing has become a key factor for success in the service industry over the past years (Bolton, Kannan & Bramlett, 2000; Levey, 2005).

In such a highly competitive market, service providers in many industries have discovered the importance of customer retention (Shoemaker & Lewis, 1999). They recognize the fact that keeping their customers is just as important as creating them. Loyalty programs have now become so common in the hospitality industry that it is hard to find a business that does not have such a program. It is known that loyal customers make more purchases than non-loyal customers do, and they are less likely to switch to a competitor brand just because of price and other special promotions (Shoemaker & Lewis, 1999).

The most essential theory of loyalty marketing is that a small increase in loyal customers can bring a significant increase in profitability to a business. Reichheld and Sasser (1990) found that a 5 % increase in customer retention resulted in up to a 125 % increase in profits in nine service industry groups they studied. Moreover, the Harvard Business Review discovered that a company can double its profits by retaining just 5% more of its customers (Maxted, 2005). In the changing global environment, it is not too much to say that all business firms are looking for innovative ways to increase customer loyalty, because customer loyalty has a very powerful impact on firms' performance and it is considered as a major source of competitive advantages (Lam, Shanker, Erramilli, & Murthy, 2004).

Loyalty marketers are not just collecting customer data, but they are also analyzing their customers’ behavior in order to have a better understanding and to make improvements. They want to know what types of rewards the customers are redeeming, what kinds of partner offers appeal to customers, and even the customers' lifestyle or preference. The knowledge that vendors gain from knowing their customers can be expected to bring a better chance of success (Capizzi et al., 2003). Overall, one of the most dominant trends of loyalty programs these days is the coalition model.

Companies in different businesses are bonding together in order to share the branding, operational costs, marketing expenses, data, and customers. These multi-merchant loyalty coalition programs offer strong benefits to attract more customers by creating value (Capizzi et al., 2003). For example, hotels are partnering with other airlines, rental cars, restaurants, and even credit card companies and offering loyalty customers more opportunity to earn points and benefits. One of the world's most recognized hotel rewards program, the Marriott Rewards, has partnerships with Boston Coach, Chase, Hertz, Skymall, Air Canada, British Airways, American Airlines, and numerous other airline companies.

Members of the Marriott rewards can also earn additional points via the Marriott rewards visa card issued by Bank One (Marriott International Inc., 2011). Another example of this type of loyalty program in the hotel industry is the Hilton HHonors offered by Hilton. Hilton HHonors has more than 55