Loyalty Cards and Customer Loyalty - Literature review Example

Loyalty Cards and Loyalty Loyalty programs like loyalty cards of Tesco aim at increasing the brand loyalty of the s. This brand loyalty is expected to enhance the brand equity of Tesco. The loyalty cards also aim at increasing the revenues in the short and long run by giving incentives to the customers to make more purchases and repeat purchases at the stores of the retailers offering the cards (Sharp, Byron and Anne Sharp 1997). The success of the loyalty cards was proved in the retail context of United Kingdom when Tesco launched its first nation wide supermarket-only loyalty card scheme, Clubcard , in 1994. A year later Clubcard holders were spending 28% more at Tesco stores and 16% less at rival Sainsbury’s stores. As a consequence, Sainsbury’s too had to launch its own loyalty card program (Victoria Trench, 2010). The Clubcard loyalty card scheme of Tesco has played the most important role in making Tesco the largest retailer in UK. Tesco now sells a third of Britain’s groceries. It was not long ago, when in the beginning of the 90s, Tesco occupied a small relatively down-market slot (Economist, 2005 can be accessed at http://www.economist.com/node/4247169?story_id=4247169). Rivals like J.Sainsbury or Waitrose were considered more up market and where the upper middle class went. Since then the scenario has completely changed for Tesco as it emerged as the largest retailer of UK. A study of a cross-section of customers at the Tesco store in Aldershot showed that Tesco is now patronized by all three general classes of British customers : wealthy and upper class customers, middle class customers and those coming from the poor class. The Clubcard program has played the most important role in making Tesco the largest retailer in UK. It helped Tesco in three ways: 1) The discount encouraged customers to spend more at Tesco stores like the one at Aldershot. 2) It increased the market penetration of Tesco by attracting new customers to Tesco. 3) The most important benefit is the huge amount of information about customers that is generated by the Clubcard program. The third benefit of generating huge amount of customer information is the most important benefit of the loyalty card schemes like Clubcard of Tesco. The loyalty card schemes allow retailers like Tesco to record what the customers are buying. This information on customer buying patterns is used strategically at Tesco stores like the one at Aldershot. The marketing strategy of Tesco relies heavily on this information. For instance, the store at Aldershot customizes its product offerings according to the profile of the local area. This customization of product offerings using the information generated by the loyalty card on the local customer profile is not limited to the Aldershot store of Tesco only. Brixton, in South London, is an area that has a lot of immigrants from Caribbean. The Tesco store at Brixton sells plantains which is a kind of savory banana popular among the local population of Caribbean immigrants. The Tesco stores in Central London do not sell plantains but sell sandwiches (because of a number of offices in the surrounding areas) to office workers at lunch time and then ready-made meals to them in the evening (Economist, 2005). The information generated through loyalty card schemes have enabled retailers like Tesco to combine the knowledge about customer buying behavior of the village shop with the economies of scale in buying and logistics of a multi-national retailer. The information is also shared with the suppliers. A product is developed and perfected according to the specific needs and demands of the customers of Tesco. Because Tesco has now such a diversified product portfolio – that includes everything from clothes to financial services- the positive feedback effect of this information on customer behavior is greatly strengthened. The information generated by the loyalty cards helps retailers in their customer relationship management (CRM). The objective of customer relationship management is to make customers so loyal so that their lifetime value can be gained or exploited by the retailer. Take the example of a customer A, who buys, suppose, GBP 100 worth of goods annually from his nearby Tesco store at Aldershot. A is presently 30 years old. Taking an average life expectancy of 75, A will live for another 45 years. Ignoring inflation, the lifetime customer value of A for the Tesco store at Aldershot is: 45* 100 = GBP 4500 (assuming that A continues to buy the same value of goods worth GBP 100 every year). The aim of customer relationship management (CRM ) of the Aldershot store of Tesco is to make A so loyal that he continues to buy at the Tesco store for the rest of his life. Only then can his customer lifetime value be exploited by Tesco. The loyalty card programs like the Clubcard therefore become an integral part of customer relationship management (CRM). At the emotional level too, the loyalty card schemes generate goodwill for the retailers in the minds of the customers. Analysis of the results of the survey done at the Tesco store at Aldershot: A survey of 200 customers of Tesco store at Aldershot was undertaken as part of the primary research. The customers were given a questionnaire. Random sampling was done while choosing the respondents who were leaving the store after completing their shopping. Q) Has the Clubcard of Tesco increased the amount you spend in the Tesco store? 62% of those surveyed replied in positive that they were spending more in Tesco stores because of the discounts and rebates given by the loyalty card. 22% of the respondents replied in negative while 16% were undecided. The results of the primary research show that the loyalty card of Tesco had a significant positive impact in increasing the buying of the customers at its store in Aldershot. Q) Has the loyalty card improved your perception of Tesco? 71% of the customers surveyed replied in affirmative that the loyalty card has improved their perception of Tesco. 29% of those surveyed replied in negative. The loyalty card improved the brand image of Tesco in the minds of the customers. Q) Have the service and the product offerings of the store improved over the time you have been shopping at the store? 55% of the respondents replied in affirmative that the service and product offerings of the Tesco store at Aldershot have improved over the time they have been shopping there. 10% replied in negative while 35% were undecided. Majority of the respondents clearly felt that the service and product offerings of the Tesco store have improved over the course of the time that they have shopped at the store. This can be an indicator of the effective use of the information on customer behavior generated by the loyalty card program. This might have resulted in improvement of service and product offerings at the Tesco store. Q) Do you think that loyalty card of Tesco really creates significant value for the customers? 60% of the respondents said that the customer loyalty card of Tesco created value for the customers. 30% of the respondents replied in negative while 10% were undecided. Effectiveness of loyalty cards: If the results of the survey at Tesco store at Aldershot are generalized then they indicate towards the effectiveness of loyalty card programs in achieving their objectives. Loyalty card schemes that actually create value for customers increase the brand loyalty of the customers towards the retailer. There is a direct relationship between satisfaction and customer loyalty. More satisfied customers are more loyal (Fred Reichheld ,1996). Dissatisfied customers have no loyalty at all. Loyal customers make repeat purchases. Loyalty cards create more satisfied customers and hence more loyal customers (Fred Reichheld ,1996). It increases the sales of the retailer because customers end up spending more in the stores. The greatest benefit of the loyalty card programs like the Clubcard definitely lie in the huge amount of information on customer behavior that they generate. The huge database of information on customer behavior that Tesco now has is one of its biggest strategic assets. It can leverage this strategic asset for sustaining its competitive advantage over its competitors. These benefits more than offset the impact on the margins that loyalty card programs may have because of the discounts and rebates that they give (Susie Mesure, 2003). Loyalty cards therefore continue to be one of the most potent tools of loyalty marketing. Loyalty marketing is that approach to marketing in which a company focuses on growing and retaining existing customers through incentives like loyalty cards (Philip Kotler, Kevin Kohler, 2000). Re-launch of the loyalty card program of Tesco and the increased effectiveness of loyalty cards in the post-recession scenario: The effectiveness of loyalty cards in the post-recession scenario has increased greatly. This is because the customers in UK and everywhere else have become more value conscious. They have become more prudent with their buying decisions and are looking for greater value for every penny that they spend. The GBP 150 million re-launch of Clubcard by Tesco in 2009 was in recognition of this tendency of customers to look for greater bargains in the post recession scenario (James Thompson, 2009). In such a market the importance of customer loyalty has increased even more. With the re-launch of the Clubcard, Tesco aimed to add another new 1 million customers to its loyalty card scheme. This would bring the total of loyalty card holders to 16 million. This is equivalent to about one in every two households of Britain. Recommendations on how Tesco could improve its Clubcard scheme: The Clubcard loyalty card scheme has played a very important role in the success of Tesco. The only way that Clubcard scheme can be improved further is by creating more value for the customers through the loyalty card. In the post-recession scenario, Tesco can use the Clubcard scheme to offer more discounts and vouchers to the customers. The slight loss in profit margin would be more than offset by the greater volume of sales. After all, Tesco’s business model relies on low-margin and high-volumes. The huge database of information that Tesco has on customers’ buying behavior can be used more effectively in offering customers greater discounts on items that they buy routinely from the Tesco stores. With its rivals having very similar loyalty cards, the loyalty card scheme of Tesco has now lost much of its competitive advantage. Tesco needs to come up with some really innovative features in its Clubcard for regaining that competitive advantage. It can do so if it once again sieves through the huge data of information on customer buying behavior and buying pattern that it has in its databases. It may identify some till now unidentified pattern in customer buying and evolve Clubcard further to give some respite to the recession hit customers of UK. References: Victoria Trench, 2010, Who wins with supermarket loyalty cards , BBC ( can be accessed online at http://news.bbc.co.uk/2/hi/business/8505031.stm ). Economist, 2005, Tesco: the sceptered aisle, (can be accessed at http://www.economist.com/node/4247169?story_id=4247169). James Thompson, 2009, Tesco to re-launch Clubcard scheme with GBP 150 million campaign, The Independent (can be accessed at http://www.independent.co.uk/news/business/news/tesco-to-relaunch-clubcard-scheme-with-163150m-campaign-1681873.html) Susie Mesure, 2003, Loyalty card costs Tesco £1bn of profits - but is worth every penny,The Independent ( can be accessed at http://www.independent.co.uk/news/business/analysis-and-features/loyalty-card-costs-tesco-acircpound1bn-of-profits--but-is-worth-every-penny-582877.html). Sharp, Byron and Anne Sharp (1997), "Loyalty Programs and Their Impact on Repeat-Purchase Loyalty Patterns", International Journal of Research in Marketing, 14 (5), 473-86. Blau, John (2004). "Metro Store bows to pressure from anti-RFID activists" InfoWorld Albrecht, Katheriner, 2007, "Why getting a shopper card under a fake name is not the answer" Consumers Against Supermarket Privacy Invasion And Numbering Susan Ward,2008,"Cool Tool of the Week" About.com. "Safeway scraps loyalty card", 2000, BBC News. Philip Kotler, Kevin Kohler, 2000,Management Marketing, Prentice-Hall. Evans, Stuart. (2007) "No Such Thing as Loyalty", iclployalty.com Fred Reichheld (1996) Loyalty Rules!, Harvard Business School Press, Boston. Fred Reichheld (1996) The Loyalty Effect, Harvard Business School Press, Boston. Root, Damon, 2009, "Marketplace of Ideas." Academic Search Complete, EBSCOhost, Chris X. Moloney (2006) "Winning Your Customers Loyalty: The Best Tools, Techniques and Practices" AMA Workshop Event(s). Misc. materials distributed related to event(s). San Diego. Carrol, P. and Reichheld, F.,1992, "The fallacy of customer retention", Journal of Retail Banking. Scott Robinette, Vicki Lenz, Claire Brand, 2000, Emotion Marketing: The Hallmark Way of Winning Customers for Life. McGraw-Hill Professional. Appendix : Questionnaire for the respondents at the Tesco store at Aldershot, UK: Q) Has the Clubcard of Tesco increased the amount you spend in the Tesco store? Q) Has the loyalty card improved your perception of Tesco? Q) Have the service and the product offerings of the store improved over the time you have been shopping at the store? Q) Do you think that loyalty card of Tesco really creates significant value for the customers? Read More