Developing a Loyalty Program for the Online Grocery Business - Assignment Example

? Consultant Report: Developing a loyalty program for the online grocery business BY YOU HERE HERE HERE PLACE YOUR TRANSMITTALLETTER HERE EXECUTIVE SUMMARY The services of the consultant have been sought in relation to providing guidance about the viability and relevancy of establishing a customer loyalty program for the online grocery company. Research supports that implementation could pose problems such as cost management and difficulty in gaining real-time market research to understand current consumer attitudes and sentiments as compared to a bricks-and-mortar facility. Theoretical research also supports that complex consumer behaviour characteristics, such as psychological influence and the phenomenon of making social self-comparisons to others could be influential in the success dynamics of the loyalty scheme. A primary study was conducted that refuted much of the psycho-social dimensions associated with loyalty studies. Findings indicated that the primary motivator for enrolment in loyalty programs was price, with no mention of psycho-social characteristics and implications. As such, recommendations founded on the research include rejection of tiered loyalty programs, targeting only relationship-centric promotions to the older consumer demographic, and using short-term pricing incentives. TABLE OF CONTENTS 1.0 Introduction................................................................................................ 1.1 Aim............................................................................................................. 1.2 Scope......................................................................................................... 2.0 Literature review........................................................................................ 2.1 The benefit of loyalty programs................................................................. 2.2 The management of loyalty programs....................................................... 3.0 Survey design............................................................................................ 4.0 Discussion.................................................................................................. 4.1 Results of survey........................................................................................ 4.2 Relating results to theory............................................................................ 5.0 Conclusion.................................................................................................. 6.0 Recommendations...................................................................................... 7.0 References.................................................................................................. Consultant Report 1.0 Introduction This report provides consultant advice on the potential opportunities of implementing a customer loyalty program for the online grocer. Loyalty programs, in some industries, have a direct correlation to repurchase intention that is supported by research studies on the phenomenon of the linkages between consumer behaviour and their utilisation patterns associated with loyalty schemes. There are many implications for the issuer of the loyalty program, both advantageous and unfavourable, that include cost and management problems, abandonment strategies in the event of scheme failure, and the ability of the program to alter consumption behaviour. 1.1 Aim The aim of the study is to understand the theoretical versus practice-based underpinnings of loyalty schemes and their relationship to potentially coercing increased repurchase intention with desirable target markets and improving business profitability. 1.2 Scope To fully comprehend the potential success opportunities for launching a loyalty program for the online grocer, the report utilised a blend of secondary research on the phenomenon of consumer loyalty, consumer behaviour, plus control and management of loyalty schemes. Supplementing the aforementioned theory are findings from a primary market research study that recruited a small sample of random consumers to determine their perceptions of loyalty programs, their current level of involvement with loyalty schemes, and their overall attitudes related to customer satisfaction as associated with loyalty program frameworks and reward offerings. 2.0 Literature review This section identifies a variety of studies regarding loyalty programs and their relationship to such schemes’ ability to influence positive consumption behaviour and repurchase intention. The literature review further examines the potential management issues and control mechanisms needed to operate a consumer-centric loyalty program. 2.1 The benefit of loyalty programs Loyalty programs can be developed in order to provide targeted consumers with rewards associated with cumulative purchases or simply provide short-term discounts on select grocery merchandise. The intention of retaining currently-loyal customer segments is typically the rationale for cumulative purchase reward schemes. Gaining loyalty from customers not yet attached to the brand is generally the justification for short-term reward schemes. It is dependent on the specific objectives of the issuer as to which loyalty program would be most viable. Lewis (2004) offers that reward programs are influential in coercing repeat purchases and also assisting in retaining desirable customer segments. Data from the United States indicates that the average consumer maintains involvement in 12 different loyalty schemes in a variety of industries (Ferguson and Hlavinka 2007). Not only do these statistics indicate that there is a considerable market interest in utilisation of loyalty program structures, but the expenditures of issuers of these programs topping $1 billion to reward consumers (Wagner, Hennig-Thurau and Rudolph 2009) indicates that many businesses find loyalty program development to be a viable investment. It is unlikely that so many industry players would devote this level of investment into loyalty schemes if they were not achieving adequate return on investment. One main advantage of loyalty schemes is that it maintains the potential to solve problems associated with oversupply that occurs due to demand seasonality (Yi and Jeon 2003). One of the most fundamental concerns for online businesses with significant inventory volumes are holding costs, entailing taxation of held inventories, warehousing operational costs and labour expenditures to support movement and control of high inventory volumes (Heizer and Render 2004). By providing short-term discounts available to loyalty program participants on select merchandise, it can enhance inventory management and sustain cost reductions, as well as providing a template by which more predictive supply chain strategies can be developed. From an operational perspective, Yi and Jeon (2003) believe that the incentives-based characteristics of short-term product discounts improve issues associated with inventory waste on seasonable (or other selected) products. Loyalty programs are also intended to improve customer relationship management (CRM) to achieve higher customer retention ratios. Relationships, as defined by Gutierrez (2005) are built through a combination of trust, perceived firm commitment to the customer and achievement of perceived customer satisfaction. A well-structured loyalty program illustrates firm commitment and trust by rewarding customers for loyalty, thus following on promises associated with the provision of recurring incentives for repurchase habits. Customer satisfaction is achieved by providing perceived price fairness that is considered an important component in how a consumer is satisfied. From the consumer perspective, loyalty cards have the advantage of providing value associated with the issuer brand. Whether short-term discounts or cumulative rewards for recurring repurchase behaviours, monetary cost savings are the primary motivator for joining loyalty programs (Peterson 1995). However, it should be recognised that the highly-saturated competitive grocery industry (referring to such online grocery services as Tesco) provides very low switching costs for consumers to defect to competing online brands. Any price-related market response to discounting online products by competition could theoretically supplant perceptions of value by providing alternative options with lower prices. 2.2 The management of loyalty programs Consumers are largely attracted to e-services as they provide convenience, the technologies available for an online business model are increasingly becoming more user friendly, and for cost savings associated with physical consumer movement to the bricks-and-mortar retail environment (Anguelov et al. 2003). However, from the standpoint of the online business manager, costs of maintaining online loyalty programs can be significant. Loyalty programs maintain the ability to increase operating expenses as the data associated with the scheme must be stored and analysed for it to be relevant to the needs of the business. Partch (2004) warns that the added expenses in this venture might not achieve competitive advantage when competitors attempt to launch similar programs to attempt rival price competition to gain market interest. Furthermore, in the bricks-and-mortar environment, it appears to be more simplistic to effectively target desirable markets than in the online sales model. The typical bricks-and-mortar methodology of gaining relevant and real-time market sentiment is through data collection using multi-item scales through questionnaire distribution (Buckinx, Verstraeten and Van den Poel (2007). This data is utilised to translate into effective short-term or cumulative purchase discounting, facilitated by a relatively crude measurement system. For the online grocer, in order to gain relevant market data, research instruments would require online development, thereby imposing operational and information technology-related costs into the business model. The complexity of maintaining not only an online loyalty program, but establishing an inter-dependent technology architecture to gain important market sentiment could be substantial alongside the uncertainty of whether the program will even be successful. The implication is that the bricks-and-mortar methodology of conducting market research is much more cost effective and uncomplicated compared to the restrictions and IT development obligations of the online business in this effort. 2.3 Customer perceptions; trust; value and program adoption Customer perceptions associated with the trust, value and relevancy of loyalty programs is probably one of the most fundamental considerations before launching an online loyalty program. The concept of values (as a belief) is highly relative as well as subjective as it pertains to one market compared to another (Schiffman and Kanuk 2010). Often referred to as cultural capital, it is the disparities of attitudes, lifestyles, beliefs, and personalities that define an individual comparatively against another in society. In order to design a relevant and consumer-centric loyalty program, it is necessary to first define market characteristics most likely to seek the online grocer and sign up for the program. This can be a complicated segmentation process, coupled with necessary market research, simply to understand market values and attempt to align the program with these consumer principles (Henry 2005). Despite the potential problems associated with disparate consumer values that can complicate creating a targeted loyalty program promotion, characteristics of consumer behaviour (inherent) provide opportunities for gaining interest in the program. O’Cass and McEwen (2004) describe the phenomenon of conspicuous consumption, the tendency of consumers to consider the consumption of goods as a sign of social status. Though this typically relates to luxury goods in the retail sector, the ideology of consumers wanting to compare themselves to others in the social environment has significant implications for the issuer of the loyalty program. Consumers who make self-comparisons against others in society help to define a person’s self-concept and can even provide feelings of personal well-being when they perceive themselves to be in a higher echelon than others (Suls, Martin and Wheeler 2002). People genuinely have a need to believe they are superior to others (Taylor and Brown 1988). This characteristic of consumer behaviour has many implications for the issuer of loyalty programs. Many businesses utilise tiered loyalty programs, such as offering Premium memberships to new customers, Gold memberships to long-term customers, and platinum schemes with higher reward incentives and offerings. Tiered programs such as this have the capability of appealing to the psycho-social characteristics of markets, which is important since loyalty program membership makes the individual feel a sense of belonging and personal ownership of the firm (Hart et al. 1999). When a business offers tiered loyalty programs, achievement of preferred rewards (such as Platinum schemes) leads to increases in repurchase intention due to the esteem perceived by the issuer (Russell, Suh and Morgan 2007). Thus, what tiered loyalty programs accomplish is two-fold: allowing for a sense of well-being when comparing the self to those holding no loyalty status or a lower-tier status and building esteem through perceived preferential treatment that leads to long-run loyalty toward the issuer. Nunes and Dreze (2006) reinforce the importance of providing exclusiveness in loyalty programs, offering advice for the issuer not to simply give rewards to just anyone. Trust, in the literature of business, begins with reciprocal acts between two parties and is only developed over time (Starnes, Truhon and McCarthy 2010). Under this theory, trust is not able to be established without the duration of mutually-rewarding relationships over a period of elongated time. This has implications, potentially negative, for implementing a loyalty program as short-term discounting (the most common incentive offered in these schemes) might not have the psycho-social influence that is more sustainable over time. Cumulative rewards for recurring purchases, when referencing the work of Starnes et al. (2010), might be the most logical choice when trust is expected to be the outcome of implementation of the program. 3.0 Survey design It is not reliable to depend only on theoretical underpinnings when attempting to measure whether development of a loyalty program would be viable for the online grocer. To justify or refute the data provided in the literature review, a quantitative primary study was developed. The researcher recruited 10 random consumers of varying demographics (i.e. age, gender, ethnicity) to determine their perceptions, utilisation patterns, and general psychologically-driven attitudes of loyalty programs. Consumers were asked about their current usage (or lack thereof) of loyalty schemes to determine the volume of consumers likely to utilise the online grocer program. Furthermore, the survey asked questions to determine what specific benefits they perceived available through loyalty programs, focusing on both positive and negative experiences. The survey also included a ranked order scale, from 1-10, focusing on questions surrounding social comparisons, tiered loyalty programs, short-term discounting, and conspicuous consumption. The methodology behind the survey framework utilised for the study was to uncover the psychological and sociological drivers that could potentially influence willingness to adopt certain loyalty schemes. The ranked order scale also provided the ability to formulate a mean score (an average) that could be charted statistically to determine a generalised score related to multiple dimensions of loyalty program offerings and relevancy to these markets. Data was collected by intercepting active bricks-and-mortar shoppers at Sainsbury as they entered the facility. Figure 1: Survey Template Utilised in Study 1. Do you currently have enrolment in any grocery loyalty program? 2. If so, with what organisations? 3. What was your primary rationale (if applicable) for enrolment in this/these programs? 4. To what level do you believe that loyalty program incentives build your perceptions of trust and commitment to your needs by the issuer? 1 2 3 4 5 6 7 8 9 10 5. I often make self-comparisons to others in society in order to help justify my identity and status in society. 1 2 3 4 5 6 7 8 9 10 6. Loyalty programs give me a sense of belonging and ownership of the company where I am enrolled. 1 2 3 4 5 6 7 8 9 10 7. Are you familiar with tiered loyalty programs (i.e. Gold, Premium and Platinum levels) that offer discounts to different program participants of different hierarchy? 8. To what degree would you find personal satisfaction and self-esteem in achieving higher-level rewards status as compared to others with lower status? 1 2 3 4 5 6 7 8 9 10 9. Do you believe that loyalty programs have any negative consequences to the holder? If so, what might they be? (25 Words or Less). 10. If you are currently a loyalty program holder, how long have you been a member? 4.0 Discussion This section describes the results of the primary study as well as justification or disparity between theoretical perspectives on loyalty program outcomes described in the review of literature. 4.1 Results of Survey Respondents Respective Rankings Loyalty Sentiments Respondent 1 – Female Aged 37 Trust and commitment – 7 Self-comparisons – 2 Belonging and ownership – 3 Tiered rewards motivation - 4 Enrolled – Yes (Tesco) Price motivator Member 3 years Respondent 2 – Female Aged 25 8,3,6,5 Enrolled – Yes (Tesco) Price Motivator Member 3 years Respondent 3 – Female Aged 48 5,1,6,3 Enrolled – Yes (Tesco) Loyalty Motivator Member 1 year Respondent 4 – Male Aged 71 9,8,10,8 Enrolled – Yes (Tesco) Price Motivator Member 4 years Respondent 5 – Female Aged 38 6,4,2,4 Enrolled – No Respondent 6 – Male Aged 60 10,5,8,2 Enrolled – Yes (Tesco) Price Motivator Member 5 years Respondent 7 – Male Aged 33 10,6,2,2 Enrolled – Yes (Sainsbury) Points Motivator Member 6 years Respondent 8 – Male Aged 24 4,1,3,3 Enrolled – Yes (Tesco) Price Motivator Member less than 1 Year Respondent 9 – Female Aged 39 8,3,4,4 Enrolled – Yes (Tesco) Price Motivator Member 5 years Respondent 10 – Male Aged 33 8,4,5,2 Enrolled – Yes (Morrisons) Price Motivator Member 5 years Only three respondents, Respondents 2, 5 and 8 indicated negative consequences of the loyalty program which was indicated to be privacy and spying concerns. 4.2 Relating results to theory Correlation of the data findings was both relevant and non-justified as it pertains to the literature on loyalty programs and consumer behaviour associated. Firstly, there was a direct correlation between the duration of membership and the level to which respondents felt that loyalty programs built trust and commitment perceptions in the brand. Those respondents that reported elongated membership reported higher rankings in this category as compared to shorter-duration members. Starnes, Truhon and McCarthy (2010) indicated that trust is only developable over time, supported by reciprocal acts between two parties. This has significant implications for the online grocer in determining the viability of establishing an online loyalty program. Individuals that reported limited experience as a member of their enrolled programs carried significantly lower belief that loyalty programs improve relationships founded on trust and organisational commitment. This may imply that there would be limited short-run opportunities to gain consumer loyalty until the program had reached its maturity stage. The only respondent that indicated a significantly above-average ranking on self-comparison tendencies was the older demographic, Respondent 4, aged 71. The mean average related to the social self-comparison ranking was only 3.7 for the holistic respondent group. Suls, Martin and Wheeler (2002) and Taylor and Brown (1988) indicated that many consumers have a legitimate need to make social self-comparisons as a means of improving self-esteem and also generic well-being. This led to the potential for utilising a tiered rewards program that has different discriminatory rewards and incentives for varying status members. Russel, Suh and Morgan (2007) identified that these schemes are effective in promoting recurring future purchases due to the psychological impact this structure has on motivation and self-esteem. The results of the study, however, appear to refute this notion, as the majority of consumers reported little prevalence of this phenomenon in the social environment. In nearly every instance, those who reported significantly lower-than-average tendency to make self-comparisons also agreed they would find little satisfaction and esteem through tiered loyalty programs. In relation to belonging and ownership perceptions through loyalty enrolment, the results were highly disparate between all respondents. A mean score of 5.0 in this ranked category makes it impossible to quantify whether belonging would be an advantageous outcome of loyalty program implementation. Only the older demographic, Respondents 4 and 6 (71 and 60 years of age respectively) indicated significantly above average belongingness and perceptions of ownership through loyalty enrolment. This might suggest that if creating a sense of belonging is an objective for building loyalty, this might be targeted strategies for only the older consumer. 5.0 Conclusion Though the majority of respondents in the study currently maintained loyalty cards with local grocers, it was primarily price that served as the motivator for enrolment with no mention of psycho-social motivators. Thus, actual study results tend to refute a majority of literature in this report that indicated the relevancy of psychological programming as a motivator for loyalty or associated with how the brand is perceived. The research indicated this might be highly relevant, which had implications in areas of promotional strategy of the schemes as well as how the consumer might perceive the brand. There is no evidence supporting the literature that conspicuous consumption will play a role in how loyalty programs would provide genuine or perceived consumer value. 6.0 Recommendations The following recommendations are suggested: 1. Conduct more intensive market research utilising a much larger sample to indicate whether psycho-social factors could potentially play a role in loyalty development. 2. If the program is to be launched, utilise short-term discounting as price is the most powerful motivator for enrolment. 3. Promote only socially-centric advertisement to the older demographic as this segment is more concerned about tiered promotions and social self-comparisons. 4. Do not attempt to promote any conceptions of belongingness and the value of ownership in the grocery model to the younger demographic (under 40) as this is of little research-supported concern to this market segment. 5. Virtually no markets found value with a tiered loyalty program. Considerations for this should be abandoned based on market sentiment. 7.0 References Anguelov, C.E., Marianne, A.H. and Hogarth, J.M. (2004). U.S. consumers and electronic banking: 1995-2003, Federal Reserve Bulletin, 90(Winter), pp.1-18. Buckinx, W., Verstraeten, G. and Van den Poel, D. (2007). Predicting customer loyalty using the internal transactional database, Expert Systems with Applications, 32(1). Ferguson, R. and Hlavinka, K. (2007). The colloquy loyalty marketing census: sizing up the US loyalty marketing industry, Journal of Consumer Marketing, 24, pp.313-321. Gutierrez, M.S. (2005). Consumer-retailer relationships from a multi-level perspective, Journal of International Consumer Marketing, 17(2/3). Hart, S., Smith, A., Sparks, L. and Tzokas, N. (1999). Are loyalty card schemes a manifestation of relationship marketing?, Journal of Marketing Management, 15, pp.541-562. Heizer, J. and Render, B. (2004). Operations Management - Flexible Version Package, 7th edn. 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