The Influence of Customer Loyalty on Customer Lifetime Valuation - Literature review Example

The influence of customer loyalty on customer lifetime valuation Introduction Every other company seeks to make it profitable in the business undertakings that it has. In order to make this realizable, the company ought to focus on its marketing strategies. Traditionally, marketing has been seen as the sole tool through which a company can make profits. The strategies have devolved over the years from a focus on the product, price, and people (customers): what is commonly known as the 4Ps of marketing. The relationship marketing strategy promotes the idea that if a company focuses on its relationships with stakeholders then it’s bound to be more successful. These relationships are described to include the customers, suppliers, competitors and the employees. However, the relationship with its customers that creates customer loyalty and retention is most important for increasing profitability (Oliver 1997). However this is not always the case as loyal customers are not always the profitable customers. Based on these diverse opinions on the influence of customer loyalty and retention on profitability, one begins to question the inclusion of this aspect in the marketing strategy. This paper will therefore make a review of literature that shows the link between marketing strategy and customer loyalty. The review will also include the extent to which this link is important and profitable to firms. The focus is to establish the relationship between customer loyalty and customer lifetime value (profitability) which in turn determines the practicability of including loyalty programs in marketing strategies. Theoretical framework The concept of customer loyalty can be traced to the work of Storbacka, Strandvik, and Grönroos (1994) which has with time evolved to be the focus of most marketing strategies. Pezeshki et al (2005), note that the concept of customer satisfaction, customer retention and customer loyalty are important in defining the success of a product in the market. This concept is based on the relationship marketing strategy theory. The underpinning of the theory is that profitability is increased through effective costs and time. The satisfaction that is derived from the use of a product or service increases the level of loyalty the customer has for the brand. The loyalty model as described by Rossat et al 1999) shows that organisations will always seek to create value for their consumer which in turn increases the profits of the company. The model implies that loyalty creates value and profits either as an effect (loyalty measures the level of value creation) and the cause whether loyalty ultimately lead to value creation (Rossat et al 1999). The relationship marketing strategy only thrives when the organization has fulfilled the elements of trust, communication and commitment between them and the consumer. The theory also makes the assumption that the consumer lifetime value (profitability) can be increased when the company invests in the most valuable customers (focusing on customer loyalty and retention). (Helgesen 2000) described the interrelationships between satisfaction, loyalty and profitability as the customer relationship orientation. This model does not focus on the customer retention phase as shown by Pezeshki et al (2005). However the model includes the interrelationship between satisfaction leading to loyalty and consumer profitability. Oliver (1999) defined customer loyalty as the customer’s commitment to repurchase or repatronise a preferred product consistently in the future causing repetitive same brand purchasing, despite situational influences and marketing efforts having the potential to cause switching behavior. Consumer loyalty can either be as a result of the behavior or the attitude of the customer. The behavioral loyalty is determined and measured by the behaviors and the reaction of the consumers towards the consumer’s products in terms of the frequency of the purchase. On the other hand, attitudinal loyalty is seen through the awareness of the company and the level of satisfaction with the product. Therefore customer loyalty includes the attitude and behavior of a consumer that shows the customers preference of one product over other brand (Magatef and Tomalieh 2015). This loyalty is developed by customers repeatedly buy the products of one brand over the other brands over time. The ultimate impact is that the level of defection from the brand will be lowered when loyalty is achieved: customer no longer considers price and quality in their purchasing decisions. Magatef and Tomalieh (2015) however differentiate a satisfied customer and a loyal customer in the view that a loyal customer will cost the company very little in creating repurchases. It has been proven that it is a lot cheaper for an organization to retain a customer than it is to attract e ones. In this aspect, the cost effectiveness of the customer loyalty theory is achieved. Therefore in order to make a satisfied customer into a loyal customer, the customer loyalty schemes can be applied. The economic logic of customer loyalty, apart from reducing costs of acquisitions of new customers, is that the loyal customers incites other people to buy into the product hence reducing the company’s advertising costs( Reichheld 1993). Customer lifetime value can be defined as net present sum of all future profits that can be derived from a customer throughout the time of the customer’s loyalty to the brand. It is a measure of the effectiveness of the marketing strategy of a company (Zhang et al 2013) since it gives the quantitative impact of marketing strategies. Empirical review There exists previous study that have been done in respect to the role that customer loyalty as an aspect of marketing strategy is important to the success of the company itself. Helgesen (2000) in a study on the interrelationship between customer satisfaction, loyalty and profitability found that there exist a positive correlation between the satisfaction and customer loyalty. However, the research shows, that this correlation weakens over time and that there exist an optimal level of satisfaction for the consumer beyond which loyalty declines. There was a positive relationship between loyalty and customer profitability: the more a customer is loyal the higher is the profitability but at a decreasing rate. The analysis also showed that when a customer is satisfied and loyal then the company can derive a higher profit from the consumer. Hallowell R (1996) in a study on retail banks to estimate the relationship between customer satisfaction and profitability, they found that increased customer satisfaction has an impact on the profitability of the banks. Anderson et al (1994) studied the relationship between satisfaction, and profitability in Sweden to establish the economic benefits of customer satisfaction. Their findings were that there is indeed a relationship between satisfaction and profitability with respect to how price and quality affects the satisfaction of a consumer. The research also revealed that the customer’s satisfaction re affected by quality expectations: there is appositive relationship between these two variables. Sivadas and Prewitt in an attempt to define the relationship between quality satisfaction and quality found that quality affects attitude of the customer as well as customer satisfaction. The study was carried out through a phone interview on 542 shoppers who showed that satisfaction was a determinant in the repurchase and product recommendation choices of the consumers. In understanding the impact of loyalty programs in cresting consumer lifetime value in the retailing sector, Waarden (2007) showed that loyalty programs positively affect CLV. The research also shows that these programs were effective in increasing the amount of money that the consumers would spend in the grocery stores. Zhang et al (2010) showed that there is indeed a positive relationship between customer loyalty and customer retention and gross margin and in turn the customer’s lifetime value. The research further shows that the higher the degree of loyalty of the consumer the higher the CLV: lee loyal consumers are less profitable but profitable nonetheless. The research was conducted on the purchase of the findings of the research contribute to the debate on the impact of customer loyalty on profitability levels of the company. The same results were concluded by a research done by Reichheld and Saaser (1990). In their findings, 5% retention could translate to at least 25% increase in profits. Marshall (2010) sought to establish the relationship between commitment, loyalty and CLV among distribution organization. The findings revealed that the element of commitment is positively correlated to the loyalty of the customer. The research however found that there was no significant relationship between the behavioral loyalty and CLV which was measured by the frequency of repurchases of the customer. This, Marshall explained could e as a result of the inconsistency with which the loyal customer repurchases. There was also no significant correlation between attitudinal loyalty and CLV which was measure by the bond created between the organization and the customer. The concept of unprofitable loyal customers was also proved by Reinartz and Kumar (2000) using a study on four companies consumer dynamics. The research showed that the relationship between impacts of loyalty on profitability is very small. Furthermore, there was no evidence that loyal customers are less expensive to serve. The arguments are that long serving customer always finds a way to get premium services thus increasing the costs to the organization. The study also found no evidence that loyal customers provide new business as stipulated by the relationship marketing theory based on French grocery store chain customers. Reinartz and Kumar (2002) in a report on Harvard business review explained why loyal customers are responsive to price changes, contrary to the loyalty theory. Their study showed that Loyal; customer are more likely to pay less for the same bundle of goods that newer customers would. The same sentimental have been expressed by Keiningham et al (2006) who explicitly dismisses the loyalty theory as a myth. Application of the Theory The relationship strategy promotes the customer focus marketing strategy: concentrating on the customer satisfaction, customer retention and customer loyalty. If the tenets of the loyalty theory are anything to go by, then the logical application of the marketing strategy would be to use loyalty programs in achieving customer loyalty. Some of the strategies that have been allied in marketing based on the relationship theory including Woolworth are direct mailing strategy. There has been the inclusion of the customer service on the social media platforms which focus customer retention. However, based on the research by Keiningham et al (2006) then the application of the theory ought to be selective. Keiningham et al (2006) advocates that in application of the relationship theory the company should focus more on customer selection more than it does on the customer retention. Moreover, the relationship between CLV and customer loyalty is complex and therefore each company should adopt a strategy that is aligned to their customers pattern (Keiningham et al 2006). As much as the customer focus is beneficial to the growth of the company so are the relationships that are maintained within the workplace: employee focus should be a priority. References Anderson e, Fornell c and Lehman D 1994 customer satisfaction, market share and profitability: findings from Sweden journal of marketing vol 58 (3) July pp 53-66 Helgesen O 2000 Are loyal customers profitable? Customer satisfaction, customer loyalty and customer profitability at the individual level foundation for research in economics and business administration Bergen, February 2000 Magatef G and Tomalieh F 2015 the Impact Of customer loyalty Programs on Customer Retention International Journal of Business and Social Science vol 6 8(1) August 2015 Marshall N W 2010 Commitment, Loyalty and Customer Lifetime Value: investigating the relationships among key determinants Journal of Business and Economics Research August 2010 vol 8 pp 67-84 Oliver R L 1997 Satisfaction: a behavioral perspective on the consumer Oliver R l 1999 Whence Consumer Loyalty journal of marketing vol 63(4) pp 33-44 Pezeshki V, Mousavi A and Rakowski R 2005 Profitability through Customer Relationship Marketing proceedings of the International Conference on Computer and Industrial Management October 29-30 2005 Bangkok Thailand Rossat J, Larsen J, Ruta D and Wawrzynosek 1999 Customer loyalty, a literature review and analysis Reichheld fF1993 loyalty based management Harvard business review 2 pp 64-73 Reichheld F and Sasser E 1990 Zero defections: Quality Comes to Services Harvard Business Review vol 68 pp 105-111 Reinartz W and Kumar V 2002 the mismanagement of customer loyalty Harvard business review July 2002 [online] available from: https://hbr.org/2002/07/the-mismanagement-of-customer-loyalty Reinartz W and Kumar V 2000 on the profitability of long life customers in a non-contractual setting: an empirical investigation and implications for marketing journal of marketing vol 64 pp 17-35 Waarden L 2007 the effects of loyalty programs on customer lifetime duration and share of wallet journal of retailing April 2007 vol 83(2) pp 223-236 Zhang J, Dixit A and Friedmann R 2010 customer loyalty and lifetime value: an empirical investigation of consumer packaged goods journal of marketing theory and practice vol 18(2) pp 127-140 Read More