The Components of a Retailer Customer Loyalty Program - Essay Example

2744 Table of Contents Components of the Critique I. Introduction of the Study 2 II. Detailed Analysis of the Study 3 A. A Look at the Purposes 3 B. Evaluating the Limitations 4 C. Considering the Practical Implications 5 D. Value of the Study 8 III. Important Points of the Study 9 Appendix 1 Research Findings 12 Appendix 2 Loyalty Types 13 References 14 Bibliography 15 Empirical Analysis of the Components of a Retailer Customer Loyalty Program: A Critique Components of the Critique I. Introduction of the Study In this age, doing business and selling to customers demand more than the usual exchange of products and services. According to Gallagher, Levinson and Wilson in Guerrilla Selling, business “has changed and continues to evolve so rapidly that even the most sophisticated entrepreneurs have trouble keeping up” (Gallagher, Levinson and Wilson, 1992, p 32). It requires imaginative activities and innovative practices to convince customer to buy and more so to keep the customers from doing repeat business. This research study for review and analysis looks into one of the ways of capturing customer for loyalty and retention for the continuous competitive advantage of a business enterprise – through a retailer customer loyalty program. The concept of customer loyalty program is simple and yet complicated because of the multiple activities related to it but the goal is always the same – to encourage repeat business. Often, the business enterprises or the retailers, as they are the focus of this study offer a membership club to its customers. The members are then entitled to benefits, perks, privileges, discount schemes or whatever activities and benefits that the company has lined up exclusive to these member-customers. As the study by Fiorito, Gable and Tople stated: “one means of achieving loyalty, from the activities engaged in by retailers (e.g. measuring customer satisfaction; handling complaints) to the benefits being offered (e.g. providing financial incentives to customers; sending customers thank you notes) that contribute to maintaining a long-lasting, permanent relationship with customers” (Fiorito, Gable and Tople, 2006, p 32). II. Detailed Analysis of the Study A. A Look at the Purposes The study looked into three interrelated purposes. Basically, it wanted: to determine the benefits offered to customers and activities taken by retailers whether or not they have formal customer loyalty programs, whether there are differences in the benefits/activities of retailers with and without formal loyalty programs whether specific benefits/activities of retailers can predict whether or not they have formal loyalty programs (Fiorito, Gable and Tople, 2006, p 32). It also wanted to know the evaluation of the existing customer loyalty programs by its perceived success through meeting the enterprise’s expectations and increase in sales and if the program will be implemented continuously (2006, p 34). Thus, these are three specific areas explored by the study. Primarily, it was aimed to know the specific benefits and activities that were designed for the customers in line with the customer loyalty schemes even if the retailers do not have a formal loyalty program, wherein “formal loyalty programs are those in which the retailer explicitly elaborates the benefits they offer to their customers” (Fiorito, Gable and Tople, 2006, p 40). Thus, the opposite or the informal means that the activities were not properly communicated to the customers and there was no documentation. The benefits and activities that were determined were further studied for specific differences, coming from formal or informal programs and later, if the specific type of benefits and activities implemented could effectively be an indicator whether they were from a formal or an informal customer loyalty program. B. Evaluating the Limitations Some of the significant constraints were the limitation of the study in one geographical area, the respondents coming from one membership organization and the size of the population. These factors could have influenced the study differently because of homogeneity, proximity and possible relational influences of the participants of the study. It also failed to take into consideration two very important factors that could contribute largely to the effect of the study – the environment of the retailers and the competition. Based on some insights and literature, there is such thing as saturation point of the loyalty program. Wreden, as quoted by Beal stated that the “value of loyalty programs also becomes more difficult to identify as they reach a saturation point”. He explained that in the previous decades, the loyalty programs recorded an increasing rate of spending at 30% a year but dropped dramatically to just 1.5% during the previous year (Beal, 2004). It necessarily demonstrated that just like products, the loyalty program has a definite life cycle and has probably reached a plateau or a maturity stage. The threat then would be the possibility of decline and eventual death or obsolescence. Another alarming factor into the viability of these programs is that “the number of loyalty programs in existence far outweighs the percentage of people enrolled in them” (Beal, 2004). This was most obviously caused by competition. The mindset of the retailer was to jump into the bandwagon or be left behind. Because of competition, the conduct of such loyalty programs became a necessity rather than a rare treat. Neal declared that because the “loyalty card had become a commodity; the playing field is once again level” (Neal, 2005). No one has gained a competitive edge over the others. Aaronson concisely explained this in his statement: Point systems have become a cost of doing business for those industries. Having one isnt a differentiator, but not having one is a detractor. One things for certain: theyre no longer the most effective loyalty builders. (Aaronson, 2005) The study also did not segregate the retailer by categories or industries. The participants were of different types ranging from generic general merchandise stores and department stores to specialized retailers like drug stores, home furnishings and specialized stores. This will necessarily have an impact when competition within one industry was taken into consideration as well as the number of players per industry in proximate locations. In the end, the objective of encouraging patronage and increasing the barrier to make switching possible resulted to nothing. Neal also reported that because of the development of this scenario, these programs fail to influence customer behaviour in the end. For those who offered discount schemes, it became a losing proposition because they even sacrificed their bottom-line profit for the customer loyalty program that failed to deliver the expected results. Neal succinctly presented this in the statement that “they reduce the amount of profit per customer by discounting existing behaviour rather than rewarding increased positive behaviour (e.g. spending more or returning more often)” (Neal, 2005). However, the authors also acknowledged the said constraints and their possible effects by admitting that there is “a need for replication to corroborate these findings (of their study)” (Gable, Fiorito and Tople, 2006). C. Considering the Practical Implications To appreciate the result of the study with respect its practical implications, three things were raised: 1. Customer loyalty is one critical key to business success and retaining an existing customer costs far less than acquiring new ones. 2. One way to do this is to create customer loyalty programs that effectively reward one’s best or potentially important best customers. 3. Further, these program participants will spend more than the non-participants. (Gable, Fiorito and Tople, 2006, p 1) True, it has been said probably a million times, acknowledged everywhere and “widely recognised that it is much less costly and much more profitable to keep existing customers than to win new ones, customer retention has become a major goal for most organisations” (Customer Loyalty, anon, n.d.). There is probably no doubt about it now. The real question is how. This study offered that creating “customer loyalty programs that effectively reward one’s best or potentially important best customers”. This means that the loyalty program must not be designed for all customers. It highlighted the fact that it should be for the best and potential best customers. But the “best customers are also the hottest prospects for (…) competitors (Fripp, n.d.) The idea that a customer loyalty program must be designed for the profitable customers only is supported by Beal as he claims that in setting up a customer loyalty program, it should be properly laid down that “unprofitable customers are not eligible for rewards or the program should be used as a tool to make them profitable”(Beal, 2004). As Wreden declared and cited by Beal that “the last thing in the world you want to do is make an unprofitable customer loyal” (Beal, 2004). What the company got was a loyal customer but not a difference in the bottom-line profits. What could be devised in set up of profitable and unprofitable customers is the Pareto principle or the 80-20 rule which was devised by Vilfredo Pareto, an Italian economist who “noticed that in very many situations, 80 per cent of the outcomes seemed to be attributable to 20 per cent of the causes” (Reynolds, 1994, p. 55). Following this principle, 80 percent of the profit of an enterprise could come from just 20 percent of the product line or 20 percent of the company’s customer are the best and profitable customers that could generate for them 80 percent of their profits. The third supposition that “program participants will spend more than the non-participants” (2006, p 1) could not also be necessarily be true because of, as stated previously, the copycat loyalty programs within competing industries. Because of this, there is no guarantee that the member or the cardholder is not a member of the others as well thus the customer has the same probability of purchase among the competitors in the market. Neal said that “Successful loyalty programmes should take the high ground, and offer a differentiated proposition. But the all too common me too programmes do little or nothing to enhance consumer perceptions or differentiate the brand” (Neal, 2005). Another issue with this is the actual customer loyalty that goes beyond the customer loyalty programs. In an article entitled Customer Loyalty (anon, n.d.), it defined and illustrated the types of loyalty and their effect on the buying behaviour of customer. It states that there are 5 types of loyalty (see appendix 2 for the table): 1. Monopoly loyalty – customer has no choice or there is no competitor 2. Cost of loyalty – customer is discouraged to switch because of the cost of transferring 3. Incentivised loyalty – customer perceives that he/she might be able to use the points/perks/benefits some day 4. Habitual loyalty – the enterprise is chosen because of convenience and not for anything else; should a competitor that is deemed more convenient challenges the position, the customer has the potential to easily switch 5. Committed Loyalty – a positive level of commitment to the brand, more than loyalty is the driving force of the customer’s behaviour and purchase decisions. (Customer Loyalty, anon, n.d.) D. Value of the Study This research study espouses support for the implementation of retailer’s loyalty program and has detailed some of the activities and benefits (both hard and soft benefits) that could be offered to customers to secure for a retailer its competitive advantage. At one end, there is great value in the insights that were put forward. However, there could be other factors that must also be considered in using these loyalty programs as tools for customer retention, repeat purchases and ultimately increase in profit. One factor, which has been discussed previously, is the proper weeding off of customers so that only the profitable customers are encouraged and retained with loyalty benefits and privileges. Another issue about loyalty programs is the proliferation of such so that eventually, it fails to become a competitive advantage that could be wielded against the competitors. When all the suppliers in the same market category which targets and vies loyalty of one market segment has the same weapon, the fight would end in a draw and everyone would be on level ground. “The key challenge in developing an effective rewards program is researching the key elements that will drive loyalty” (Customer Loyalty Programs, anon, n.d.). Neal also promotes six practical steps for establishing a successful loyalty scheme: 1. Define objectives – the objectives of the program must be clear and all activates are aligned to these set goals 2. Segment customer base – niche marketing is the key of cost effective programs because they directly targeted to the intended market 3. Understand customer motivations – different strokes for different folks is still the key to hammering the program and capturing the desired market and full understanding of the desired strokes spell the difference between success and failure of a loyalty program. 4. Use audience insights – openness and the efforts at talking to customers to get to know their views would be a great factor for optimum customer satisfaction 5. Establish share of basket – customers who spend more or who has the potential to spend more must be the target and the focus of the budget and efforts of the company 6. Build the bottom-line – marketing budget must be based on potential customer value and not on the entire customer base (Neal, 2005). Wreden, as cited by Beal declares that "A loyalty program does not ensure loyalty [because] what ensures loyalty is everyday operational excellence and solid products” (Beal, 2004). “Real customer loyalty involves more than just making repeat purchases” (Customer Loyalty, anon, n.d.). “Ultimately, it is the product that determines loyalty” (Beal, 2004). E. Important Points of the Study In summing up the important points of this empirical research study, there are three general points that covered the entire breadth of the study. First is the analysis and evaluation of the difference of having a customer loyalty program as a retailer’s competitive advantage. This type of approach could only be considered as an advantage if the enterprise was able to differentiate its loyalty program, push it to a higher ground from the existing levelling off of equal benefits and activates of competing brands and make it a cut above the rest so that the customers will take notice. Customer loyalty programs are also not aimed to the mass market. Beal cites Wreden that: Loyalty programs are an expensive proposition. In the supermarket industry, where loyalty programs are relatively mature, they cost from 1% to 1.5% of revenue, and in other industries they cost between 2% and 5% (Beal, 2005). Proper weeding out of the customers that put in more profits and ultimately running and maintaining this segment spells the success of the bottom-line profit. More than anything else, delving into the data from customers’ perceptions and preferences must be considered in designing a customer loyalty program to properly cater to the desires of the captured market. This is the second point which is the anatomy of customer loyalty program: its activities and their specific benefits. Neal explains in detail the difficulty and the options available that must be considered in designing a retailer customer loyalty program: With a broad spread of customers, individual motivations will vary hugely. Loyalty schemes need to concentrate on relevance to the people they are trying to influence. For some customer segments, particularly the high-value ones, its all about service, convenience and added value. Special deals, special treatment at point of sale, and recognition of customer value should all be considered when developing an effective loyalty program. (Neal, 2005). This study was correct in offering that there are multiple ways of devising activities and providing benefits on loyalty programs. However, there is no sure formula for such because the type of benefit and activity depends on the industry, the environment, the mindset of the customers and the preference of the target or captured market. The last point was the limitations of the study which could have spelled the difference in some of the outcome of the study. It involves what the study has failed to look into which could provide and entire new perspective to the empirical analysis of customer loyalty program. Especially when it comes to customers which have boundless need and wants, preferences and opinions, insights and behaviours, it will be hard to design an all encompassing research study that will be able to understand all the quirks and fads and trends especially in the very volatile areas of customer satisfaction, customer retention and customer loyalty. As such, an empirical research study such as this will always fail to cover all the groundwork in looking into the mechanics of a customer loyalty program. However, it will always be a take off point of other researches. The inability of this research to understand the saturation point and bandwagon effect in loyalty programs could be because of its limitation in terms of size, geographical breadth and random testing. However, the contributions of this empirical research study, if combined with the innovative ideas and current trends could provide a wide spectrum of understanding regarding loyalty programs equated with customer loyalty and retention for customer satisfaction. Appendix 1 : Findings of Research Study From Table III. Benefits offered and activities employed by retailers to cultivate customer loyalty and categorized by those having formal and not formal loyalty programs Reproduced from Myron Gable, Susan S. Fiorito and Martin T. Topol. New York, USA. An empirical analysis of the components of retailer customer loyalty programs. 2006. p 42 Appendix 2 : Loyalty Types Table 1 : Loyalty Types From Customer Loyalty : how to measure it, understand it and use it to drive business success. (Retrieved from http://www.saferpak.com/csm_articles/Loyalty 1 Understand it_measure it and drive business success.pdf References Aaronson, J.2005. Loyalty doesnt come from a program. (Click Z article). [Online]. 20 May 2005. Available at : http://www.clickz.com/3506306 [Acessed 19 April 2009] Beal, B. 2004. Getting loyalty programs right. (Search CRM.com). [Online] (14 July 2004). Available at http://searchcrm.techtarget.com/news/article/0,289142,sid11_gci992695,00.html [Acessed 19 April 2009] Customer loyalty: how to measure it, understand it and use it. [Online]. Available at : http://www.saferpak.com/csm_articles/Loyalty 1 Understand it_measure it and drive business success.pdf Fiorito, S S, Gable, M and Topol, M T. (2006). An empirical analysis of the components of retailer customer loyalty programs. International Journal of Retail & Distribution Management, [Online] 2006. p 36-49. Available at: http://www.emeraldinsight.com/0959-0552.htm [Accessed 17 April 2009]. Fripp, P. 2009. Customer Retention and Loyalty: Find Out What Your Customers Want Before Your Competitors Do (Fripp article). [Online] Available at : http://www. fripp.com/art.findout.html [Acessed 18 April 2009] Gallagher, B. Levinson, J C. Wilson. O R. 1992. Guerilla selling: Unconventional weapons and tactic for increasing your sales. Houghton Milling Company. Great Brook Consulting. 2007. Customer Loyalty Programs (Great Brook article). [Online]. Available at : http://www.greatbrook.com/customer_loyalty.htm [Acessed 18 April 2009] Reynolds, R. 1994. Beyond total quality management. Great Britain at the University Press Cambridge. Neal, B. 2005. The trouble with loyalty schemes...(Thewisemarketer.com).[Online] April 2005. Available at : http://www.thewisemarketer.com/features/read.asp?id=61 [Acessed 18 April 2009] Bibliography Aaronson, J.2005. Loyalty doesnt come from a program. (Click Z article). [Online]. 20 May 2005. Available at : http://www.clickz.com/3506306 [Acessed 19 April 2009] Adams, C W. (n.d.). Customer satisfaction  and customer loyalty are the best predictors of customer retention. (Adams six sigma). [Online]. Available at : http://www.adamssixsigma.com/Newsletters/ customers_results.htm [Accessed 18 April 2009]. A Model of Future Customer Value.  2001. Measuring Customer Retention - Basic  (Recent Repeater Model). [internet]. Digitrends (Published 2001). Available at: http://www.jimnovo.com/measure-loyalty.htm [Accessed 18 April 2009]. Beal, B. 2004. Getting loyalty programs right. (Search CRM.com). [Online] (14 July 2004). Available at http://searchcrm.techtarget.com/news/article/0,289142,sid11_gci992695,00.html [Acessed 19 April 2009] Customer loyalty: how to measure it, understand it and use it. [Online]. Available at : http://www.saferpak.com/csm_articles/Loyalty 1 Understand it_measure it and drive business success.pdf Essinger, J & Wylie, H. 1999. The seven deadly skills of competing . International Thomson Business Press Fiorito, S S, Gable, M and Topol, M T. (2006). An empirical analysis of the components of retailer customer loyalty programs. International Journal of Retail & Distribution Management, [Online] 2006. p 36-49. Available at: http://www.emeraldinsight.com/0959-0552.htm [Accessed 17 April 2009]. Fripp, P. 2009. Customer Retention and Loyalty: Find Out What Your Customers Want Before Your Competitors Do (Fripp article). [Online] Available at : http://www. fripp.com/art.findout.html [Acessed 18 April 2009] Gallagher, B. Levinson, J C. Wilson. O R. 1992. Guerilla selling: Unconventional weapons and tactic for increasing your sales. Houghton Milling Company. Great Brook Consulting. 2007. Customer Loyalty Programs (Great Brook article). [Online]. Available at : http://www.greatbrook.com/customer_loyalty.htm [Acessed 18 April 2009] Reynolds, R. 1994. Beyond total quality management. Great Britain at the University Press Cambridge. Neal, B. 2005. The trouble with loyalty schemes...(Thewisemarketer.com).[Online] April 2005. Available at : http://www.thewisemarketer.com/features/read.asp?id=61 [Acessed 18 April 2009] Read More