3. Satisfaction-Loyalty-Profit Chain
Product
Performance
Customer Retention / Revenue /
Service
Performance Satisfaction Loyalty Profit
Employee
Performance
Source: Strengthening the satisfaction-profit chain”, Eugene W Anderson, Vikas Mittal.
Journal of Service Research, Nov 2000. Vol 3, Iss.2, p 107
4. • Direct link suggests, that as customers experience greater
satisfaction with a firm’s offering, profits rise
• Improving customer satisfaction comes at a cost and once the
cost of enhancing satisfaction is factored in, offering
“excessive satisfaction” doesn’t pay
• Marginal gains in satisfaction decrease, while the marginal
expenses to achieve the growth in satisfaction increase
• There is an optimum satisfaction level for any firm, beyond
which increasing satisfaction does not pay
5. The link between Satisfaction and Retention
Source: “Strengthening the satisfaction-profit chain”, Eugene W Anderson, Vikas Mittal. Journal of
Service Research, Nov 2000. Vol 3, Iss.2, p 114
6. The link between Satisfaction and Retention
(contd.)
• Link between satisfaction and retention is asymmetric:
– Dissatisfaction has a greater impact on retention than satisfaction
• Even if the level of satisfaction is high, retention is not guaranteed
• If customers are dissatisfied, other products become more enticing
• The link is nonlinear in that the impact of satisfaction on retention is
greater at the extremes
• The flat part of the curve in the middle has also been called the
“zone of indifference”
• Factors like the aggressiveness of competition, degree of switching
7. The link between Satisfaction and Retention
Source: “Why satisfied customers defect”, Jones, Thomas O, Sasser, W Earl Jr. Harvard
Business Review. Boston: Nov/Dec 1995. Vol. 73, Iss. 6
The figure shows the variability in the relationship between satisfaction and retention
across industries. Loyalty was measured as the customer’s stated intent to repurchase
8. LINK BETWEEN LOYALTY AND PROFITS
• Reichheld’s hypotheses
– Long term customers spend more per period over time
– Cost less to serve per period over time
– Have greater propensity to generate word-of-mouth
– Pay a premium price when compared to that paid by short-term customers
• Does not hold true in a non-contractual
relationship
– Revenue stream must be balanced by the cost of constantly sustaining the
relationship and by fending off competitive attacks
– Efforts at increasing customer satisfaction and retention not only consume a
firm’s resources but are subject to diminishing returns
9. Customer Loyalty
• Loyalty to a product or service by repeat purchases can be due to
customer’s natural satisfaction and preference for the products’
features and benefits
• Loyalty can also be induced through marketing plans and programs
from the firm
• Behavioral loyalty: the observed action that customers have
demonstrated towards a particular product or service
• Attitudinal loyalty: the perceptions and attitudes that a customer has
10. Loyalty Programs
• A marketing process that generates rewards to customers based on their
repeat purchasing
• Consumers who enter a loyalty program are expected to transact more with
the focal company, giving up the free choice they have otherwise
• In exchange for concentrating their purchases with the focal firm, they
accumulate assets (for example, ‘points’)
• Points are exchanged for products and services, typically but not
necessarily associated with the focal firm
• CRM tool used by marketers to identify, award, and retain profitable
customers
11. Key Objectives of Loyalty Programs
• Building true (attitudinal & behavioral) loyalty
• Efficiency profits
• Effectiveness profits
• Value alignment
12. Building True Loyalty
• Encompasses both attitudinal and behavioral components of loyalty
• Greater commitment to the product or organization through the building of true
loyalty
• Function of true value provided to the customers
• Involves degree of involvement in the product category, visibility of the product
when using it, or value expressive nature of the product
• Goal of many customer clubs
• Difficult in the case of a low involvement category– e.g.: grocery shopping
13. CRM at Work: Supermarkets - Difficulty in
Building True Loyalty
• Despite spending hundreds of millions of pounds on price-cutting
campaigns and loyalty card schemes, supermarkets have only
persuaded a small minority of shoppers to stay loyal
• According to a report from Mintel Research:
– Only 15% of all grocery shoppers are completely loyal to the store where they
do their main grocery shopping
– 29% use one other store
– 22% use two others
– Men are more likely than women to be loyal to a single store
– 46% of men shop in just one or two main stores
14. Efficiency Profits
• Profits that result from a change in customer’s buying
behavior due to the loyalty program
• Change in buying behavior can be measured, in:
• Basket size
• Purchase frequency acceleration
• Price sensitivity
• Share of category requirements (SCR) or share-of-wallet
• Retention
• Lifetime duration
• Measured in terms of the immediate profit consequences
as compared to profit consequences without loyalty
15. Effectiveness Profits
• Measured in terms of the long-term profit consequences realized
through better learning about customer preferences over time
• Allows sustainable value creation for customers through
customization of products or communication
• Most likely to generate sustainable competitive advantage since
it produces the highest profits in the long run
• The strategy of using a LP to learn about customer preferences
may result in impressive gains for both customers and
organizations
• Customers get more of what they truly want, and firms are safe
in terms of not having to engage in a costly mass marketing
exercise
16. Value Alignment
• Goal of aligning the cost to serve a particular
customer with the value he/she brings to the firm
• Allows firms to serve their most valuable customers in the best
manner
• The goal of value alignment is particularly critical when there
is great heterogeneity in the customer’s value and in the cost
to serve the customer
Example: the airline business, the hospitality industry and the
financial services industry
17. Design Characteristics of Loyalty Programs
• Reward structure
– Hard vs. soft rewards
– Product proposition support (Choice of rewards)
– Aspirational value of reward
– Rate of rewards
– Tiering of rewards
– Timing of rewards
• Sponsorship (existence of partner network,
network externalities)
– Single vs. multiform LP
– Within sector vs. across sector LP
– Ownership (focal firm vs. other firm)
18. Reward Structure
• Hard vs. soft rewards
– Financial or tangible rewards (hard rewards) and those based on psychological or
emotional benefits (soft rewards)
– Hard rewards: price reductions, promotions, free products and preferred
treatment
– Soft rewards: psychological benefit of having special status in addition to
receiving preferred customer service
19. Reward Structure (contd.)
• Product proposition support
– Reward directly supports the firm’s product proposition
• Example: The US Bagel franchise Finagle-A-Bagel has
a LP that allows participants to redeem their
accumulated bonus points for the firm’s own products –
sandwiches and drinks
– Allows LP member to redeem points for products that are completely unrelated
to the focal firm’s offering
• Example: British Petroleum’s LP users may redeem
points from their gasoline-related purchases for
merchandise such as first-aid kits, photographic films,
coffee mugs, and Barbie dolls
20. Reward Structure (contd.)
• Aspirational value of reward
– Consumers prefer hedonic goods as opposed to utilitarian goods when receiving
a gift or a LP reward
• Mercedes Benz’s LP makes it possible to transform
points against a flight in a MIG 29 combat aircraft
• Neimann Marcus, the US luxury retail chain, gives out
each year a new list of “wow and cool” rewards. These
unique rewards include a world famous photographer to
come to a customer’s home for taking pictures
21. Reward Structure (contd.)
• Rate of rewards
– Ratio of reward value (in monetary terms) over transaction
volume (in monetary terms)
– How much a consumer is getting in return for concentrating his
or her purchases
• Tier-ing of rewards
– Rewards based on asset accumulation response function - how
assets or rewards are accumulated as a function of spending
behavior
22. Change in Cumulative Spending with Two
Different Response Functions
Asset accumulation per $
Asset accumulation per $
spent
spent
Cum ulative $ spendings Cum ulative $ spendings
In case 1, the buyer receives the same amount of rewards per $ spent,
regardless of the spending level
In case 2, the buyer receives a larger amount of rewards per $ spent,
with increasing spending level. Here, the program is relatively more
attractive for buyers who are high spenders. Many airline programs
follow this pattern
23. Reward Structure (contd.)
• Timing of Rewards
– Determined by minimum redemption rules, type of reward given out, and
reward rate
– Longer the timing to build up to a certain reward level, the greater the
“breakage” (the amount of rewards that are never redeemed)
– “Lock-in” effect - firm creates redemption rules that favor long accumulation
periods, thereby impacting customer retention
– Customers build up assets that function as switching cost
24. LPs Based on Sponsorship
• Single vs. multi-firm LP
– Single: LPs that reflect only the transactions with its own customers
– Multi-firm: LP member may also accumulate assets at organizations associated
with the focal firm’s LP
• Within sector/across sector
– Supply side dimension of multi-firm LP design-degree of cross sector partners
• Example for within sector: The STAR Alliance of SAS, Lufthansa, United
Airlines, Varig
• Example for across sector: The LP of AOL and American Airlines, with its
2000 or so partners, spans many different industries
• Ownership
– For multiform LPs, the ownership dimension characterizes who owns the LP
within the network; whether it is the focal firm, a partner firm or a firm whose
25. Summary
• Satisfaction-profit-chain (SPC) needs to be implemented at a disaggregate
level or individual level than aggregate, firm-level
• Link between satisfaction and retention is asymmetric, i.e., dissatisfaction
has a greater impact on retention than satisfaction, and nonlinear
• Reinartz and Kumar demonstrated that loyalty is not the only path to
profitability
• The success or failure of a loyalty program (LP), whether contractual or
motivated through incentives, is determined by profitability from the
customer
• Most companies need to revisit their business model
– to reflect on the impact of Loyalty Programs on their bottom line
– to determine how customer service initiatives add value to future
