Impact of loyalty programs in retailing business in India for creating long term relationships

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There has been a revolution during the last three decades in the Retail Industry, especially in India. Customer Relationship programs have been taken as the strategy to attract customer for repeat purchase as well to up-sell and cross-sell to the existing customers at lower cost than attracting the new ones. Working with customer care the company hopes to create satisfied and loyal customers. Under the loyalty program companies are offering different kind of benefits to the customer. Gift cards, frequent purchase program, point program, rewards, offers, Schemes, value added services etc are lucrative content of loyalty programs.

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Impact of loyalty programs in retailing business in India for creating long term relationships

  1. 1. 2013-14 Symbiosis Institute of Business Management, Pune Lovekshitij Suryavanshi Bharat Manuja Lalit Sharma PGDMM Customer Relationship Management Impact of loyalty programs in retailing business in India for creating long term relationships
  2. 2. 2 SYMBIOSIS INSTITUTE OF BUSINESS MANAGEMENT Pune 412115 (M.S.) CERTIFICATE This is to certify that project entitled “Impact of loyalty programs in retailing business in India for creating long term relationships” SUBMITTED BY Mr. LOVEKSHITIJ C. SURYAVANSHI Mr. LALIT SHARMA Mr. BHARAT MANUJA PGDMM PROGRAM 2013-2014 In partial fulfillment of the conditions for the award of POST GRADUATE DIPLOMA IN MARKETING MANAGEMENT from “SYMBIOSIS INTERNATIONAL UNIVERSITY” Has been prepared under my supervision and guidance it is also certified that:- 1) The candidate has satisfactorily conducted this research for not less than one academic semester. 2) The project is of satisfactorily high standard to warrant its presentation for examination Guide Director Dr. Mallika Srivastava SIBM, Pune SIBM, Pune
  3. 3. 3 “Impact of loyalty programs in retailing business in India for creating long term relationships” A Project Submitted By LOVEKSHITIJ C. SURYAVANSHI LALIT SHARMA BHARAT MANUJA PGDMM PROGRAM 2013-2014 Under The Guidance Of Dr. MALLIKA SRIVASTAVA TO “SYMBIOSIS INTERNATIONAL UNIVERSITY” In Partial Fulfillment of the Requirements For the Award POST GRADUATE DIPLOMA IN MARKETING MANAGEMENT SYMBIOSIS INSTITUTE OF BUSINESS MANAGEMENT 2013-2014
  4. 4. 4 DECLARATION I Lovekshitij C. Suryavanshi, Lalit Sharma, Bharat Manuja hereby declare that the project entitled, “Impact of loyalty programs in retailing business in India for creating long term relationships” Is the result of our own research work and that the same has not been previous submitted to any examination. Date : 5th April 2014 Place: Pune LALIT SHARMA BHARAT MANUJA LOVEKSHITIJ C. SURYAVANSHI PGDMM. 2013-2014 SIBM, PUNE
  5. 5. 5 ACKNOWLEDGEMENT It is our sincere, humble and deepest sense of gratitude towards our guide Dr. Mallika Srivastava whose valuable encouragement and practicable suggestions it was his direction and encouragement at every moment and step that motivated me to steer the research work confidential and successfully. Her encouragement has been a source of inspiration to us; it is great pleasure that she spent her precious time providing continuous ideas and expert guidance throughout the course of this research We are also thankful to all the faculty members for valuable suggestion which help us a lot. We are also thankful to our parents and all our friends who helped us a lot during the project work. Place: - Pune Date: - 5th April 2014 LALIT SHARMA BHARAT MANUJA LOVEKSHITIJ C. SURYAVANSHI PGDMM 2013-2014
  6. 6. 6 INDEX 1. Abstract……………………………………………………………7 2. Introduction………………...……………………………………...8 3. Loyalty in Retail Industry……...………………………………...10 4. Objective……………………………………………………...….11 5. Need of Study……………………………………………………12 6. Review of Literature…………………………………………….14 7. Types of Loyalty …………………………………………….…..15 8. Types of Loyalty Program….……………………………………17 9. Benefits of Loyalty Program…………………......................……19 10.Impact of Loyalty Program…………………………...…………23 11.Factors which influence loyalty………………..................……..28 12. Conclusion……………………………………….……………..29 13. Bibliography……………………………………………………...…………………..30
  7. 7. 7 ABSTRACT There has been a revolution during the last three decades in the Retail Industry, especially in India. The retail market has changed from a product- oriented industry to a more market-oriented to the service and experience oriented, with the customer as the core of their operations. This customer centricity has been the outcome of the hyper competition in the retail markets, and every retailer is doing their best to woo the customers from other retailers. This phenomenon has resulted in the maximization of the customer focus and the path towards bringing in the customer delight, just not the satisfaction. Customer Relationship programs have been taken as the strategy to attract customer for repeat purchase as well to up-sell and cross-sell to the existing customers at lower cost than attracting the new ones. Hence companies started to work its customer loyalty programs to keep customers for long time while making profit through them. Working with customer care the company hopes to create satisfied and loyal customers. One of the most popular ways of working with customer care in the retail business is customer loyalty program. The popularity of this is based on the beliefs that loyal customers are lucrative and these programs would bond customers to the company. Under the loyalty program companies are offering different kind of benefits to the customer. Gift cards, frequent purchase program, point program, rewards, offers, Schemes, value added services etc are lucrative content of loyalty programs. The study is intended to examine how four well established companies in the retail business in India do business with a customer loyalty program concentrating on long-term relationship and improvement in sales. A customer survey has been conducted to analyze customer loyalty programs.
  8. 8. 8 INTRODUCTION: Loyalty programs are widely used in building relationships with customers. The dynamic competition in business today has provoked the companies to implement the loyalty programs with the only intention of building long term relations with the customers. Good relationship with the customers is extremely important for an organization in sustaining and winning in the market. Loyalty programs are implemented in every industry like banking, retailing, travel, services etc. and are recognized with an accumulation scheme to receive an incentive over a long period. The relationship with the brand and the customer grows and develops with the loyalty programs. Factors Influencing Loyalty in Retail Industry: a. Satisfaction which originates from a previous purchase experience with a retail outlet works as a motivating factor for the customer to visit the store again resulting in repeat purchase and cross selling b. When a customer becomes a part of any loyalty program, switching barriers are formed, such that if he leaves, he has to lose on any accumulated points on the prior purchases made by him. This stops the customer from switching over. c. Interpersonal relationships are developed when the customer visits the store frequently for shopping of groceries. These frequent visits help to strengthen loyalty and helps in increasing the switching barrier. d. If the customer has alternatives in context to the location of the store, the customer tends to get attracted to the store which is closer and convenient, which may be a barrier to loyalty.
  9. 9. 9 Customer Loyalty Customer loyalty is recognized as a means to profitability and long-term sustainability. According to Reichheld & Schefter, even if it is important for a business enterprise to attract a large customer base, that customer base does not assure long term profitability till the business enterprise earns loyalty. While agreeing to this viewpoint Kandampully argued that the capability of an organization to create, maintain and increase a large and loyal customer base is important to attain and sustain a winning place in the marketplace. This is an indication that the loyalty of customers gives an advantage over the competitors in any business sector. However Shanker views loyalty purely as an attitude, whereas Hofmeyr & Rice considers loyalty to be “the behavioral propensity to buy a brand repeatedly”.
  10. 10. 10 LOYALTY IN RETAIL INDUSTRY The organized retail in India is booming since 1991 with national and international players. The Head of Future Group Mr. Kishore Biyani states that to retain customers in retail the quality of services is the only key. The amount spent by a repeat customer is much more than the first time customers. Therefore these repeat customers must be encouraged to come back. Getting the customers back is the only purpose of the loyalty card programs. The loyalty programs offered by different retailers to pursue the customers are: a. Lifestyle offers ‘The Inner Circle’ b. Pantaloons offers ‘Green Card Reward program’ c. Westside offers ‘Club West’ d. Shoppers’ Stop offers ‘First Citizen’ According to the FMI study US food retailers attribute 10 to 20 percent increase in sales to the loyalty programs. Tesco, the largest super market chain in UK attributes one third of its 6 percent volume increase in sales over six months to its newly launched Club Card.
  11. 11. 11 OBJECTIVE To study Impact of loyalty programs in retailing business in India for creating long term relationships. To check the significant relationship between the loyalty card programs and its benefits and long term relationship of the customer with the organization.
  12. 12. 12 Need for the study Customer loyalty programs have been in active existence since 1980s. However, not many attempts were made in the past to objectively measure benefits from such programs with respect to the loyalty program members. Mimouni- Chaabane and Volle attempted to address this void by developing an instrument that measures perceived benefits from customer loyalty programs. The researchers explain the scale to measure perceived benefits from customer loyalty programs as “a scale that measures the main benefits customers perceive when they participate in loyalty programs” (Mimouni-Chaabane and Volle). The instrument is a sixteen item scale that measures five types of perceived benefits namely, monetary savings, exploration, entertainment, recognition and social benefits from customer loyalty programs. In India too, loyalty programs are gaining popularity and marketers are giving them the importance they deserve. The Indian loyalty market is presently valued at around Rs 5000 crores (US$ 1.1 billion) (Nair, 2009) and is set to grow even further. Though there is availability of voluminous literature on customer loyalty, studies that focus on customer loyalty programs in the Indian context have been limited. Rao and Jain (2009) had studied loyalty programs of retail chains in Delhi to find the level of satisfaction of loyalty card holders where they concluded that customers at present are moderately satisfied with the cards and the privileges. Given this context, it is imperative that in India the efficiency and impact of customer loyalty programs need to be investigated. India is culturally and economically different from the US and the developed western European countries. It is most likely that something like loyalty program membership would be considered luxury in the Indian context. Therefore, intuitively the perceived benefits derived by Indians from a loyalty program might not be exactly the same for that of the French
  13. 13. 13 members. Therefore, the researchers thought that it would be a worthy attempt to assess how Indian customers perceive the benefits of these programs. This will immensely contribute to the extant body of knowledge in this emerging field and will help the loyalty business as a whole by better understanding the market.
  14. 14. 14 REVIEW OF LITERATURE To improve profitability, customer Loyalty can be gained by putting in efforts to build a long-term relationship between the supplier and individual customer. To attain customer loyalty the supplier must understand the customers’ needs, spending habits, what does the customer buy or does not buy, so as to have meaningful communication with the customers. According to Czepiel’s customer loyalty “is a notion to describe the end result of a relationship between the organization and the customer”. In order to gain loyalty, the organization can provide incentives that will increase the value for the customers and in that manner create buying fidelity among them. Butscher states that some clubs are assigned to establish emotional relationships, while others, build long and profitable relationships without dimensional requirements. Dickand Basu, provided a notable insight into loyalty by citing loyalty as “the strength between relative attitude and repeat patronage”. Scholars propose loyalty as an emotional concept, Jenkinson refuses defining loyalty in behavioral terms and explains loyalty as “the reflection of a customer’s subconscious emotional and psychological need to find a constant source of value, satisfaction and identity”. This supports loyalty as an emotional concept created by trust. Humby and Hunt also remark that “loyalty is an emotional response based on empathy”.
  15. 15. 15 Types of Customer Loyalty To make customers permanent customers loyalty programs play an important role. A huge range of various kinds of loyalty programs are usually used and these are dependent on the kind of business the company is in. Loyalty programs are divide into two main categories most of the times i.e. one is offer increased value and the other is discounts, rebates, special offers and bonuses. However in either case the objective of the company is to retain the customer using different methods. Customer Satisfaction: According to Bloemer customer satisfaction is be defined as a result of a subjective valuation whether consumption fulfill or exceed expectations. It is assumed in this definition that satisfaction is a condition that happens when expectation is matched to the actual result. Bloemer & Ramprasad state that customer satisfaction is a key issue for all organizations in all sectors. Customer Loyalty: To tackle the increasing competition the retailers focus on customer loyalty programs. They play a major role to prevent the customers from switching over to competitors. The drivers of retention are Relative attitude and behavior relationship. According to Czepiel’s customer loyalty “is a notion to describe the end result of a relationship between the organization and the customer”. Therefore the organization must provide benefits which delight the customer to gain loyalty of customers. Customer Retention: While commenting on the complexity of customer loyalty Gustavfsson pointed out three major drivers of retention namely overall customer satisfaction, affective commitment, and calculative commitment. Customer satisfaction is the result of perception and experience of the customer with the organization. Affective commitment is the tendency of the customer to stay with the
  16. 16. 16 organization based on emotional attachment which develops through repeated usage of products and services of the organization which in turn results in trust. Calculative commitment holds a logical outlook and is based on economic dependence of a product due to lack of choice or switching cost which creates loyalty.
  17. 17. 17 Types of Loyalty Program 1. Rewards: Award points for purchases. Points can be exchanged for rewards. This type of loyalty program is used when a company wants to capture new consumers and differentiate the brand from the competitors. Examples: Titan as titan users accumulates points of their purchase and can exchange it for a discount or for a gift like Rs. 25 is equal to the 1 point. American Express card users accumulate points they can then use for gifts, travel, or transfer to an airline Frequent Flyer program. 2. Rebate: Award a gift coupon redeemable for the next purchase, whenever the consumer reaches a certain spending or shopping level. When companies have a wide range of products then this reward program can be used to motivate new incremental purchases. 3. Appreciation: Offer a rebate, not the cash then the result will be incremental visits and sales. In this type, consumers are offered with the appreciation reward of the same company. Airlines, hotels, phone companies use this to accumulate points for additional services within their own brand like Seat upgrades, free tickets, hotel stays at different locations, etc. 4. Partnership: Reward the consumer’s accumulated purchases with a partner’s products or services. Example: Tata’s Westside, as they offer a discount if consumers make payment above Rs. 2500 with ICICI debit card.
  18. 18. 18 5. Affinity: An affinity program offers special communications, value added benefits and bonuses and recognition as a valued consumer. This is used where rewards are no longer needed to cultivate a long term relationship, just as a reminder to learn more about companies’ other products and services. Examples: Bank’s Debit cards, gold and silver debit cards. Fig: Stimulus-Response Model of Buyer Behaviour
  19. 19. 19 Benefits of Loyalty Program  Retain your existing customers The effect of the customer retention rate on actual, bottom- line customer numbers cannot be over-estimated.  Acquire new customers A loyalty program should attract new customers to the business; how effectively will depend on how exciting and how valuable the rewards seem to be to the target audience. Acquiring customers is essential to any business, but it can be expensive if compared to nurturing existing good customers.  Move customers up-segment By grading rewards (for example, offering extra points for exceeding a specified spend threshold in a time period), customers can be moved up from one spend level to the next.  Deselect unprofitable customers It can be more profitable to lose bad customers than to gain new ones. Cherry pickers (who buy only your discounted lines and nothing else) cost you money, as does any low-spending customer. They cost more money to service than they generate. Designing a loyalty program that rewards better customers without rewarding this segment at all gives them less reason to stay.
  20. 20. 20  Recover defected customers The success rate in approaching “lost” customers can be three to four times as high as it is when prospecting for new customers.  Increase Customer Lifetime Value (CLV) Customer Lifetime Value is increasingly being recognized as one of the most important measures of the worth of a customer. It takes into account not only the customer’s value now but the expected value over their projected lifetime as a customer. It is arguably the best way a marketer can demonstrate unequivocally that a programme is working: the CLV of targeted customers will rise.  Best customer marketing (BCM) Best customer marketing involves spending more time, effort, and money on the best customers in order to maximize the return on investment. The strategy has been honed to a fine art by marketers such as Brian Woolf and Hawkins Strategic. Not surprisingly, the principles of best customer marketing are the driving force behind the leading loyalty program in the world today.  Build relationships with customers Building customer relationships is crucially important but not always as straightforward as it might seem. It has been said that relationship marketing is powerful in theory but troubled in
  21. 21. 21 practice – an unpalatable concept but probably one with which many marketers could identify.  Create advocates for business Advocacy is one of the highest forms of loyalty that a customer can show. Advocates are so satisfied and pleased with your offering that they tell their friends and associates. And to most people, a personal recommendation is far more convincing than any amount of promotional material.  Adjust pricing levels A loyalty program can help formulate pricing structure. If enough best customers are happy to buy a product at a particular price there seems little point in reducing that price simply to attract cherry-pickers. The effect of changing prices can also be studied – for example, which customer segments buy significantly more or less.  Select stock lines effectively Knowing what your best customers buy frequently helps choose which lines to stock and which lines to expand on.  Plan merchandising optimally Basket analysis can identify what lines are bought at the same time, particularly by best customers, and planograms can be planned accordingly to encourage cross-purchasing.
  22. 22. 22  Reduce promotional and advertising costs Because advertising can be targeted instead of untargeted, significant savings can be made. There is no need to send out thousands of flyers that will be thrown away unread, or take pages of newspaper space that is irrelevant to many of the readers. And targeted advertising works measurably.
  23. 23. 23 Impact of Loyalty Programmes 1. Shoppers Stop First Citizen Loyalty programme grows to 2.5 million customers [It is the biggest and most successful Loyalty programme in this category] In 2012 The First Citizen Loyalty Programme of Shoppers Stop has crossed a milestone of 2.5 million members. With a growing base of over 2.5 million members contributing over 72% to sales annually, Shoppers Stop First Citizen loyalty programme is the biggest and most successful programme in this category.
  24. 24. 24 Under this programme, customers who sign up for the First Citizen membership with Shoppers Stop are treated to various offers and special privileges such as the exclusive First Citizen lounge at every store, facility to redeem their reward points directly at the cash counter, exclusive cash counters for Golden Glow members, exclusive preview of Sale and other annual offers to name a few. “The First Citizen Loyalty Programme which has more than 2.5 million members who contribute over 72% to turnover. Clearly, this denotes a base of thoroughly engaged, loyal and serious shoppers. Shoppers Stop First Citizen members are entitled to various special privileges. Shoppers Stop have introduced numerous innovative benefits exclusively for First Citizens such as Choose Your Sale Date (an exclusive one-day sale for the customer). Choose Your Own Gift, etc. Shoppers Stop have launched a First Citizen mobile app as well. 2. Pantaloons Payback Green card program Pantaloons Green card program is an exclusive loyalty card of the department store format of Pantaloon retail India Ltd. It provides membership plus has a provision of 12-months purchase based upgrading system. This is a 4-tier loyalty program, where tier 1 customers get 1 star status, tier 2 gets 3 star status, tier 3 gets 5 star status and the topmost tier members get an exclusive 7 star status. Getting a green card issued is quite easy but for retaining one star status, one has to make a purchase of Rs 8,000 within two years of card issue date. 1 Star status can be upgraded to a 3 star, 5star and 7 star status by shopping for Rs. 8000, Rs. 20,000 and Rs. 40,000 respectively immediately preceding 12 months of current shopping date.
  25. 25. 25 All are entitled to a range of benefits and privileges depending upon their member status. 1 star members gets a gift voucher of Rs. 200 on new enrolment, while 3star, 5star, and 7star members get a discount of 5%, 7.5% and 10% respectively. All members get special privilege of End of season Sale preview, special billing counter during End of Season sale, special service desk for handling all queries and providing information, free car parking (except 1 star members), exclusive shopping offers sent to members on a regular basis through SMSes, e-mail, telephones and exchange of products within 60 days of purchase (90 days for seven star members). 5 star and 7 star members get an exclusive privilege of free car parking and free home delivery of purchases around the year. As per Pantaloons Dec 2011 report s Green Card loyalty programme of Pantaloons accounts for 55% of sales.
  26. 26. 26 3. Westside’s ‘Club West’ ClubWest is an exclusive loyalty program of Tata group’s department store chain. This is a two-tier program - Clubwest Classic and Clubwest Gold. A purchase of Rs 2000 and Rs 5000 on the same day entitles a customer to a complimentary membership into Clubwest Classic and ClubWest Gold respectively. Alternately, one can enroll into Clubwest Classic by paying a nominal one-time fee of Rs 150. Members can earn reward points on every purchase - Classic members can earn one point for every Rs 100 spent and Gold members can earn one point for every Rs 80 spent at any of the stores.
  27. 27. 27 Apart from this, all members are entitled to a range of benefits like dedicated customer help desk for a member's assistance at each of the stores, Exclusive shopping hours only for members during sales, Advance intimation of all in-store promotions and special offers through direct mailers, and a special discount on dining at select restaurants round the year. Tata group’s Westside retail chain currently generates over 50% sales from its over eight lakh members of ClubWest loyalty program.
  28. 28. 28 Factors Which Influence Loyalty  Satisfaction that a consumer feels from prior purchase experience with a retail outlet motivating a consumer to come to the store again.  Switching barriers gets created when once a consumer becomes a part of loyalty program and if leaves it then all the accumulated points get lost.  An interpersonal relationship is developed with the employees working in the particular store when a consumer visits the retail store frequently which helps in strengthening loyalty.  Attractiveness of alternatives, it happens when there is opening of a new outlet closer to the consumer then consumer get attracted to that store and he will look at the benefits of loyalty programs of both the alternatives then only he will decide he should stay loyal or switch.
  29. 29. 29 Conclusion Loyalty programs impact the consumer purchase behavior in positive manner as it influences the consumers to make repeated purchases as consumers find the different benefits i.e. direct and indirect or immediate. Loyalty programs helps in increasing customer retention which significantly improves a company’s profitability and thus means the positive impact of loyalty programs. Consumers show committed behavior towards loyalty programs due to different types of benefits perceived by them. Rewards which are economic, psychological and sociological in nature lead to greater trust, commitment and development of long term relations. Loyalty Programs create an emotional bond leading to high & irreversible switching costs. Loyalty Programs impact customer loyalty differently in case of high involvement and low involvement purchases. Different consumer shows different behavior towards the same loyalty program scheme due their psychological, demographical and emotional factors. The price promotion also generated excess loyalty but less than the loyalty program and the price promotion generated a greater, but temporary, market share gain.
  30. 30. 30 Bibliography 1. Customer relationship management, Emerging concepts, tools and applications, by Jagdish N.Sheth, Atul Parvatiyar and G. Shainesh. 2. http://www.businessknowhow.com/marketing/loyaltyprog.htm 3. shgww.com/five-types-of-loyalty-programs/ 4. http://www.moneybar.net/productsservices/sbe-loyalty- types.aspx 5. www.crmtrends.com/loyalty.html 6. www.crmlandmark.com/library/loyaltyprograms.pdf 7. www.iocl.com/Services/MarketingLoyaltyPrograms.aspx 8. www.loyaltycardsindia.com 9. http://www.shoppersstop.com/redeem-your-reward-points

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