Loyalty programs aim to increase profits by improving customer retention and purchasing behavior. Effective programs consider customer satisfaction levels, reward structures, and partnership networks to optimize the satisfaction-loyalty-profit chain at both aggregate and individual levels. Properly designed programs evaluate profitability from customers over time to ensure loyalty initiatives enhance business models and financial returns.
Customer segmentation is the process of dividing customers into groups based on common characteristics so companies can market to each group effectively and appropriately.
Segmentation allows marketers to better tailor their marketing efforts to various audience subsets. Those efforts can relate to both communications and product development. Specifically, segmentation helps a company:
Create and communicate targeted marketing messages that will resonate with specific groups of customers, but not with others (who will receive messages tailored to their needs and interests, instead).
Select the best communication channel for the segment, which might be email, social media posts, radio advertising, or another approach, depending on the segment.
Identify ways to improve products or new product or service opportunities.
Establish better customer relationships.
Test pricing options.
Focus on the most profitable customers.
Improve customer service.
Upsell and cross-sell other products and services.
Chadwick Martin Bailey’s Brant Cruz and Jeff McKenna presented best practices of market segmentation based on their years of experience working with clients like eBay, Electronic Arts, Plantronics, and Microsoft.
Customer segmentation is the process of dividing customers into groups based on common characteristics so companies can market to each group effectively and appropriately.
Segmentation allows marketers to better tailor their marketing efforts to various audience subsets. Those efforts can relate to both communications and product development. Specifically, segmentation helps a company:
Create and communicate targeted marketing messages that will resonate with specific groups of customers, but not with others (who will receive messages tailored to their needs and interests, instead).
Select the best communication channel for the segment, which might be email, social media posts, radio advertising, or another approach, depending on the segment.
Identify ways to improve products or new product or service opportunities.
Establish better customer relationships.
Test pricing options.
Focus on the most profitable customers.
Improve customer service.
Upsell and cross-sell other products and services.
Chadwick Martin Bailey’s Brant Cruz and Jeff McKenna presented best practices of market segmentation based on their years of experience working with clients like eBay, Electronic Arts, Plantronics, and Microsoft.
Impact of loyalty programs in retailing business in India for creating long t...Love Suryavanshi
Impact of loyalty programs in retailing business in India for creating long term relationships. Various topic on sutomer loyalty and loyalty program has been covered.
Customer Loyalty Outcomes
Characteristic Features of Behavioral Loyalty, Attitudinal Loyalty and Cognitive Loyalty, Role of Customer
Loyalty outcomes in business decisions, Significance of Customer Loyalty for Marketers, Relationship
Influencers of Customer Loyalty including factors mediating customer loyalty relationship with other relationship influencers, Customer Affinity, Customer Engagement.
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