Customer Loyalty Programs: Are They affecting Profit and Market Share?

In today’s economy, companies must examine every avenue to gain and retain their portion of the market share. They must continue to expand their customer base, but they must also concentrate on keeping existing customers. Customer loyalty programs are designed to assure that existing customers continue to purchase goods and services, rather than switching to a competitor. This study will explore whether these programs actually have a measurable affect on profit and market share. It will examine the real value of customer loyalty programs and their impact on the company bottom line.

Customer loyalty programs can have a positive impact on customer retention, but they also have a downside. They represent a capital expenditure and continuing operating costs. Nearly 75% of U.S. shoppers currently belong to a customer loyalty program (CIOInsight 2003). Schemes are creative and include anything from free merchandise to frequent flyer miles. Managing customer loyalty has become a major part of the marketing mix. The effectiveness of these programs has become a topic of interest in both the academic and business world.

This research study will have a real dollar impact for the companies that choose to use the information. They will be able to determine if their money on customer loyalty programs is being well spent. The justification for choosing this topic is a practical one. Companies need to know if the money they are spending on customer loyalty programs is bringing them a healthy return on their investment, or whether their money would be better spent elsewhere. This study will help companies to answer these important questions.

Literature Review

There are several underlying theories regarding what makes customers remain loyal to a company. First, the customer must feel satisfied with their relationship with the company in order to remain a loyal customer. Recent marketing surveys indicate that incentives such as customer loyalty cards are only effective if the customer has an overall feeling of satisfaction with the company in the first place (CIOInsight 2003). Customer loyalty only results in return sales if the customer is happy with the products and service.

The customer base is measured by comparing the inflow of new customers to the outflow of customers. A 5% change in positive customer retention can amount to a profit increase from 25-100% (CIOInsight 2003). Research indicates that customer reward programs may not be as efficient as it would seem. The one-size-fits-all approach of many customer rewards programs only appeal to one type of customer (Meyer-Waarden & Benavent 2008). It was also found that many loyal customers were already loyal customers before the customer loyalty program was in place (Meyer-Waarden & Benavent 2008). These factors will represent confounding variables that must be considered in the current study design.

Customer Motivation

Customer rewards can be divided into intrinsic rewards and extrinsic rewards. Intrinsic rewards are those that match the customer’s natural purchase patterns. Extrinsic ones are those that are different from a customer’s personal shopping goals (Meyer-Waarden & Benavent 2003). The motivations and buying patterns of the customer must be considered in order for a customer rewards program to be effective. It is not known how customers react to customer loyalty programs where one company chooses to compete by lowering prices, thus creating an asymmetric market (Singh, Jain, & Krishnan 2008). A number of strategies exist that could interfere with the success of a customer loyalty program. For instance, if an airline offers frequent flyer miles, but raises its prices, it could harm its competitive advantage (Basso, Clements, & Ross 2007).

Tesco used customer loyalty to its advantage by concentrating on local market and local marketing trends, making it a world contender with its Fresh and Easy Neighborhood Market Stores (Phillips 2007). Launching a customer loyalty program is much like the launch of a new business, or a new product line. Marketers must come to understand their customer base intimately and they offer them the right mix at the right time (Steers 2007). Perceived attractiveness and switching costs have an impact on the effectiveness of customer loyalty programs. High switching costs can offset the attractiveness of the program. However, attractiveness can have a positive impact on the willingness to switch, regardless of the degree of psychological attachment to the company (Wirtz, Mattila, & Lwin 2007).

As one can see, literature suggests that the success or failure of a customer loyalty program depends on many factors, just as the initial purchase decision does. The bottom line can be harmed if the program fails to drive future sails. Many customer loyalty programs represent expenditure, rather than increased profits (Dowling & Uncles 1997). In order to have an affect on future purchases, the program must effectively leverage the product to the customer by creating an increased value to the customer (Dowling & Uncles 1997). This study also revealed that rewards that are delayed are less effective than those that arrive rather quickly (Dowling & Uncles 1997).

Recent statistics indicate that loyalty is a trend of the past. Managing turnover is the name of the game in the new business world. Customer turnover, employee turnover, and investor turnover are key elements of today’s business climate. However, Reichheld and Teal (2001) disagree. They argue that customer loyalty is as much, a part of the business scene as it was in the past and that it continues to play an important role in the business mix. Reichheld says that a successful company must have three things, loyal customers, loyal employees, and loyal owners. Loyalty alters many key business indicators. For instance, spending rates go up, referrals go up, customer are less price sensitive, the costs of servicing customers goes down, returns and losses are lower and profits go up (Reichheld & Teal 2001). Reichheld and Teal feel that the first year is the most crucial.

What Retains Customers?

Customer loyalty programs are an important tool in maintaining customer relations. However, the market has become saturated with such programs, creating a competitive environment in customer retention programs. This can reduce the effectiveness of an individual customer loyalty program (Yuping & Rong forthcoming). Meyer-Waarden (2007) agrees. In a study involving the number of grocery store competitors within a geographical area, it was found that competition reduces customer loyalty to a single merchant. Many customers were found to have multiple customer loyalty cards, which tended to reduce he lifetime loyalty of the customers. Lifetime loyalty using a tiered customer loyalty program helps to retain lifetime customers through continual value building (Kimar & Shaw 2004).

Larger firms have a competitive advantage over smaller firm in this respect (Yuping & Rong forthcoming). In a related piece of literature, Humby, Hunt & Phillips (2003) provide an in-depth look at the Tesco success story and how their winning customer loyalty program made them a global success. Many of the principles in this book complement the principles outlined by Yuping & Rong. The Tesco story demonstrates practical application of the principles discussed in Yuping & Rong.

There are many different strategies in gaining customer loyalty. Price discounts are the most common, and consequently the least effective of these incentives (Butscher 2002). Total customer satisfaction is the most important factor in customer loyalty, regardless of discount pricing (Butscher 2002). Direct rewards are preferable to indirect rewards (Jeon 2003). High customer involvement is preferred to low customer involvement programs (Jeon 2003).

The literature reveals that customer loyalty is a highly competitive field. It is similar to first sale marketing in many ways. Many of the drivers of customer loyalty are dependent upon the ability to offer value in the long-term. The literature also revealed that enrollment in customer loyalty programs does not necessarily translate into market share (Leenheer, Van Heerde, Bijmolt & Smidts 2006). The problem of turning membership into retained profits is the key question that will be addressed in this research study. The literature review revealed a gap in understanding how membership can be translated into revenues.

Problem Definition

The purpose of this study is to gain an understanding of how customers make the decision to use a particular customer loyalty program for future purchases. It will consider many of the factors discovered during the literature review regarding the variables that influence customer purchase decisions. The objective of this study will be to determine which factors influence the decision to use a particular customer loyalty program for grocery customers who have more than one grocery customer loyalty cards.

Research Methodology

Type of Investigation

This study will select a random sampling of customers at three local grocery stores. It will use a survey to determine that factors that influence their decision to use that particular grocer’s customer loyalty card, as opposed to competitor cards. The survey will ask what particular factors influenced that day’s purchase decision and the decision to use the corresponding rewards program. It will determine if the rewards program was a factor in the decision of use the chosen grocer on that day. It will examine the factors of convenience, price, location, customer service, product selection, or the rewards program in the choice of purchases for the day.

Sampling Design

The study will utilize random sampling technique at three different grocery locations. The researcher will administer the study to customers who are shopping at the store. The researcher will ask the customer questions about what influenced their decision to shop at that particular store that day.

Data Collection Method

The primary data collection method for the study will be quantitative. Quantitative study methods are most useful when the data can be transformed into t numerical data point. This study will compare the importance of the factors being examined through a Likert-type survey questionnaire. Study participants will fill out and return the study results immediately to the researcher onsite.

Contribution of Study

This study will contribute to a better understanding of the importance of customer loyalty cards to the decision to shop at a particular grocer. The study will help manager, policy makers, and other researchers better understand how to improve overall customer loyalty. It will play an important role in helping to develop customer loyalty programs that actually result in higher profits and greater market share. It will help managers and others to build brand equity that will provide a substantial customer base over a longer period.

Without this study, managers and others will continue to spend money on programs that may or may not work in retaining customer loyalty. An understanding of what customers want is an important factor in assuring that managers receive value for the money spent on these programs. This study will help to fill the gap discovered during the literature review regarding the factors that contribute to a successful customer loyalty program.

As one can see, managing customer relations involves many of the factors that are present in any marketing campaign. Just as with primary marketing, retaining customer loyalty means gaining a thorough understanding of customer wishes and needs. Customer loyalty is a highly competitive field and companies must make certain that their money is not wasted. This study will help retailers and others understand what drives customer decisions to return to a particular retail establishment and the role that customer loyalty cards play in that decision.

Bibliography

Basso, L., Clements, M., & Ross, T. 2007. Moral Hazard and Customer Loyalty Programs. [online]. 14 August 2007. Available at http://www.economics.ucr.edu/seminars/winter08/ets/TomRoss.pdf[Accessed 25 October 2008[.

Butscher, S. 2002. Customer Loyalty Programmes & Clubs. 2nd Edition. Aldershot, England: Gower Publishing Company.

CIOInsight. 2003. Trends: Loyalty Programs. CIO Insight Online. [internet] 1 December 2003. Available at http://www.cioinsight.com/c/a/Special-Reports/Trends-Loyalty-Programs/[Accessed 25 October 2008]/

Dowling, G., & Uncles, M. 1997. Do Customer Loyalty Programs Really Work? MIT Sloan Management Review [online] Summer 1997. 38 (4): 71-82. Available at http://sloanreview.mit.edu/smr/issue/1997/summer/6/[Accessed 25 October 2008].

Humby, C., Hunt, T., & Phillips, T. 2003. Scoring Points: How Tesco Continues to Win Customer Loyalty. 2nd. Revised Edition. USA: Kogan Page Ltd.

Jeon, H. 2003. Effects of Loyalty Programs on Value Perception, Program Loyalty and Brand Loyalty. Journal of the Academy of Marketing Science. 31 (3): 229-240.

Kimar, V. & Shaw, D. Building and sustaining profitable customer loyalty for the 21st century. Journal of Retailing. [online] 80 (4): 317-329. Available at http://www.sciencedirect.com/science?_ob=ArticleURL&_udi=B6W5D-4DXTHWB-2&_user=10&_rdoc=1&_fmt=&_orig=search&_sort=d&view=c&_acct=C000050221&_version=1&_urlVersion=0&_userid=10&md5=a1b75df88e766190eb7bfbffb88fdfe3[Accessed 25 October 2008].

Leenheer, J., Van Heede, H., Bijmolt, T. & Smidts, a. 2006. Do Loyalty Programs Really Enhance Behavioral Loyalty? An Empirical Analysis Accounting for Self-Selecting Members. Social Science Research Network. ERIM Report Series Reference No. ERS-2006-076-MKT. Available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=969532[Accessed 25 October 2008].

Meyer-Waarden, L. 2007. The effects of loyalty programs on customer lifetime duration and share of wallet. Journal of Retailing. [online]. April 2007. 83 (2): 223-236. Available at http://www.sciencedirect.com/science?_ob=ArticleURL&_udi=B6W5D-4N74JDR-1&_user=10&_rdoc=1&_fmt=&_orig=search&_sort=d&view=c&_version=1&_urlVersion=0&_userid=10&md5=e05ae047dc2d4340ca4af494aa732cc0[Accessed 25 October 2008].

Meyer-Waarden, L. & Benavent, C. 2008. Rewards That Reward. MIT Sloan Management Review [online]. 22 September 2008. Available at http://sloanreview.mit.edu/wsj/insight/marketing/2008/09/22/[Accessed 25 October 2008].

Phillips, T. 2007. Tesco knows loyalty like no other, (opinion). Retailing Today [online]. 18 June 2007. Available at http://www.accessmylibrary.com/coms2/summary_0286-34043290_ITM[Accessed 25 October 2008].

Reichheld, F. & Teal, T. 2001. The Loyalty Effect: The Hidden Force Behind Growth, Profits, and Lasting Value. USA: Harvard Business School Press.

Singh, S., Jain, D., & Krihnan, T. 2008. Research Note – Customer Loyalty Programs: Are They Profitable? Management Science [online]. June 2008. 54 (6): 1205-1211. Available at http://mansci.journal.informs.org/cgi/content/abstract/54/6/1205[Accessed 25 October 2008].

Steers, S. 2007. Loyalty programs boost retention, profits; agents should be cross-selling home-based business accounts, commercial clients. National Underwriter Property & Casualty. 14 May 2007.

Wirtz, J., Mattila, a., & Lwin, M. 2007. How Effective Are Loyalty Reward Programs in Driving Share of Wallet? Journal of Service Research. [online]. 9 (4): 327-334. Available at http://jsr.sagepub.com/cgi/content/abstract/9/4/327[Accessed 25 October 2008].

Yuping, L. & Rong, Y. forthcoming Competing Loyalty Programs: Impact of Market Saturation, Market Share, and Category Expandability. Journal of Marketing. [online]. Available at http://www.yupingliu.com/files/papers/liu_yang_loyalty_program_competition.pdf[Accessed 25 October 2008].

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