Customer Relationship Management: A Database Approach

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Customer Relationship ManagementA Database
Approach
MARK 7397 Spring 2007
Class 9
James D. Hess C.T. Bauer Professor of Marketing
Science 375H Melcher Hall jhess_at_uh.edu 713
743-4175
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Loyalty Programs Membership Growth
6
3.6
1100 USA
1051
973
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Design Elements of Loyalty Programs

• Satisfaction-loyalty-profit chain
• Loyalty programs
• Key objectives of Loyalty Programs
• Examples of Loyalty Programs
• Design Characteristics of Loyalty Programs
• Reward Structure

Next Week What makes a loyalty program
effective?
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Satisfaction-Loyalty-Profit Chain
Product
Performance
Customer
Retention /
Revenue /
Service
Performance
Satisfaction
Loyalty
Profit
Employee
Performance
What do we know about this conceptual chain?
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The link between Satisfaction and Retention
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Customer Sub-Types
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Customer Loyalty

• Loyalty to a product or service by repeat
  purchases can be due to customers natural
  satisfaction and preference for the products
  features and benefits, but it can also be induced
  through marketing plans and programs from the
  firm.
• Definitions of Brand Loyalty
• 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 towards a
  particular product or service

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Results of Customer Satisfaction-Profit Link
Studies

• Direct link suggests, that as customers
  experience greater satisfaction with a firms
  offering, profits rise
• Improving customer satisfaction comes at a cost
  and once the cost of enhancing satisfaction is
  factored in, offering excessive satisfaction
  doesnt 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

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The link between Loyalty and Profits

• Reichhelds 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 firms resources but
  are subject to diminishing returns

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Lifetime Duration-Profitability Association

• Reinartz and Kumar Across the different firms,
• there is a segment of customers that is loyal but
  not very profitable (due to excessive resource
  allocation)
• there is a segment that generates very high
  profits although it has only a short tenure
• Since these short-term customers can be very
  profitable, it is clear that loyalty is not the
  only path to profitability

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Association of Profitability and Longevity of
Customers
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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

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Key Objectives of Loyalty Programs

• Building true (attitudinal behavioral) loyalty
• Efficiency profits
• Effectiveness profits
• Value alignment

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Efficiency Profits

• Profits that result from a change in customers
  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 programs net of the LP cost

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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

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Examples of Loyalty Programs

• Volkswagen Club and Card
• Customers collect points from Volkswagen (VW) for
  servicing their car or buying accessories and
  from partners of car rental companies and tour
  operators
• The points can be redeemed for dealer services,
  price reductions on car purchases, and catalog
  merchandise
• Star Alliance Frequent Flyer Program
• Any flight on any Star Alliance airline counts
  towards a members frequent flyer program
• Neimann Marcus
• Offers its LP InCircles to all customers. Using
  a shopping card, customers accumulate points that
  can be redeemed for exclusive rewards
• Club Bally Member Rewards

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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

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Reward Structure

• Hard vs. soft rewards
• Hard rewards price reductions, promotions, free
  products and preferred treatment
• Soft rewards psychological or emotional benefits
  of having special status in addition to receiving
  preferred customer service

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Reward Structure (contd.)

• Product proposition support
• Reward directly supports the firms product
  proposition
• Example The US Bagel franchise Finagle-A-Bagel
  has a LP that allows participants to redeem their
  accumulated bonus points for the firms own
  products sandwiches and drinks
• Consumers prefer hedonic goods as opposed to
  utilitarian goods when receiving a LP reward
• 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 customers home
  for taking pictures

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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
• Tiering of rewards
• Rewards based on asset accumulation response
  function - how assets or rewards are accumulated
  as a function of spending behavior
• Timing of Rewards
• - Lock-in effect - firm creates redemption
  rules that favor long
• accumulation periods, thereby impacting
  customer retention
• - Longer the timing to build up to a certain
  reward level, the greater
• the breakage (the amount of rewards that are
  never redeemed)

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How can loyalty programs backfire?

• Design can change behavior in a
  counter-productive way.
• Reduce the profitability of top-level customers
• Increase resentment of customers toward each
  other
• Attract the wrong type of customer

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Summary

• Satisfaction-profit-chain needs to be implemented
  at a disaggregate (individual) level rather than
  aggregate (firm) level
• Link between satisfaction and retention is
  asymmetric, i.e., dissatisfaction generally has a
  greater impact on retention than satisfaction,
  and nonlinear
• Loyalty is not the only path to profitability
• 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 revenue streams