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Customer Relationship Management A Databased Approach


Results of Customer Satisfaction-Profit Link Studies ... alliance with partner firms such as Sony, Royal Caribbean, and Warner Brothers ... – PowerPoint PPT presentation

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Title: Customer Relationship Management A Databased Approach

Customer Relationship ManagementA Databased
  • V. Kumar
  • Werner J. Reinartz
  • Instructors Presentation Slides

Chapter Eight
  • Designing Loyalty Programs

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

Satisfaction-Loyalty-Profit Chain
Retention /
Revenue /
Source Strengthening the satisfaction-profit
chain, Eugene W Anderson, Vikas Mittal. Journal
of Service Research, Nov 2000. Vol 3, Iss.2, p 107
Results of Customer Satisfaction-Profit Link
  • 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

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
The link between Satisfaction and Retention
  • Link between satisfaction and retention is
  • 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
  • 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 cost, and the level of
    perceived risk influence the shape of the curve
    and the position of the elbows

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
customers stated intent to repurchase
How Competitive Environment affects
Satisfaction-Loyalty Relationship Example
  • In the very competitive automotive industry,
  • Very high levels of satisfaction are necessary
    for a customer to repurchase the same brand again
  • When utilising an airline
  • Consumers may incur considerable switching costs
  • This cost might increase due to bonus point
    build-up in frequent flyer programs and due to
    limited airline choice at any given airport
  • Thus, consumers tend to re-patronize an airline
    even though their satisfaction might only be

The link between Loyalty and Profits
  • Reichhelds hypotheses
  • Long term customers spend more per period over
  • 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
  • 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

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

Lifetime Duration-Profitability Association
  • Overall trend shows a direct correlation
    between loyalty and
  • profitability
  • Outliers on the graph who generate high
    profits while not
  • having high loyalty will outperform those
    customers who have a
  • high level of loyalty but who are not very

Association of Profitability and Longevity of
Source The mismanagement of customer loyalty,
Werner Reinartz, V Kumar. Harvard Business Review
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
  • 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 towards a
    particular product or service

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

Key Objectives of Loyalty Programs
  • Building true (attitudinal behavioral) loyalty
  • Efficiency profits
  • Effectiveness profits
  • Value alignment

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

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

Efficiency Profits
  • Profits that result from a change in customers
  • 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
  • Retention
  • Lifetime duration
  • Measured in terms of the immediate profit
    consequences as compared to profit consequences
    without loyalty programs net of the LP cost

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
  • 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

Value Alignment
  • Goal of aligning the cost to serve a particular
  • customer with the value he/she brings to the
  • 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
    customers value and in the cost to serve the
  • Example the airline business, the hospitality
    industry and the financial services industry

Revenue and Profitability of Customers
Example of a firm with a highly heterogeneous
customer base
-Tier A represents 71 of the customer
base, Tier B 42 and Tier C the remaining 27.
- More than a quarter of the customers are
unprofitable and need to be subsidized by the
highly profitable ones
Examples of LPs
  • Frequent-Buyer programs
  • City Bagels, a sandwich retail chain offers every
    10th sandwich free for customers who have nine
    stamps from previous purchases
  • 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
  • The points can be redeemed for dealer services,
    price reductions on car purchases, and catalog
  • Star Alliance Frequent Flyer Program
  • Any flight on any Star Alliance airline counts
    towards a members frequent flyer program

Examples of LPs (contd.)
  • Webmiles allows its members to collect and redeem
    assets in a network of retail partners. Thus, the
    retailers become members in Webmiles partner
  • Webmiles manages the program and the
    communication with more than 1 million customers
  • Neimann Marcus
  • Offers its LP InCircles to all customers. Using
    a shopping card, customers accumulate points that
    can be redeemed for exclusive rewards
  • Buitoni Pasta Club
  • Buitoni offers a platform for exchange among
    pasta enthusiasts sharing recipes, cooking
    experiences, and testing innovative product
    concepts. The club offers an opportunity for
    Buitoni to get closer to heavy end-users

Loyalty Programs Membership Growth
CRM at Work Frequent Flyer Programs
  • American Airlines, United, Continental, and USAir
    multiply miles flown by a customer by a
    coefficient derived from the type of seat class
    that customer has paid for
  • Passengers who are willing to pay to upgrade to
    business or 1st class will, in turn, earn more
    miles and thus be rewarded sooner and more often
  • Southwests reward program is based on the number
    of flights that an individual takes. Every eight
    round trip flights are worth one free round trip
  • Southwest rewards customers who fly 50 round trip
    flights in a year with a free companion pass for
    the next year
  • Southwest captures the business of high value
    customers who fly at least once a week, on an
  • By reducing the role of the middleman, Southwest
    is able to capture revenue
  • Result Southwest has been the only major airline
    that has had a positive net income since the year

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)

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

Reward Structure (contd.)
  • Product proposition support
  • Reward directly supports the firms product
  • 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
  • Allows LP member to redeem points for products
    that are completely unrelated to the focal firms
  • Example British Petroleums LP users may redeem
    points from their gasoline-related purchases for
    merchandise such as first-aid kits, photographic
    films, coffee mugs, and Barbie dolls

Reward Structure (contd.)
  • Aspirational value of reward
  • Consumers prefer hedonic goods as opposed to
    utilitarian goods when receiving a gift or a LP
  • Mercedes Benzs LP makes it possible to transform
    points against a flight in a MIG 29 combat
  • 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

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

Change in Cumulative Spending with Two Different
Response Functions
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
Reward Programs in the Gaming Industry
  • Harrahs Entertainment Three-tiered loyalty
    program - Total Rewards.
  • The tiered structure offers different levels of
    reward services and privileges to customers of
    differing tiers
  • Reward ranging from cash back at slots/tables to
    complimentary offers for shows, meals, and hotel
    stays at any Harrahs location.
  • Members also can draw benefits from Harrahs
    alliance with partner firms such as Sony, Royal
    Caribbean, and Warner Brothers

CRM at Work Bloomingdales Rewards Plus Program
  • Increasing levels of rewards to customers based
    upon their annual spending level
  • First tier Premier Insider- all members that
    sign up for a Bloomingdales credit card
  • Second tier Premier Plus Insider- members who
    spend more than 1000 annually
  • Third tier Ultimate Premier Insider customers
    who spend over 2500 each year at Bloomingdales

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

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 firms
  • 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 sole purpose is to manage a LP

  • 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
  • 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
  • to reflect on the impact of Loyalty Programs on
    their bottom line
  • to determine how customer service initiatives add
    value to future revenue streams