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Customer Relationship Management: A Database Approach

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Title: Customer Relationship Management: A Database Approach


1
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
2
Loyalty Programs Membership Growth
6
3.6
1100 USA
1051
973
3
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?
4
Satisfaction-Loyalty-Profit Chain
Product
Performance
Customer
Retention /
Revenue /
Service
Performance
Satisfaction
Loyalty
Profit
Employee
Performance
What do we know about this conceptual chain?
5
The link between Satisfaction and Retention
6
Customer Sub-Types
7
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

8
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

9
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

10
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

11
Association of Profitability and Longevity of
Customers
12
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

13
Key Objectives of Loyalty Programs
  • Building true (attitudinal behavioral) loyalty
  • Efficiency profits
  • Effectiveness profits
  • Value alignment

14
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

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
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

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

18
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

19
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

20
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)

21
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

22
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
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