Customer Loyalty in Retail Sector

1 January 2017

Customer loyalty schemes (or programs) are explicit efforts by the retailers in different formats to gain the long term patronage from the customers. Loyalty schemes are designed and developed for variety of reasons: to reward the loyal customers, to generate more information about the customer behaviour, buying patterns. It also helps to influence consumer behaviour, and as defensive measure to combat a competing scheme.

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The purpose of this study is to describe the objectives of the loyalty schemes, the origin its evolution over the years, the important aspects of its implementation and strategic approaches to maximise the impact. This will also focus on the retail sectors and its effect on consumers, economies, and businesses. Successful retailers connect with the customers through loyalty programs at three levels starting with initiation, retailer communication, and finally the customer-retailer feedback loops. Customer loyalty programs

Loyalty programs are ways for the retailer to encourage the ongoing patronage of the customers. It allows the retailers to gather the information about customer buying behaviour in order to understand the trends, and reward them appropriately with loyalty. It has many forms which varies in its application and industry sector. It is an engagement between the company and the customer for building a sustaining relationship over a period of time. There are two types of customer loyalty programmes, credit card rewards programme and frequent flyer programs.

A brief history: It started in 1981 as frequent flyer programme in American Airlines, the first of its kind to retain the airline’s most frequent flying customers by rewarding them for using the airline services. Its database of 150,000 premium customers was identified to be a part of the AAdvantage club. This was copied by other airlines and much before that there used to be coupons: the idea was similar to encourage repeat business by rewarding customers for their loyalty. The Consumer Buying Process:

The consumer usually goes through the five stages of the buying process. The need recognition and problem awareness leads to information search in the marketplace. Then after searching through the plethora of information the customer is able to do justice by evaluation of the alternatives. The customer asks people around him like personal sources, commercial sources, public sources, and experiential sources who had used the product or service. Then the ‘aroused’ customer seriously thinks of the purchase concern for a particular product of his choice.

After the purchase has been done, he consumes a service or a product that results in the formation of experiential outcomes about the product. The theory of cognitive dissonance comes into play over here, where the feeling may be prevalent for the customer to switch brands for the next time. To manage the post purchase stage in the consumer’s mind the job for the marketing team is to engage the consumer closer to the brand values. This potential customer can only be swayed when the needs and criteria’s are fulfilled.

The customer’s indecisive behaviour should be reinforced with positive elements about brand which would evoke a positive response in the sales figures. The evaluation process by a customer differs for a low involvement and a high involvement purchases (example buying a soft drink, and buying a car). It has been seen that customer feels that involvement factor, the degree of perceived relevance and personal importance attached to the choice. The lesson for the marketing team of retailers is therefore to provide trial or sampling of the product in the hope of securing a sale.

The same concept is being adopted by the airlines and hospitality industry where the offers is not through a sampling of a product but through up-gradation to upper class of seats, business suites, cabins, or services which is totally new for the customer(which is the aspirational level). The customer loyalty funnel is the next stage where the customer is hooked to the set of offerings. A response from the customer to come back and repeatedly use the product or service is a definite indicator of the customer to be loyal.

Through loyalty programmes companies therefore can track the behaviour of customer, and trends of his activities over a period of time. It can lead to customer behaviour where customers can book earlier, stay longer, do vacationing more often, and earn reward points for this behaviour with the brand. So loyalty programmes provide an opportunity to learn about the customer’s preferences, and expectations. Customers tend to be loyal only when they can identify their values matching with those of the brand. This leads to brand association from the customer’s with the company’s logo, brand. Eyeballs Buyers Loyalty Action Performance

Consideration Awareness There are five types of the consumer behaviour which have been measured over particular period of time span: the percentage of consumers buying a brand, number of purchases per buyer, the percentage who continue to buy the brand repeatedly, the 100% loyal customers and the segment of population who buy other brands. Polygamous Loyalty: This is a theory which is for the stationary markets, customer loyalty is divided into number of brands. The long run propensities to buy a particular brand for a customer now a days is very less the primary reason being the choice of too many brands in the same sector.

So polygamous loyalty is actually consumer behaviour which is connected to brand switching (a conscious once-and-for all change of allegiance to another brand- as if the propensities are 100% or zero). The promiscuous (customer behaviour is like a butterfly shifting from one flower to another) behaviour of the customer happens when the choice of brands are large at a given point of time. It generally happens in the segments of fast moving consumer goods where the need for gratification is instant for the customer and it does not require huge amount of money to invest.

It has also been seen as a trend in the retail service industry where the unavailability of the specifics of a service is not available or offered. The Leaky Bucket Theory: The leaky bucket theory says that when a company expects its existing customers to exhibit a loyal behaviour the company arms itself with marketing strategies which are designed to replace the disloyal customers who leak away with the new ones to keep the sales momentum steady. The domain of this theory across many countries over 20years of research around the globe has revealed that purchase habits of people buying products are highly are not sticky.

Empirical record and predictive norms show that only 10% buyers for many types of frequently purchased consumer goods are 100% loyal to a particular brand over only one year period. Extensions of this work show that even in service situations exclusive loyalty is confined to small number of buyers. The empirical studies show that it is difficult to be too enthusiastic about a loyalty marketing program as the customer preferences are always changing. Creating a group of 100% loyal customers therefore is much of hypothetical situation. Double Jeopardy and Brand Loyalty:

The issue of finding a single brand loyal customer is very rare in the market. Most of the brands of the same kind exist along the double jeopardy line. There may be existence of the big group of brand which are ‘super loyalty’. The figure shown below shows the relationship of most established and competitive consumer and service markets industry. 0% Market Share 100% 0 Repeat purchase probability 1. 0 Double jeopardy line Change of pace brands Super loyalty brands Niche brands The oblong shaped structure at the middle is dissected by double jeopardy line which depicts the buyers predicted by double jeopardy law.

Niche brands have relatively more buyers who are loyal and likely to make repeat purchase. Super loyalty brands are those which enjoy higher status in terms of market share and probability of a repeat purchase. The new segment of change of pace of brands lies at the bottom of jeopardy line, which is a brand with higher than expected market share, but less than expected proportion of loyal buyers. It is also to be noted that the brands can be profitable only when the repeat purchases are there, or else it falls below the double jeopardy line taking the position of a different brand.

Researcher across the world, suggests that the most effective ways to get more buyers is to gain more distribution outlets. This acts as a trap to catch customers who would naturally want a service delivery outlet nearest to the vicinity of his stay, office, home. The service and even airline industry understands this, so they extend the offerings through hotels, travel agents, online or mobile bookings, business agents for corporate sales. So loyalty programs will be only effective when the repeated reinforcements of positive elements of the brand are projected in the customer’s mind. Linking Customer rewards to loyalty programmes:

Products and services are consumed by the customers who benefit them their wants and needs. These can be psychological, functional or economic in nature and they are the elemental sources of customer value. The amount of customer value and distribution coverage will increase the market share and the loyal customers of a brand. The rewards offered by a customer loyalty program tend to disturb the above relationship. Critical analysis tells us three sets of psychological considerations: the extent to which loyalty is linked to a brand, the way customers value rewards on a particular offer, and lastly effect of time on the above two criteria.

It has been found that customer loyalty programme may induce loyalty to the program rather than a core product or service. The extent to which it may seem desirable to the customer is linked to that factor of customer’s interest and involvement with the product. For low involvement products, incentives are primary rewards while for a high involvement products it is a small incentive generally. It has been seen that a more desirable outcome is possible when the creation of a point of difference reinforces long term value proposition of the service itself.

So customer loyalty programs can be classified if the explicit rewards directly support the value proposition of the product or service which is offered to consumers or whether rewards are designed to motivate the loyalty element through an indirect route. Loyalty programs are designed to support the value proposition and help the positioning of target product in fitting the goals of loyalty marketing. Psychologists have shown interest in modifying behavioural learning with that of rewards. It has been found that there are five elements that contribute to loyalty program’s value.

The cash value of the redemption of rewards, the range of choice of the rewards, aspirational value of rewards, perceived likelihood of achieving rewards and ease of using the loyalty scheme. Furthermore it can also be added the psychological benefits belonging to the program and participating in accumulation of loyalty points. The true potential of an effective loyalty program tends to attract customers on the basis of the value it offers as a reward but also when the rewards are available when they demand it. If it is delayed and the process of redemption of is problematic customers are bound to switch the brands.

The Retail Sector: The retail sector either provides a good or a service or a mix of both in a service sector to a set of targeted customers. The retail operations typically need footfalls of the customers as the first step to make the business model viable. There are three kinds of service retailing: rented goods services, owned goods services, and non goods services. So in order to sustain the retail chains have introduced various loyalty programmes to retain customers. Characteristics of Services Retailing: The four characteristics of services retailing are intangibility, inseparability, perishability, and variability.

The intangibility aspect of service retailing has the key features like services features are difficult to display, its prices difficult to determine, judgement quality is subjective, and it cannot be patented, which means easily duplicable. Inseparability factor of customer receiving the service is the crux of service production, and consumer loyalty rests with employees. Perishability of services is a feature which is offered to consumers for a specific period of time, which substantiates that it cannot be inventoried and effects of seasonality can be severe.

Though standardization and quality control is hard to achieve the variability factor of service is a critical factor in service retailing. Typical Customer Services: The typical customer services in a retail setting entails some important factors and facets of which are as follows: credit facility, delivery, alterations, gift packaging, complaints handling, trade-in, trial purchases, extended store hours, mail and phone orders. Some of the extended services which are offered to retail customers are restrooms, restaurants, shopping bags, information, pay phones, parking, and baby sitting.

Empower Front line employees Focus on Customer Concerns Show that you are listening Express sincere understanding Apologize and rectify the situation The gaps in the customer service leave the customer dissatisfied and hence the customer discontinues the service. The turning around of weak customer service can be done in this way: Delivering Value: The basic premise of the consumer behaviour theories will lead to interesting facts. The consumers will demand more for less from the shopping experience in lesser time.

The consumers will split the commodity shopping venture from the value added shopping trip. This means the perceived value that the shopper has is a part of a series of bigger activities and processes i. e. the value chain. The customer’s view is to see the total benefits accrued versus the price paid to purchase it. The retail value chain comprises of the total bundle of benefits offered to customers through a series of activity linked channel distribution. Several factors are store location, parking, retailer ambience and merchandising, product range and quality, stock position and shipping.

The three aspects of a value oriented retail strategy are expected, augmented and potential. The customer service in the retail segment is an important aspect where the expected customer service level that customers want to receive such as basic employee courtesy. Augmented customer service in retail includes the acitivities which enhance the shopping experience and give retailers a competitive advantage. The next issue is classifying customer services, in the retail format. The table below shows that we can map Cost of offering the customer service

HighLow Value of customer service to be shopper Low High Patronage Builders>High cost activities that are primary factors behind customer loyalties| Patronage Solidifiers>The low cost little things that increase loyalty| Disappointers>Expensive activities that do no real good. | Basics>Low cost activities that are naturally expected, absence could reduce the patronage. | the value of customer service and the cost of offering it. The high and low parameters depict the types of relationship which are expected.

The patronage builders are high on both factors which leads to high cost activities while the opposite is low on both factors which are basic low cost activities which is naturally expected and can reduce the patronage. The disappointers are those who are low in perceived value of a shopping experience. The patronage solidifiers is that segment where low cost little things increases loyalty. Key Concepts of Loyalty Marketing Programs: The US model which was replicated all over the world in airlines and also in hotels, restaurants, travel, coffee houses, cruises.

The reason loyalty marketing is the key to the effective marketing mix is because of its approach. It is a scientific model, which can be tracked, measured the effectiveness. The expenditure in a mass marketing exercise with print, Television is huge. So companies are trying to find out newer ways to reach specific targeted customers at a much lesser cost. Thats where the loyalty marketing programmes steps in. Some of the key universal characteristics which define the loyalty programmes are as follows: 1. Lifetime value of customer: The history of marketing shows that it uses the old transactional model when analysing customer purchases.

The newer model is specific with the actual and potential on the basis of the expected purchases in the course of the total lifetimes. The long-term approach in supporting the loyalty factors is the basic premise of the targeted consumer marketing. 2. Share of customer: The long term perspective of a customer and company is seen as the is also seeking to maximise the share of the customer’s category spending over lifetime of purchases. 3. Cost to retain VS cost to acquire: The general thumb rule is that it is 4-15 times more expensive to acquire a new customer than to retain an existing customer.

Loyalty marketing programs therefore leverages this disparity by targeting the customer retention in a focussed manner. The more a customer buys a product the greater are the chances of winning and choosing a product. 4. The 80-20 Rule: The general rule of 80-20 says that 80% of the given effect is likely to be caused by a mere 20% of the relevant variables. Therefore the 805 profits are likely to be generated by 20% of the customers. In the airline industry it has been seen that the business travellers segment flies frequently, stays at the same hotels, at high yield rates, to combine to account for a big slice of revenue and profit.

So this type of marketing allows marketers to identify the premium segment of the business travellers and provide them with recognition and benefits which again is a part of the revenue contribution. Goals of Loyalty Marketing: The goals of this type of marketing usually have five main goals: 1. Enrolment: This is the first step where the initial contact of the customer and representative takes place, which results in explaining of benefits and creation of the unique customer identification number. This id will help to search; track the details of the customer-company relationship.

The potential customer in the loyalty program receives the first greeting official letter which lays down the rules, to upgrade his awareness. The loyalty bonus points, how it is earned, milestones, statement generation date, are clearly communicated to the customer. 3. Customer Retention: This goal is the crux of the customer loyalty marketing. It has been seen that the loyalty program usually succeeds in protecting a substantial chunk of company’s proven customer base, which is a important element for the financials of the revenue production.

Through this programme it succeeds in retaining the existing customer base, rather than making efforts to generate a new one. 4. Customer Reactivation: This happens when the customer in the database is a lapsed customer, who has stopped using the customer loyalty card. The issue is to tap the total customer base to coax them to actively use the product, know the actual reason and offer something in return. This will help them to recapture the switchers segment of those customers, retain them and prove their loyalty towards the brand. 5. Maximise the share of the customer:

The share of the customer is the basic tenet of the customer retention strategy, where the loyalty marketing seek to increase the share of total spending. Most of the best customers have multiple loyalty cards of different organisations and the efforts are to cross bundle offers to boost customer’s spending. So from the marketing point of view the companies seek to maximise the share of customer’s total category spending. The Airlines Retailers: The airlines company uses frequent flyer programs- FFPs( a type of loyalty programs) which can be found everywhere.

This customer loyalty programmes were initially used in US airlines to start with which slowly developed into a global fad. The airline industry which is in the retail sector of the services started offering following a trend in the market. Some of the carriers felt that using FFPs is a kind of discount or rebate, which is inconsistent with their premium-pricing strategy(first class and business). The reasons why FFPs are very attractive loyalty programmes( customer’s viewpoint) and effective ( airline standpoint) is the reward side of the equation.

The result is a free ticket for most of the FFP members who have used the airline service. The operational side of the airlines for FFP programme as a general rule reserves 5% of the airline seats for the FFP programme which awards tickets to the lucky winners. Below is the chart of the cost and revenue factors which affect this program. Costs | Revenues| FFPs are big operations, employing thousands of employees as CCE, marketing, and technical staff. The extra costs involved are computers, telephone systems, facilities. FFPs are an effective way of marketing programmes and almost all airlines companies are willing to pay for the privilege of participating as partners.

Conversely, loyal customers may come to the retailers again and again for a price discount or seeking a better form of service. So taking notice of the above explained Double Joepardy relationship the loyal customers are likely turn out to be more frequent buyers. Their expectation set rises as well , as they may seek some type of volume discount on the number of repeat purchases. Next the assumption of spending more time may label a customer loyal, but the weight of the purchase matters, not the loyalty. Conclusion:

In short the business of customer loyalty program is always a profitable business if it can be designed to be more profitable and effective in its reach. Though there are categories where we cannot impose this like highly innovative products, fads & fashions, but as the brand gets bigger there are more chances of customers to be more brands loyal which was shown in Double jeopardy line model. So if loyalty program should enhance product or service value proposition, broaden the reach of availability, to neutralise a competitor’s loyalty program effort.

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