A conceptual model for exploring impact of loyalty programs on ...

IRACST- International Journal of Research in Management & Technology (IJRMT), ISSN: 2249-9563 Vol. 2 No.2, April 2012

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A conceptual model for exploring impact of loyalty programs on consumer purchase behavior: with special reference to

Indian apparel retailers Author’s Name: Dr. Ruchi Jain Author’s Name: Sakshi Singhal

Department: Amity School of Business Name of Organization: Amity University, Uttar Pradesh, India

ABSTRACT

A loyalty program is an important element of customer

relationship management for firms related to the

retailing sector, apparels, airlines, and hotel industry.

As there is proliferation of loyalty programs over the

wide range of categories, this is little research that also

focuses on loyalty programs and measurement of its

impact on consumer purchase behavior. The need of

measuring the impact of loyalty programs is that loyalty

programs acts as incentive schemes which benefits

consumers based on the repeated purchases made by

them. The loyalty program encourages the consumers to

make decisions more dynamically while making repeated

purchases with the firm. The loyalty programs provides

rewards on cumulative purchasing which enhances

customer retention and encourages them to make

repeated purchases by proving incentives which is

beneficial to them. In this project, impact of loyalty

programs on the consumer purchase behavior is

analyzed by studying the benefits of loyalty programs for

the customers as well as for the company, by studying

the different type of loyalty programs offered by the

apparel sector players like globus, lifestyle, pantaloon,

shoppers’ stop and Westside. The impact of loyalty

programs is studied

by finding out key factors which impact the consumer

loyalty and their purchase behavior.

Key Words: Loyalty programs, Consumer purchase

behavior, Rewards, Loyalty Cards, Customer

satisfaction, Customer loyalty

1. INTRODUCTION

1.1 CONCEPT OF LOYALTY PROGRAMS

“Loyalty Programs” can be defined as a program that

allows consumers to accumulate free rewards when they

make repeated purchases with a firm and therefore

encourages the consumers to be loyal to the firm. In

marketing terms, a loyalty card is a plastic or paper card,

which is quite similar to the other financial cards in

visibility and that, identifies the card holder as a member

in a loyalty program. Loyalty Cards typically have a

barcode or magstripe that can be easily scanned when it

is swapped at the particular stores. Loyalty cards can be

in the form of small key ring cards which are often used

for convenience in carrying and ease of access for the

consumers. Loyalty programs are predominantly run by

retailers and the service industry.

Companies typically have several goals when launching

loyalty programs, all of

which are focused on generating greater profits from the


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program’s members.

These goals include

• Improving knowledge of the customer

• Leveraging that knowledge to increase the sales of

undersold and/or highly profitable products/services

• Increasing customer retention and purchase frequency

Loyalty cards are the easiest and cheapest way of

running the loyalty programs. This type of loyalty

programs is more applicable in organized retail sector. It

is special type of scan able card which can be swiped at

the time of purchase. Loyalty cards are durable and

cheap. A loyalty card is a mechanism for identifying and

rewarding the loyal customers in a way to make them

feel special and rewarded. The various types of cards

are: Point cards, multi retailer cards, co-branded cards,

store cards etc. The customers are awarded with points

according to their purchase on each transaction under

loyalty card scheme. The points collected can be further

used as rewards which can redeemed at future purchases

as discounts, gifts etc.

The retailer or group of retail shop may issue a loyalty

card to a consumer which can be used as identification to

the retailer. By presenting the card, the consumer or

purchaser is typically entitled to either a discount on the

current purchase, or an allotment of points that can be

used for future purchases. It is largely influenced by

consumer’s evaluative response of the value perceived of

an offer-a loyalty program.

The card issuer or the retailer requests the customers

seeking the issuance of a loyalty card to provide some

amount of identifying or demographic data, such as

name and address which is always confidential to the

firm and non-disclosure by the stores. The stores might

use the consumer’s data as part of its marketing research.

These cards can be used to determine, for example,

consumers’ birthday date so that they can influence them

to shop from their stores by giving them discounts on

their birthday.

1.2 FIVE TYPES OF LOYALTY PROGRAMS

1. Rewards: Award points for purchases. Points can be

exchanged for rewards. This type of loyalty program is

used when a company wants to capture new consumers

and differentiate the brand from the competitors.

Examples: Titan as titan users accumulates points of

their purchase and can exchange it for a discount or for a

gift like Rs. 25 is equal to the 1 point. American Express

card users accumulate points they can then use for gifts,

travel, or transfer to an airline Frequent Flyer program.

2. Rebate: Award a gift coupon redeemable for the next

purchase, whenever the consumer reaches a certain

spending or shopping level. When companies have a

wide range of products then this reward program can be

used to motivate new incremental purchases.

3. Appreciation: Offer a rebate, not the cash then the

result will be incremental visits and sales. In this type,

consumers are offered with the appreciation reward of

the same company.

Airlines, hotels, phone companies use this to accumulate

points for additional services within their own brand like

Seat upgrades, free tickets, hotel stays at different

locations, etc.

4. Partnership: Reward the consumer’s accumulated

purchases with a partner’s products or services.

Example: Tata’s Westside, as they offer a discount if

consumers make payment above Rs. 2500 with ICICI

debit card.


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5. Affinity: An affinity program offers special

communications, value added benefits and bonuses and

recognition as a valued consumer. This is used where

rewards are no longer needed to cultivate a long term

relationship, just as a reminder to learn more about

companies’ other products and services.

Examples: Bank’s Debit cards, gold and silver debit

cards.

1.3 CONSUMER PURCHASE BEHAVIOR

The actions that a person takes while purchasing and

after purchasing the particular brand or the product

includes the mental and social processes that follows

some particular actions like:-

Why should I choose this product or brand over the

other?

How should I make choices?

What value does this product or brand provides?

Consumer purchase behavior includes the purchase

decision process which consists of five stages by which a

consumer passes through in making choices while

buying the particular product or the service.

Consumers make many buying decisions every day.

Most large companies’ research consumer buying

decisions in great detail to answer questions about what

consumers buy where they buy, how and how much they

buy, when they buy, and why they buy. Marketers can

study actual consumer purchases to find out what they

buy, where, and how much.

Figure-1

Pre-Purchase Behavior – the behavior that is reflected

by the consumers during information search about a

product or a brand or a service like from where to buy,

which brand to buy is known as pre-purchase behavior.

Purchase behavior- the behavior that is reflected by the

consumers at the time of purchase of a product or a

service like why to buy, usage is known as purchase

behavior.

Post Purchase behavior- the behavior that is reflected

by the consumers after the purchase of a product or

service from a particular brand which also includes the

after sales services, reparability etc is known as post-

purchase behavior.

2. REVIEW OF LITERATURE

• Preeta H.Vyas and Piyush K.Sinha (December

2008 ) has concluded that as acquiring new

customers is getting costlier day by day,

business organizations have offered

continuity/loyalty programmes to retain/reward

existing customers and maintain relationships.

The premise of CRM is that once a customer is

locked in, it will be advantageous to both the

organization as well as customer to maintain

relationships and would be a win-win situation


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for both. Consumers find it beneficial to join

such programmes to earn rewards for staying

loyal. Through loyalty programmes, firms can

potentially gain more repeat business, get

opportunity to cross-sell and obtain rich

customer data for future CRM efforts.

• Grahame R. Dowling and mark uncles(1997)

has concluded that in a bid to strengthen

relationships with their customers marketers are

showing renewed interest in customer loyalty

programs. Research on “normal” patterns of

loyalty in established competitive markets

suggests that in many cases it is hard to obtain

exceptional advantages through the launch of a

loyalty program. Also, competitive forces tend

quickly to erode any differential gains. A

loyalty program must enhance the overall

value-proposition of the product or service. This

in turn will help to motivate buyers to make the

next purchase of a product, and therefore

support other aspects of the firm’s offensive and

defensive marketing strategy.

• Lois O’Brien and Charles Jones (May-June

1995) has concluded that many of the rewards

and loyalty programs in the marketplace today

reveal a limited understanding of customer

needs and desires. From a customer’s

perspective, five elements determine a

program’s value. They are cash value, choice of

redemption options, aspirational value,

relevance and convenience. Few programs

today offer all five, but companies that want to

play the rewards game should be sure their

value measures up to customer’s alternatives.

• Youjae Yi and Hoseong Jeon (2003) have

concluded that the results indicate that

processes underlying the effects of the loyalty

program on customer loyalty are different

depending on involvement. In the high-

involvement condition, direct rewards are

preferable to indirect rewards regardless of

reward timing. In the low-involvement

condition, immediate rewards are more

effective in building a program’s value than

delayed rewards. This means that delayed

rewards such as a mileage program can be

justified in the high-involvement condition as

long as they are linked with value-enhancing

rewards. In the low-involvement condition,

there may be a conflict of interest between the

customer and the program sponsor, because the

customer may be concerned with only the

reward schedule and not the reward type. In

cases of low involvement, immediate rewards

such as lotteries are recommended because

customers may purchase to receive incentives.

• Byron Sharp and Anne Sharp have mentioned

about the Comparison between price promotion

and loyalty programs in terms of loyalty. The

differing effects of a loyalty program and a

price promotion on repeat-purchase behavior in

the same market. The price promotion also

generated excess loyalty but less than the

loyalty program. The price promotion generated

a greater, but temporary, market share gain.

• Yuping Lu (2007) has concluded that despite

the prevalent use of loyalty programs, there is

limited evidence on the long-term effects of

such programs, and their effectiveness is not


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well established. Using longitudinal data, the

study shows that consumers who were heavy

buyers at the beginning of a loyalty program

were most likely to claim their qualified

rewards, but the program did not prompt them

to change their purchase behavior. In contrast,

consumers whose initial purchase levels were

low or moderate gradually purchased more and

became more loyal to the firm. For light buyers,

the loyalty program broadened their relationship

with the firm into other business areas.

3. ANALYSIS AND DISCUSSION

Loyalty Programs are a unique business model, as they

provide significant benefits for all three stakeholders at

the same time; customers, program owner and program

partner. Customers can redeem points that were accrued

for everyday spending and will therefore experience a

discount. The program owner will either secure existing

business or will experience new and incremental

business. The same benefit goes to the partner of a

program. They will take advantage from a larger

customer base, making incremental business as well.

3.1 MONETARY PROGRAMS

Figure-

2


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3.2 BENEFITS OF LOYALTY PROGRAMS

Table-1

Benefits for

customers using

Loyalty Program

Benefits for companies that

offer Loyalty Program

Saving Money Identification of customers

(Enabling deeper relationship

marketing)

Risk is Reduced Identification of customer

behavior-who buys what,

when, where, how much, how

etc.

Convenience factor –

Ease of payment

Customer Tie-in

Special

offers/discounts for

Card holders

Increased sales volume

Feeling of Belonging

and Membership

Damage to competitors

Possibility of receiving

other financial services

Differentiated products and

services from competitors

Member Magazines Switching barriers are created

Satisfaction from the

company

Obtain rich customer data for

future CRM efforts

Cross marketing opportunities

All of the benefits discussed to this point lead to a

loyalty program’s key goal and most important metric of

success: improved profitability. Greater profits are a

result

of:

• Profitable customer retention

• Higher prices paid for unique products/services

• Increased average purchase size

• Decreased marketing and systems costs

• Decreased unsold expired inventory

Figure-3

In this above graph, it shows that with the loyalty

programs companies are able to differentiate its products

and services over time with other competitors’ products

and services which is a benefit for a company to offer

loyalty programs to the consumers.

3.3 LOYALTY PROGRAMS IN APPAREL

SECTOR

Today, the stores have started offering special discounts

to the consumers who join their loyalty programs. For

instance, Lifestyle has a loyalty program know as The

Inner Circle while Westside has Club West as their


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reward or loyalty program scheme. The pantaloon has

Green Card and Shopper’s stop offers First Citizen to

encourage the consumers for repeat purchases. Some

stores like Lifestyle, Westside, Pantaloon or Titan

provide their loyalty or membership cards when the

customer buys for a total of Rs 2500 or above. Few

companies works in tie-ups with certain banks to

increase the effectiveness of loyalty programs like First

citizen Citibank Card and ICICI Bank’s Tie-ups with Big

Bazaar and also the Westside.

In keeping with the Group’s tradition of making every

shopping experience rewarding and memorable, The

Inner Circle – Landmark Group’s Loyalty program

allows members, to enjoy exclusive benefits and

privileges such as reward points and exciting offers. The

Inner Circle is today recognized amongst the leading

Loyalty Program in the country with an ever increasing

base of customers. The card is accepted across all

Landmark Group Stores in India including Lifestyle,

Home Centre by Lifestyle, Max Fashion, Splash,

Bossini, SPAR Hypermarket, Polynation Food Court,

Gloria Jean’s Coffees & The Yellow Chilli chain of

restaurants.

Figure-4

Table-2

LIST OF THE BENEFITS OFFERED THROUGH

LOYALTY PROGRAMS:-

Particulars Shopper’s

Stop

Pantaloons Westside Lifestyle

Loyalty First

citizen

Green card Club Inner

program club West Circle

Redeemable

reward

points

Y Y Y Y

Updates Y N Y Y

Exclusive

cash counter

Y N N Y

Free

parking

Y N N Y

Valet

parking

Y N N N

Home

delivery of

altered

goods

Y N Y Y

Special

occasion

discounts

N N Y N

Exclusive

sale

Y Y Y Y

*NOTE: The benefits are offered by different retailers at

different levels (i.e. Gold, Silver or platinum)

3.4 FACTORS WHICH INFLUENCE LOYALTY

ARE:-

Satisfaction that a consumer feels from prior

purchase experience with a retail outlet

motivating a consumer to come to the store

again.

Switching barriers gets created when once a

consumer becomes a part of loyalty program

and if leaves it then all the accumulated points

get lost.


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An interpersonal relationship is developed with

the employees working in the particular store

when a consumer visits the retail store

frequently which helps in strengthening loyalty.

Attractiveness of alternatives, it happens when

there is opening of a new outlet closer to the

consumer then consumer get attracted to that

store and he will look at the benefits of loyalty

programs of both the alternatives then only he

will decide he should stay loyal or switch.

3.5 FOCUSING ON CONSUMER APPRAISAL

The key characteristics of successful loyalty programs

and has identified five key factors of performance which

are value, choice, simplicity, aspiration and relevance.

Figure-5

Loyalty Programs need to offer a minimum value in

terms of a discount factor, to be considered as attractive.

Perception also plays a vital role in the customer

appraisal. Programs need to be simple and relevant to

many potential customers.

3.6 RELATIONSHIP BETWEEN LOYALTY AND

CONSUMER BEHAVIOR:

Consumers show committed behavior towards

the loyalty as they perceive different benefits

from being loyal.

Consumers perceive two types of utilities-

functional utility by looking at its price and

performance or value perceived with the

dealing of the firm and Symbolic utility is

certain segment of consumers stay loyal to the

premium brands as it helps in self concept

projection, status or group identification.

Consumers who are price sensitive looks for

price as a determinant attribute which leads to

loyalty.

Once the consumers commit themselves to a

store, a bond gets created which make them

insensitive to the price and competitor’s offers.

The rewards which are psychological,

economical and sociological in nature leads to

greater trust and commitment and develop long

term relations.

3.7 IMPACT OF LOYALTY PROGRAMS ON

CONSUMER PURCHASE BEHAVIOR AND

INCREASED REVENUE PER CUSTOMER

Figure-6

In the above figure, it is explained that consumer loyalty

and consumer profitability results from consumer

purchase behavior. The consumer profitability has to

start with consumer purchase behavior; if the consumer

shows the positive behavior then it will lead to consumer


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satisfaction, trust and commitment. If the consumer is

satisfied then he will be committed to that organization

and will be loyal which will increase consumer

profitability of the organization.

3.8 INCREASED REVENUE PER CUSTOMER

Traditional marketing strategies often

incorporate discounting prices on products to

increase market share and revenues. However,

price reductions can easily be matched by

competitors, leading to a general deterioration

of revenues across competing companies.

Frequently, there is little to no benefit to this

pricing game as market shares are often not

affected in a significant manner, yet each

company takes in less money for its products or

services thus resulting in lowered margins.

To avoid a ruinous strategy for increasing or

maintaining market share, some industries have

introduced loyalty programs, which attempt to

increase market share by attracting repeat

customers, knowing it is less expensive to retain

a customer than to gain a new one.

Loyalty Programs allow to directly link

additional sales to individual program members.

The program also allows for a variety of

correlative measures like enrolment rate, call

volume, activity rate, etc. These metrics serve

as indications for acquisition, retention, income,

price realization and marketing savings.

Figure-

7

Increasing customer retention significantly improves a

company’s profitability and thus means the positive

impact of loyalty programs. According to Frederick

Reichheld of Bain & Company, a 5 percent increase in

customer retention results in a 25 percent to 100 percent

increase in profitability. There are several sources of

these additional profits, which Reichheld breaks down in

price premium, referrals, Cost savings, revenue growth

and acquisition cost.

4. CONCLUSION

Loyalty programs impact the consumer purchase

behavior in positive manner as it influences the

consumers to make repeated purchases as consumers

find the different benefits i.e. direct and indirect or

immediate and delayed attached with the brand. Loyalty

programs helps in increasing customer retention which

significantly improves a company’s profitability and thus

means the positive impact of loyalty programs.

Consumers show committed behavior towards loyalty

programs due to different types of benefits perceived by

them. In case of premium brands, certain segments stay

loyal to prestige brands as it helps self concept

projection, group identification and status. Rewards

which are economic, psychological and sociological in

nature lead to greater trust, commitment and

development of long term relations. Loyalty Programs

create an emotional bond leading to high & irreversible


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switching costs. Loyalty Programs impact customer

loyalty differently in case of high involvement and low

involvement purchases. Different consumer shows

different behavior towards the same loyalty program

scheme due their psychological, demographical and

emotional factors. The price promotion also generated

excess loyalty but less than the loyalty program and the

price promotion generated a greater, but temporary,

market share gain.

5. REFERENCES

Dr. Preeta Vyas & Prof. P.K. Sinha, December

2008, “Loyalty Programmes: Practices,

Avenues and Challenges”

Customer relationship management, Getting It

Right, by Judith W.Kincaid

Youjae Yi & Hoseong Jeon, 2003, “Effects of

Loyalty Programs on Value Perception,

Program Loyalty, and Brand Loyalty”

Louise O’Brien and Charles Jones, Harvard

Business Review, May-June 1995, “Do

Rewards Really Create Loyalty?”

Grahame R. Dowling and Mark Uncles, 1997,

“Do Customers Loyalty Programs Really

Work”?

Byron Sharp and Anne Sharp, Loyalty

Programs and their Impact on Repeat-Purchase

Loyalty Patterns: a replication and extension”

Yuping lu, journal of marketing, 2007 , “The

Long-Term Impact of Loyalty Programs on

Consumer Purchase Behavior and Loyalty”

Anoop Kumar, 2007, “Impact of Loyalty

programs on Consumer Purchase behavior and

design for an effective loyalty card”

Consumer Behavior, by Wayne D. Hoyer,

Deborah J. MacInnis and Pinaki Dasgupta.

Customer relationship management, Emerging

concepts, tools and applications, by Jagdish N.

Sheth, Atul Parvatiyar and G. Shainesh.

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shgww.com/five-types-of-loyalty-programs/

http://www.moneybar.net/products-

services/sbe-loyalty-types.aspx

www.crmtrends.com/loyalty.html

www.crmlandmark.com/library/loyaltyprogram

s.pdf

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ams.aspx

www.loyaltycardsindia.com

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