Chapter 4 c loyalty

Effectiveness of Loyalty Programs

• Drivers of Loyalty Program Effectiveness

• LP Design Characteristics

• Achieving Competitive Advantage

• The 7-Point Check List for Successful Loyalty Program Design and

Implementation

• Minicases: Starwood Hotels

• CRM at Work: Tesco

Topics Discussed

Drivers of LOYALTY PROGRAM Effectiveness

LP Benefits to Organization

Supply side: Cost ofLoyalty

Program

2. Efficiency Profits: Greater SCR* or retention

Demand side:Attitudinal

Loyalty

Demand side:Behavioral

Loyalty

3. Effectiveness Profits:

Better value proposition

through learning

4. Value Alignment

Customer Characteristics

Market Characteristics

Firm Characteristics

LP Design Characteristics

1.Commitment, positive WOM!, Community, True Loyalty

!Word-of-Mouth

*Share of Category Requirement

Loyalty Program Design Characteristics

• Classified according to:– Reward structure

– Sponsorship (existence of partner network, network externalities)

• To know if an LP is effective:

– From the consumer’s perspective, are rewards attainable?

– From the consumer’s perspective, are rewards relevant?

– From the firm’s perspective, is the LP design aligned with the desired

goal(s)?

LP Customer Characteristics

• Skew-ness of customer value distribution varies across industries (value heterogeneity)– Similar usage and customer profitability of individual customers or accounts

(e.g.: gasoline industry)

– Different usage and customer profitability of individual customers or accounts

(e.g.: financial services or the telecom industry)

• Value alignment feasible in industries such as airlines, hotels, rental cars, pharmacies, telecom and financial services

Market Characteristics

• Market concentration (supply side)– Double jeopardy (Ehrenberg et al ): small market share brands suffer because of

two threats:

• Low share brands are purchased by fewer customers than high share brands

• Among those who buy the brand, they purchase it less often

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Double Jeopardy Line

Market ShareSource: Graham Dowling and Mark Uncles (1997), “Do Customer Loyalty Programs Really Work?” Sloan Management Review. Summer 71-82.

FIRM CHARACTERISTICS • Perishability of a product

– Hotel LPs: frequent users get upgrades to “better” rooms subject to availability.

Upgrades are only given when there is excess capacity that night. The reward of

an upgrade comes at very low marginal cost

– Airline seats

• Breadth and depth of the firm offering the product at the store/retail level results in higher efficiency profits because:

– A buyer is more likely to fulfill his needs

– A buyer has more opportunity for one-stop shopping (attributed to more time saving)

– A buyer has more opportunity for behavioral loyalty (attributed to more purchase occasions)

Achieving Competitive Advantage

• LP program - to achieve competitive advantage

• Competitive advantage of a firm results in the ability to operate more profitably over a sustained period of time

• A highly frequented category like Grocery Stores is more likely to attract members in to its LP

• LPs with the goal of creating Efficiency Profits provide the smallest basis for achieving competitive advantage

• The value provided to the customers participating in a LP must be greater than for customers not participating

• Industries such as financial services or telecom can expect to reap competitive advantage when pursuing a goal of value alignment

The 7-Point Check-list for Successful LP Design and Implementation

• Is your LP’s goal compatible with marketing strategy?

• Is the design of your LP aligned with the characteristics of your market, customer base, and your firm?

• Is cost management of LPs possible by mitigating costs via low marginal cost rewards or via contributions from manufacturers?

• For determining predicted benefits of your LP can you attempt a trade-off analysis between cost and gains of the LP program?

• If LPs are withdrawn, design faults will not only result in

losses due to the program but have more lasting impact

in the form of customer dissatisfaction

• Chances for strategic success of your LP are highest if

your goal is to achieve effectiveness profits in your marketing

operations

• Do you have the necessary capabilities within your firm for LP management? (e.g., data storage, data analysis, and learning)

The 7-Point Check-list for Successful LP Design and Implementation (contd.)

Loyalty Programs: Shackle or Reward

• Loyalty programs as they exist today fall short in terms of creating

attitudinal loyalty

• Loyalty programs focusing on incentives, deals, and promotions are

often a very costly proposition for the firm

• “LPs that are most likely to provide sustainable competitive

advantage are those that leverage data obtained from consumers

into more effective marketing decisions and thus result in true value

creation for customers. Loyalty is likely to follow”

Mini case: Starwood Hotels

• Operates a customer loyalty program called Starwood Preferred Guest (SPG) - allows customers to accumulate points for staying and spending with Starwood

• Unique - points never expire and Starwood does not have “black-out dates” (dates when customers cannot use their points )

• Challenges – Collection of too much information on individual customer behavior without

knowing how to use it, exacerbated by customer’s concern about privacy invasion

– Very little knowledge over a large portion of its customer base; while roughly 7

million Starwood customers are members of the loyalty program, 6 million are

not

– Knowing the extent to which customers will tolerate frequent offerings; while maximizing its cross-selling and up-selling opportunities

Summary

• The configuration and interaction of LP design, customer, market

and firm characteristics determines whether a LP achieves its

desired objective

• To know if a LP is effective, issues to be addressed include

attractiveness of LP, degree to which an accumulation of assets in

the program is relevant, and whether the LP’s design is aligned with

the desired firm goals

• The key reason a firm develops a LP program is to create competitive advantage

• LPs that are designed to create Effectiveness Profits have the highest

chance of creating competitive advantage