Customer Loyalty - Walailak Universitymit.wu.ac.th/mit/images/editor/images/ch03_s.pdf · Objective: to build trust and loyalty . ... Transactions Relationships Objective Make a sale

Customer Loyalty

E-Customer Relationship Management

CHAPTER 3

Objectives

Defines loyalty as behaviorally or attitudinally based

Describes factors that affect loyalty in a positive and negative direction

Explains the key dimensions of loyal program (LP) design

Perspectives of Brand Loyalty

Brand loyalty as behavior

Brand loyalty as attitude

Relationship commitment


Customer loyalty

A customer’s commitment or

attachment to a brand, store, manufacturer, service provider, or

other entity base on favorable attitudes and behavioral response (such as repeat purchase)


Two basic perspectives of loyalty describe

brand loyalty as a behavior toward the product and

customer loyalty as an attitude, or predisposition to behave


Brand loyalty as behavior

how consistent customers were in repurchasing brands

Measured by the proportion of purchases

The number of times the most frequently purchased brand is purchased,

divided by the total number of times the product category is purchased

Perspectives of Brand Loyalty Five types of behavior toward the purchase

of brands

1. Undivided loyalty describes the behavior of a customer who always selects the same brand

2. Occasional switcher usually selects the same brand over time but may want a change of pace now and then, or may face an out-of stock situation

If the soft drink machine is out of your favorite choice but you are thirsty,

you may select another flavor or brand

Perspectives of Brand Loyalty 3. Switched loyalty describes a customer who

has experienced a change of heart, or a change of brand

4. Divided loyalty shows a customer who is

loyal to more than one brand, for example,

many customers use more than one shampoo on a regular basis and

switch back and forth between two or three favorites

Perspectives of Brand Loyalty 5. Indifference represents the customer

who see no distinctions between brands or

who could not care less which brand is purchased

Variations in Behavioral Brand Loyalty

Undivided loyalty A A A A A A A A A A

Occasional switcher A A A B A A A C A A

Switched loyalty A A A A A A B B B B

Divided loyalty A A A B B B A A B B

Indifference A B C D C A D E A C

Purchases over time

Loyalty versus Inertia

Repeat

purchasing behavior

Strong commitment

Low commitment

Loyalty

Inertia


Inertia

A low sensitivity to the brand since purchases are made without a real motive for the choice

Thus, to supplement behavioral data,

organizations also need to explore methods of collecting information about customer attitudes


Brand loyalty as attitude

Measuring proportion of purchases, sequence of purchase, or most recent purchase has a major shortcoming:

It does not tell the marketer why a brand was selected

A customer may be making a repeat purchase not because of any true loyalty or commitment but

because of convenience, price, availability, or inertia due to habit


Attitudinal approach to brand loyalty

takes the view that loyalty involves much more than repeat purchase behavior and

must also include a favorable preference or commitment that has been expressed over time

“Brand loyalty is a behavioral response to an attitude toward a brand”


To understand attitudes, organizations would describe

what people know or believe to be true about the brand,

how people feel about the brand or their level of emotional attachment, and

what people intend to do about those beliefs and feelings


Inertial loyalty—also called spurious loyalty,

indicates that behavior appears to be “bogus”

because there is no strong attitudinal influence

The behavior of these customers can be driven by habit

“my mother used Tide and I’ve always used it”


Latent loyalty—customers have strong

attitudes but repeat purchase is low

For example

when a teenage girl uses her parent’s credit card to buy a high priced, prestigious perfume,

she may be very satisfied and hold strong positive attitudes

However, when her parents learn of her behavior,

they may voice their disapproval

Perspectives of Brand Loyalty Thus, the social norm about “obeying

one’s parents” creates a latent loyalty

Relationship commitment a desire to keep a valued relationship that

endures over time

Loyal customers, not only do they purchase a large amount of the product, but they may also advocate the product to

others

They may enjoy sharing their knowledge and experiences with friends and family


Transactions are discrete events that result in no feeling of relationship and no anticipation of future interactions

Customers seek to maximize their own benefit in the current exchange

while those who are committed to the relationship may be more willing

to negotiate or compromise to maintain interactions over time


Relationalism suggests an approach characterized by

cooperative actions, compromise,

sharing of benefits and costs, as well as plans for future interactions

Objective: to build trust and loyalty

Transactional/Relational Continuum

Transactions Relationships

Objective Make a sale Create a customer

Characteristic anonymity interdependence

Criteria of success Volume, price, new customers

Value enhancements, repeat exchanges

Interaction tone Sale as a conquest Discreet event

Sale as an agreement Continuing process

Factors that Affect Customer Loyalty

Customer satisfaction

Emotional bonding

Trust

Choice reduction and habit

History with the company

What Affects Customer Loyalty? Satisfaction

Emotional bonding (affect)

Trust, risk reduction

Choice reduction, habit

History with the company

Attitudinal loyalty

Behavioral loyalty

Degree of

customer

loyalty or commitment


1. Customer satisfaction

influenced not only by the overall performance of a brand, company, or experience,

but also by how well the actual performance meets or exceeds expectations

Satisfied customers may not be loyal customer

For example, Xerox revealed an interesting finding in a study of satisfaction


The company ranked satisfaction on a 5-point scale

ranging from 1 for completely dissatisfied to 5 for completely satisfied

It found that customers who rated their satisfaction as 4 were six times more likely

to switch to a competitive offering than those who marked 5 were


Why do satisfied customers often switch brands or buy from other companies?

A company’s satisfied customer might also have had

a positive experience with and be equally satisfied with a competitor’s offering

People may simply opt for a new experience

because they get less and less satisfaction from the old one


2. Emotional bonding

Brand affect—an affinity with the brand or an attachment to an organization,

which means the customer likes the organization

which can be an instantaneous response

For example, many customers identify with Polo Ralph Lauren

They identify with the brand

because the brand identifies them and their friends


CRM must reach beyond the idea of the rational consumer and

strive to establish feeling of closeness, affection, and trust

as true emotional bonding is often based on trust and respect


3. Trust

One party has confidence that he or she can rely on the other exchange partner; or,

the willingness of the customer to rely on the organization or brand to perform its stated function

which reduces uncertainty/risk and

is viewed as a carefully thought out process


In many personal selling situations, trust means that

a customer has confidence that

the sales representative is honest, fair, and responsible and

that his or her word can be relied on


If a delivery date is given, the buyer has confidence

that the product will be shipped on time

Marketers establish trust

by maintaining open and honest communication and

by keeping the promises they make


4. Choice reduction and habit

choice reduction—a natural tendency to reduce choices to a manageable set

that may be three or fewer options for many people

habitual choices—based on an accumulation of experiences over time

that result in positive or rewarding outcomes


switching cost—the costs associated with change to the unfamiliar, the untried, or the new

which may include time, money, or personal risk

perceived risk—customer uncertainty about the consequences of making a purchase

which may include performance or social risks

Factors that Affect Customer Loyalty The customer may think the new brand

will not perform as well as the current brand

5. History with the company

A positive corporate image – the perception of the organization as a whole

can have a favorable impact on customer loyalty,

creating habitual responses to the company name itself


For example, Wal-Mart is known for everyday low price,

while another department store may be known for excellent customer service

Thus perceptions of the company’s historical image can

impact customer intentions, loyalty, and likelihood of buying

The CRM system, however, is usually more focused on a customer’s actual purchasing history


Intergenerational influences

within-family transmission of information, beliefs, and resources

from one generation to the next

For example, a customer who, as a child,

saw his or her parents consistently purchase Ford cars

might be expected to accept the parents’ history of using the brand and

remain loyal to Ford vehicles

Attitudinal and Behavioral Components of Loyalty

Loyalty as one-to-one relationships

Factors that may lessen customer loyalty

Competitive parity

Variety-seeking behavior

Low involvement


Loyalty as one-to-one relationships

Multi-faceted loyalty—emphasizes that loyalty is more than a repetition of a behavior

where customers can exhibit loyalty to price, the brand, the company, or other customers

The company’s goal is to

develop a one-to-one, or customized, approach to building loyalty


Frequently, organizations attempt to

recognize individuals,

cultivate relationships through interactions

that delight customers, and

develop feeling of trust within the community over time

Loyalty and CRM System Guidelines

Recognize: name and history of each customer

Cultivate: interactions

and delight with outcomes from each

Develop: relationships

with the organization and

the community of customers

Outcome:

customer loyalty and commitment

Goal: one-to-one relationship


Recognition—implies a personal greeting

that is based on knowledge of the past history of interactions

For example

when people walk into a bank in a small town,

the employees typically recognize loyal customers and call them by name


Cultivation—implies meaningful interactions between the organization and the customer,

similar to the courtship phase prior to marriage

The organization attempts to satisfy customer expectations with each interaction and/or

to provide reasons for customers

to revisit the Web site, catalog, or store, again and again


When we converse with other people, we exchange information,

but when we talk with friends we avidly approach the interaction and

are engaged in the joy of sharing feelings as well as ideas

Cultivation within CRM systems involves the need to gather information over time and

to continually reinforce the type of loyalty that is important to the customer


Development—implies that customers have

a clear image for the organization and all of its services or brands

which defines the relationship or the strength of the tie with customers

For example, when customers think of Disney, Dell, or Hershey’s,

a clear picture of quality in entertainment, computers, or chocolate comes to mind

Loyalty and Organizational Options Customer loyalty to:

Organizational options

Brand Brand image/extensions…promotion

Product Accessories, complementary items, reliability…production

Company Personal connections/reinforcement/trust…public relations

Customers Interpersonal meetings, chats, reunions…target markets

Price Discounts, coupons, everyday low pricing…efficiencies

Place Outlets, sounds, excitement…atmospherics

Variety New options, variations…production


Factors that may lessen customer loyalty

Competitive parity

Variety-seeking behavior

Low involvement


High competitive parity

the offerings of different organizations are not differentiated and

if customers perceive that brands are identical, perceived risk is low and

there is a greater tendency for brand switching


High variety seeking behavior

occurs when people become bored

and have a need for a new experience

because of declining benefits associated with repeat patronage or

because they feel energized by the prospect of having a new experience


Low involvement

a low level of personal relevance or

perceived importance of a product or service for the customer which can lead to higher levels of deal

proneness (receptivity to sales promotion incentives) and

price sensitivity

Low share of voice, where the organization lacks sufficient resources

to develop a clear image in the minds of potential customers

What is a Loyalty Program?

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 company,

giving up the free choice they have otherwise

In exchange for concentrating their purchases with the firm,

they accumulate assets (for example, ‘points’)

Points are exchanged for products and services, typically

but not necessarily associated with the firm

Examples of Loyalty Programs (LPs)

Frequent-Buyer programs For example, a free complimentary product

City Bagels, a sandwich retail chain offers

every 10th sandwich free

for customers who have nine stamps from

previous purchases

The purpose of City Bagel’s program is

to increase both sandwich consumption and

customer retention

Examples of Loyalty Programs (LPs)

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

Examples of Loyalty Programs

The purpose of the program is to establish a better

communication between

VW, VW dealers, and the customers and to bind

customers to the brand

Star Alliance Frequent Flyer Program

The Star Alliance is a group of airlines across all

continents

that cross-list flights, share facilities, and

recognize their respective frequent-flyer

program

Any flight on any Star Alliance airline counts

towards a members frequent flyer program

Examples of Loyalty Programs

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

CRM at Work:

Frequent Flyer Programs

For many years, the belief in the airline industry

was that loyal customers are more profitable, and

that by rewarding customers based on the miles they fly

with an airline, the airline could increase their loyalty

However, there were shortcomings in this

approach

By rewarding all passengers equally,

the airline was not maximizing the value of its most

profitable customers

The seat class type and fare type were ignored

with regard to the reward system

CRM at Work:


Having realised this, the airline industry has

moved away from simply basing rewards on miles

flown

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

CRM at Work:


Delta uses a similar system, and accounts for the

fare type of the passenger

Customers who hunt for bargains and purchase

deeply discounted tickets far in advance or at just

the last minute

are reward less miles than those who pay the full fare

All these airlines increase the reward to

passengers willing to pay more per seat than the

average passenger

CRM at Work:


Effectively, this maximizes the reward for the

most profitable customers,

while minimizing rewards for bargain hunting passengers

Southwest Airlines does not reward customers in

such a manner

because there is not seat differentiation on its plane

Southwest’s reward program is based on the

number of flights that an individual takes.

Every eight round trip flights are worth one free round

trip flight

CRM at Work:


Southwest captures the business of high value customers who fly at least once a week, on an average

By reducing the role of the middleman (such as travel agents and online discount ticket sites), Southwest is able to capture revenue

Result: Southwest has been the only major airline

that has had a positive net income since the year 2000

Design Characteristics of Loyalty

Programs

Loyal programs can be described along the following key dimensions:

1. 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

Design Characteristics of Loyalty

Programs

2. 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

Hard rewards: price reductions, promotions,

free products and preferred treatment

Soft rewards: psychological benefit of having

special status (silver or gold status) in addition

to receiving preferred customer service

Reward Structure

Product proposition support

Reward directly supports the firm’s product proposition

Example: The US Bagel franchise Finagle-A-

Bagel has a LP that allows participants

to redeem their accumulated bonus

points for the firm’s own products –

sandwiches and drinks

Reward Structure

Allows LP member to redeem points for products that are completely unrelated to the focal firm’s offering

Example: British Petroleum’s 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

Aspirational value of reward

Consumers prefer hedonic goods as opposed to utilitarian goods when receiving a gift or a LP reward

Mercedes Benz’s LP makes it possible to

transform points against a flight in a MIG 29

combat aircraft

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 customer’s home for

taking pictures

Reward Structure

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 (increasing spending level)

Change in Cumulative Spending with

Two Different Response Functions

Cumulative $ spendings

As

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cum

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er $

spe

nt

Cumulative $ spendings

Asset

accu

mu

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on

per

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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 Structure

Timing of Rewards

The timing of reward redemption is an

important design feature of an LP

It is more attractive for the firm to create

redemption rules that favor long accumulation

periods,

there by impacting customer retention

“Lock-in” effect - firm creates redemption rules

that favor long accumulation periods, thereby

impacting customer retention

Reward Structure

Customers build up assets that function as switching cost

The timing of rewards is 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)

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

firm’s LP


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 2,000 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 firm, a partner firm or a firm

whose sole purpose is to manage a LP

Summary There are two basic perspectives on brand loyalty

the behavioral approach and

the attitudinal approach

The behavioral approach to brand loyalty investigates how consistent consumers are in their repurchase of a brand

The attitudinal approach to brand loyalty considers beliefs, emotional responses, and intentions that form a predisposition toward the brand that is

expressed over time

Summary The term “customer loyalty” refers to a

customer’s commitment or attachment to

a brand, store, manufacturer, service provider, or

other entity based on favorable attitudes and behavioral responses, such as repeat purchases

Using attitude loyalty and behavior to provide a framework for thinking about customer loyalty yields four categories of customers:

Summary 1. No loyalty – customers have a weak attitude and low

repeat patronage behavior

2. Inertia loyalty – customers are strong on repeat behavior but weak on attitude

3. Latent loyalty – customers have strong attitudes but repeat purchase is low

4. Loyalty – customers are high in repeat purchase behavior and strong in attitude

Loyal customers are the most desirable customers because

they purchase a large amount of the product and/or may advocate the product to others

Summary Relationship commitment is defined as an

enduring desire to maintain valued interactions

The fundamental components that are expected to affect customer loyalty are

customer satisfaction, emotional bonding, trust, choice reduction/habit, and company history

People can develop loyalty toward many facets of an organization

its product, its image, other customers, price, or brand image

Summary To implement the promise of a one-to-one

segmentation plan, organizations work to

recognize each customer, cultivate the information and understanding of expectations and preferences, and develop a sense of community

Factors that may lessen loyalty include

competitive parity, variety-seeking behavior, low involvement, price sensitivity, deal proneness, and a low share of voice or presence in the informational landscape

Summary LPs can be described according to reward

structure and sponsorship

The rate of rewards (the ratio of reward value over transaction volume) is one of the key drivers to determine LP enrollment and use

Sponsorship refers to supply side features of the LP owner

The introduction of partners is currently on of the major axes of growth in LP design

Documents

Customer Loyalty - Walailak Universitymit.wu.ac.th/mit/images/editor/images/ch03_s.pdf · Objective: to build trust and loyalty . ... Transactions Relationships Objective Make a sale