Loyalty Programs: Strategies and Practice

Key words : Loyalty Program, CRM, Multiple Factor Analysis, Cluster Analysis.

Lars MEYER-WAARDEN (Meyer-waarden@infonie.fr) PHD student at the university of Pau (France) and the Institute for Decision Theory of
Karlsruhe (Germany).

He has created the IRGREM (International Research Group for Relationship- and EMarketing)

Christophe BENAVENT (Christophe.benavent@iae.univ-lille1.fr ) Professor at the university of Pau (France)

Abstract: Few evidence come from the marketing literature about loyalty program management. The purpose of this paper is to contribute to a better theoretical knowledge about the strategies as well as the practical applications of the loyalty programs which are fully positioned in customer orientated problems. With a cross-sector sample, containing 71 loyalty programs, we point out two principal strategic orientations and practices: one based on clients heterogeneity management, searching discrimination. Another one aims on the clients management, by locking and isolating them from competitors efforts. Both are not incompatible but very complementary.

Introduction

More and more companies make recourse to loyalty programs within the framework of a defensive strategy (Dawkins and Reichheld 1990). The result is a multiplication of programs with the objective to make last the relationship with the customer. They are either focused on communication, quality and satisfaction in a transactional approach, or on true loyalty programs which are really considering the customers life cycles within a relational approach. Customer retention actions appeared having for goal to avoid their departure. Thus the detection of risky periods and signs of defection have an essential importance in the organization of such actions (Reichheld and Sasser 1990). While anecdotal evidence on lifetime-profitability relationship seems to be plentiful, Reichheld and Teals study (1996) and then the one of the Reinhartz and Kumar (2000) seem to be the only well-documented empirical investigations on this topic. Contrary to the anecdotal evidence that long-life customers are most profitable to the firm, Dowling and Uncles (1997) and the Reinhartz and Kumar (2000) caution that, the contention that loyal customers are always more profitable would be a gross oversimplification. Besides this certain authors worry about the effectiveness of the loyalty programs (Uncles 1994, Dowling and Uncles, 1997, O' Brien and Jones 1995, Sharp and Sharp 1997/99, Nako 1997, Benavent and Al. 1999/2000). The effectiveness would not be guaranteed, and it would seem that it is rather weak. Wouldn't this be whereas an effect of imitation which the absence of rigorous studies would support ? The authors in particular seriously doubt their effectiveness, while advancing that in a competitive market, the initiator of such campaigns will certainly be imitated, and that, so the total result will be a return to the former situation and will not consist like of an increase in the costs marketing. The loyalty programs would belong then to the tools of marketing, that can help to protect market shares with, however, like counterpart of high marketing costs. Dowling and Uncles question the existing contentions that the costs of serving loyal customers are really lower, that loyal customers pay higher prices, and that loyal customers spend more with the firm. Obviously, the authors are concerned with the widespread assumption of a positive lifetime-profitability relationship. These doubts are confirmed by the empirical evidence of Reinhartz and Kumar (2000). Indeed the authors found a very differentiated picture in that both long-and short life customers can be highly profitable. This report is all the more surprising that many companies developed them during previous years. Indeed, if one looks at the sector of the distribution in Europe, the costs 2

associated with management of loyalty cards were estimated in 1999 at 2,5 billion dollars for 350 million emitted cards1. This is why, the English retailers, like Safeway and Asda and Wild Oats Markets Inc. and Nob Hill Foods in the United States, decided to give up their loyalty programs. Indeed, Safeway considers the savings made at 75 million dollars per annum. However, other retailers, like E. Leclerc in France, still reinforce their marketing expenditures by devoting approximately 18 million Euros of its marketing budget to the animation and the management of their program. This mitigated report leads us to investigate about these programs, and in particular about their employed strategies. In order to clear up this question, we will first make a short literature review about the concept of customer orientation being fully located at the core of loyalty programs concerns. Thereafter, we will try to contribute to a better theoretical knowledge of the pursued strategies. Finally, the real companies practices will be presented. For this purpose an exploratory study, was carried out on 71 loyalty programs. This investigation was done in five different countries, in the industry, services and retailing sector. 1. A shift from a product orientated marketing to a customer orientated marketing The emergence of the concept of customer relationship management (CRM) is the result of a slow evolution of firms mentality of the. This orientation customer should be essential in the future because the firm gradually moved away from the customer in the last 50 years. This distance was in parallel accompanied by an economic deceleration, a product banalization and an increase in the consumers requirements combined by a logical decrease of loyalty. By devoting themselves to the improvement of their products and their working procedure, the firms had ended up losing sight of the fact that the paramount component of their goodwill are their customers. One attends since nearly one decade a return of the beam; therefore the firms turn back today with passion and enthusiasm to their customers. This tendency results in the creation of new words or even paradigms: relationship marketing, one-to-one marketing " or " customer relationship management (CRM)" are only common denominators for this new management methods directed towards the customer. The customer and his retention become a marketing 1.
1

Wall Street Journal (2000), New York, June 19th .

concern and a strategic objective.

The customer orientation is built through

customer data bases and other CRM tools. Since the early Nineties, research tasks seem to integrate more and more data at the individual level (scannerized panels, megadatabases, customer data bases). This orientation gives opportunities of behaviour followups and forecasts and made emerge marketing data bases in a significant way. The customer orientation is a very recent advancement and took a rise with the technical development of the information systems; it makes it possible to store and analyse a series of characteristics, going from household memberships, the purchased product portfolio to the responses to companies commercial solicitations. This customer focus has several notable consequences. The first consequence is a shift from transaction orientated management based on preference, towards a customer relationship management, including the transactional episodes. A second consequence is the emergence of a dualism of the marketing management process by using offensive actions aiming either at developing the customer base, or to develop the current consumption potential of existing customers, and by focussing on defensive actions aiming at immunizing the customer portfolios from competitors (Salerno and Calciu, 1996). The associated research work is recent and was developed during the Nineties. It corresponds to the firms efforts devoted to avoid the customer departure. This approach is directed towards defensive marketing strategies with a priority to preserve the actual customers, by founding individualized relations through loyalty schemes (Reichheld and Sasser 1990, Jones and Sasser 1995, Heskett and Al 1997). They are opposed to the traditional market analysis considering that the sales increase after classical offensive marketing mix actions, i.e. advertising, promotion, price. After the era of conquest marketing, that of the retention marketing began because it was aberrant to reward more one volatile purchaser for a single purchase act that a faithful one (Vavra 1993). Thus, on saturated markets with intense competition, where the recruitment costs are higher (Bolton and Drew, 1994), than those associated to retention, the strategy of consumer loyalty development seems to be a good alternative to develop the activity of the firms and to defend the market shares. Therefore the attractivity of the defensive strategies increases on competitive saturated and mature markets, with low growth rates. That is why a basic tenet of relationship marketing is that firms benefit more from maintaining long-term customer relationships as compared to short-term customer

relationships. Convincing conceptual evidence for this argument has been advanced by a number of authors (Morgan and Hunt 1994, Sheth and Parvatiyar 1995). Reichheld and Sasser state in 1990, that customer defections have a surprisingly powerful impact on the bottom line. As a customers relationship with the company lengthens, profits rise. Reichheld and Teal (1996) advance a positive lifetime-profitability relationship. In this context of difficult markets, the origin of the loyalty development tools goes up to the beginning of the Eighties when the research current of relationship marketing emerged in the industry and service sector (Grnroos 1994). Evans and Laskin (1994) define Relationship Marketing in the following manner: " Relationship marketing is an approach which focus on the customer, where the firm seeks to create long term business relations with the existing prospects and customers " . There is a shift from the product orientated transactional paradigm, towards a customer orientated relationship marketing. The customer and his conservation / development of consumer loyalty become a marketing concern and a strategic objective. The customer loyalty schemes seek to increase the purchase frequencies and/or volumes over the longest period of time . The development of consumer loyalty schemes became thus a principal concern of the firms. Thus, Barlow (1992) says: " the development of consumer loyalty is a strategy which (1) identifies,(2) maintains and (3) increase the output of the best customers through a (4) value added, interactive and long term focused relation " . The procedure is thus selective and requires information on the actual or potential value of the customer. The interactivity is also interesting by taking account of the possible in an implicit or explicit way emitted feedbacks . Finally Barlow insists on the long-term duration and relation. The development of consumer loyalty consists thus in the development of strategies and more or less general or selective actions likely to increase the fidelity of the customers. The concept of retention is more attached to the notdeparture of the customer materialized by the continuation of the repeat purchases. A first remark on the relation question is of static nature: the central point of customer relationship management is, that fidelity and repeat purchase cannot be reached only by brand preference nor even by product satisfaction. It is therefore the interactive and long term focused added value relation which becomes a choice factor at least in an emotional dimension. Trust, commitment and attachment, 5

contribute to reinforce the relationship (Morgan and Hunt 1994). These three factors reinforce the customers functional dependence to the firm and can increase the switching costs. That is why heavy purchasers with high attitudinal loyalty are the real loyals and less vulnerable to competitors actions in the context of a mutual relationship. On the other side heavy purchasers with low attitudinal loyalty are very vulnerable to competitors actions because they are perhaps locked to the company for particular reasons (i.e. monopolistic situation, particular advantages). These prisoners may switch to competitors once the exit barriers will fall down (Jones and Sasser 1995). Nevertheless the relationship does not stop with these emotional or attitudinal elements. It relates also to an informational dimension of identification: The principal claim is the development of a learning processed and privileged relationship, tied between a firm and its customer and which is nourished by a regular and followed feedback between the customer and the supplier in order to reactualize their mutual knowledge. This relation enables the firm to know more and more precisely the individual customer needs. A customer having invested in a learning processed and privileged relationship will run up against a psychological and practical barrier when he plans to switch to a competitor. This barrier can be due to the costs of research, expenses of contracts cancellation , costs of technical systems incompatibility and the need for starting again a learning processed and privileged relation with a new supplier by obtaining the same level or the same convenience of service. It can be simply related to the lost of loyalty card premiums or privileges. Deshpand (2000) illustrates perfectly one of the major changes of the marketing systems: the switch from transaction to dense and complex relations, the turn from a needs analysis to an individual customer analysis. Thus, the firms offer individualized products and services reinforcing the relation and facilitating the purchase. This individualized approach was made possible in the Nineties, when the customer orientation took a rise with the technical development of information systems, giving increased the possibilities of mass customisation (i.e. the mass personalization takes a distance from anonymous mass marketing). Thus, research tasks seem to integrate more and more data at the individual level (scannerized panels, mega-databases, customer data bases). This orientation gives opportunities of behaviour follow-ups and forecasts and made emerge marketing databases in a significant way. Blattberg and al. (1994) talk about the marketing information revolution. 6

Another remark is of dynamic nature and concerns the relationship duration. This refers us to models of lifetime cycle as such as Dwyer, Schurr and Oh (1987) suggest it. One must retain the idea of the duration and the change of the relations nature in the course of time. The notion of the duration is perfectly contained in the concept of " life time value ", which tries to reproduce the financial impact of retention (Rosenberg and Czepiel 1984) and customers lifetime cycles. The development of consumer loyalty falls under the category of rather defensive strategies and aims at maintaining customers and market shares, by increasing the relationship duration as well as the attachment. Second they search to intensify the sales level, the profit and the margin. In this context one should add the concept of customer share to that of market share. By intensifying the efforts on a established customer basis one seeks to increase the customer value by selling a maximum of products or services. This appears through increased traffic or a more significant frequency of use, by additional or cross selling, by increased repeat purchases and a reduction of the brand repertory or concurrent stores. One can talk about the passage of an extensive marketing (perpetual research for new customers) to an intensive marketing (development of the current customers potential). In this context one can refer to the empirical key instruments of promotion, i.e. to increase and accelerate the purchases and consumption by the proposal of a temporary advantage (Neslin and Al 1985, Wansink and Deshpande 1994, Bell and Al 1999). Finally, the last consideration made relates to the social context. The relationship falls under a social context woven of friendly relations, circles of membership, reference groups and communities (Semp 1998). These complex relationship networks fix us in roles and particular positions. The customer relationship management also consists in defining these networks of influences. The original marketing approaches of customer clubs (supporters) with a high identification level, the animation of structured communities (consumer or users' associations, loyalty programs) testify this tendency.

Therefore we saw that the central point of customer orientation is the establishment of an interactive and individualized value added relationship between the consumer and the supplier which is focused on the long term. One concludes from it easily that the stake of the competition is the establishment of a relationship before even any commercial exchange. One can perfectly understand that in this context, loyalty programs offer the unique possibility to establish a bridge between the methods of mass communication and the those of direct communication. Thus, loyalty programs allow the creation of a relationship, based on interactivity and individualization, if they are accompanied by the techniques of direct marketing, and they become therefore a strategic tool for the management of the customer relationship and the customers heterogeneity (MeyerWaarden and Benavent 2001). In the following chapter it will be explained, how loyalty programs can collect the prospective customers and build true internal markets. 2. Pursued Strategies by loyalty programs One of the conclusions on the efficiency of loyalty programs is that they contribute only in a relatively weak transitory element. However, Benavent and Al (1999/2000) wonder whether one of the reasons of the relative failure is not to seek in the absence of precise customer segmentation. The objective would be" to lock " those which one can retain in order to escape partially from the game of competition and imitation. In this context, looking at the existing loyalty programs one clearly discovers two great types of pursued strategies, corresponding to a dual model of the competition. Figure 1 shows two ways to avoid competition: A more traditional, transactional marketing orientated one, pursuing the strategy of differentiation and seeking to obtain the consumer's choice with rather offensive objectives (increase penetration and purchases). The other rather defensive strategy seeks to maintain and " lock " the customers by setting up exit barriers and by isolating the customers from the competitive pressures. The target is to" prohibit" to some extent the free choice (Benavent 2000).

Differentiation from competitors, create preferences, act on choice

Isolate clients from competitive pressure : prohibit choice

Figure 1: Two strategies to avoid competition

In a rather clear way one can think that loyalty programs fall under the second type of strategy, even if in certain cases the program can play a role in the differentiation policy.

Thus, we think that the principal strategies pursued by loyalty programs are (1) the customer relationship management with the general objective to increase or to maintain the business level and (2) the customer heterogeneity management in order to better manage the customer diversity of and their needs. In the last case the loyalty program is an instrument of discrimination. Very often the strategies are combined.

Importance of discrimination

Loyalty Program

Importance of relationship

Figure 2: Strategies of loyalty programs 2.1. The customer relationship management A first objective of loyalty programs is to modify the customers behaviour in order to increase their life time value. The means to achieve this are the sales turnover development, or the increase of their survival time.

Three types of actions are possible:

2.1.1.) increase of the relational value

2.1.2.) increase the flood of the transactions 2.1.3) lock the customers

One finds mainly loyalty programs of the airline or the car renting sectors. They more clearly search the service continuity or the locking of the customer, by setting up exit barriers. 2.1.1. Increase of the relational value Here the company seeks to found a relationship based approach (Vavra 1993, Morgan and Hunt 1994, Reichheld 1996), which returns (as described above) to the development of a privileged mutual learning relationship between the company and its customer which is nourished by a regular feedback in order to reactualize the knowledge. In this case the firm knows more and more precisely the individual customer needs. The result is an increase of the exit barriers.

2.1.2. Increase the flood of the transactions In order to increase the flood of the transactions, companies have several possibilities:

a) By increasing the level of satisfaction for every purchase experience and beyond this experience in order to create positive attitudes (Lababera and Mazursky 1983, Fornell and Wernerfelt 1987, Reichheld and Sasser 1990, Rust and Zahorik 1993, Bolton and Drew 1994, Reichheld 1993/1996, Jones and Sasser 1995, Heskett and Al 1997, Hennig-Thurau and Klee 1997). However the relation between satisfaction and development of consumer loyalty is far from being proven and is object of a recurring debate purpose in marketing research. Instead of developing the state of research here, we will limit ourselves to the following matter: " Without being a necessary and sufficient condition of the development of consumer loyalty, one can at least estimate that satisfaction is necessary because the non satisfaction can cause attrition of customers.

b) By increasing and intensifying the customer value (i.e. more significant frequency of visit or use, additional or cross sales by offering complementary products and a reduction of the competitive brand repertory). In this context one can refer to the key impact of instruments of promotion (i.e. purchase and consumption increase and acceleration) due to 10

a temporary advantage proposal (Neslin and al. 1985, Wansink and Deshpande 1994, Bell and al. 1999). 2.1.3. Lock customers The idea of internal, captive or " domesticated " markets, is not new. In the marketing field this concept finds a place certain. It will thus be more and more interesting to act on narrow but domesticated segments, because the width of these operations remaining limited, the risks of competitors reactions of will be less important. Having as principal concern the individualized supplier-customer relation, the evolution of information systems, are reasons which make that loyalty programs reinforce this movement towards a way of integration and individualization. In this context we would wish to develop here three ideas relating to the construction of these captive markets: The first one articulates around the term of coevolution, second one around virtual communities and the last one around strategic groups. (1) The term of co-evolution is proposed by Eisenhardt and Galunic (2000) but one find the same idea in articles written by Day (2000) or Prahalad and Ramaswamy (2000). In this context the network externalities play a significant role. There are network externalities, when the consumer value granted to a good depends on the number of users or partners. In the case of a loyalty program the more there are possibilities of gaining miles in partners networks, the more the program becomes interesting. Brought back to the problems of the loyalty programs , externalities appear through possibilities of gaining miles in partner networks. Thus, more there is multiplication of partners, more the program becomes interesting in a customer point of view. In this context, one should also consider the customer " locking " of the which can have several origins: the more the absolute number of miles becomes significant, the more the customer is " locked " because of switching costs (Jackson 1985, Shapiro and Varian 1999). These switching costs are rather artificial and quite simply related to the fact that the cumulated miles as well as the associated rewards are not transferable to another firm, when changing the supplier, and by consequence lost. In this case the switching costs quite simply represent the reward value. 11

(2) The second idea can be observed in the field of the constitution of virtual communities (Oliver 1999). The individual and his/her self-identity are immersed in a social environment. Thus, loyalty would result from a favourable and inciting social environment. For marketing strategies this fact opens the alternative between loyalty obtained by the traditional customer satisfaction approach, or gotten by the creation of a specific bond which is carried out in a strong feeling of trust and commitment. These strategies of social control could aim at locking up the customers in a dense network of social bonds. This implies naturally indirect actions, that is the construction of the consumer environment. (3) The last idea leads us to the central question of the market and competition definition. Finally, by the construction of brand alliances , and by the development of networks, firms will be able to constitute strategic communities which are likely to be actually the true basic units of the competition. One can wonder about the nature of these strategic communities: will they be internal, by associating the firms of same competitive groups (with the example of the airline alliances as the Star Alliance or the Sky TEAM) or will they be external, by associating companies of distinct competitive groups (for example the alliance of the loyalty program between Air France, Accor group, American Express ..)? 2.2. The management of customer heterogeneity. In this category one finds mainly loyalty programs searching to practise discrimination, which was made possible thanks to the customer behaviour information being recorded on loyalty cards. The storage of the individual operations on the ticket level, makes it possible to segment the customer data base precisely and opens a great number of possibilities like discrimination and individualization of the marketing mix. This corresponds to the versioning proposed by Shapiro and Varian (1998). The principal argument is that insofar as one can personalize services and products, it becomes possible to practise price discrimination on a large scale. Indeed, according to economic theory firms earn more money by not offering the same price to all the consumers. Thus, price discrimination makes it possible to attract a great number of consumers and to make pay each one the highest possible price without losing 12

too much margin. According to Woolf (1997), price discrimination can increase the gross margin by 2% in two years. The objective of price discrimination is to determine the optimal price strategy when a firm has a certain customer capital which is very heterogeneous, loyal or not, price sensitive or not (Drze and Al 1994). According to Drze and al. (1994) there are three degrees of price discrimination: The first degree is the most effective: in this case the company offers variable prices and people auto-select themselves thanks to transaction costs. In this

context loyalty cards make it possible to segment the customers in at least three groups of consumers: the occasional consumers who pay the full price, the loyal consumers, very sensitive to the price, to which the firm should grant individualized advantages, and those which are loyal, but not very price sensitive, which will also pay the full price. The second degree of discrimination corresponds to negotiation: the company make pay each customer the price which he/she considers acceptable. This form of price discrimination is actually impossible, except in certain forms of the direct sale. The third degree, corresponds to a discrimination according to socio-demographic characteristics, related to price sensitivity, such as for example old people or students. The aptitude for being able to treat the customers individually is likely to assign the competition. It will be more and more interesting to engage strong offensives on narrow segments, because of the limited width of these operations. Thus the risks of retortion will be less important. One could thus see, competitive actions taking the form of a larval and discrete guerrilla, using mainly hyper-targeted promotions and communications. The above mentioned strategies as well as their impact are summarized in figure 3.

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. Customer relationship management : Action on behaviour - Reinforce committment and trust - Develop exit barriers / dependence / choice prohibition - Encourage repurchase behaviour/ satisfaction / externalities / choice heuristics

Less multi-loyalty More important lifetime duration More important purchase baskets Less sensitivity to competitors offers

Exploit les heterogeneities Discrimination (price, products et services, communication, distribution) Purchase Volume Profit

Figure 3 Loyalty programs strategies and their impact

3. Practice in the firms In order to compare our theoretical approach to the firms practices, we realized an exploratory study on 71 European and American loyalty programs coming from the service, retailing and industry sector (see Table 1 and 2). In term of consumer loyalty development policies, Northern Europe programs are most advanced. In the retailing sector, English and German stores are leaders. The loyalty programs of Southern Europe are only in their launching phase and are based on traditional concepts, like the points system, taken up from French retailing groups as Auchan, Carrefour-Promods , exporting their knowledge from France. This study is primarily descriptive, and aims at examining the ways in which the companies conceive their loyalty programs. The sample choice was made according to the availability of information and not by a quota or random selection. The selected variables refer to the treated problems in our theoretical part, i.e. strategic alliances (monosponsor or multisponsor program), establishment of a mutual learning relationship, possibilities of cross-selling, customer "locking" (immediate or differed rewards), monetary rewards or not (hard- or soft benefits), means of communication, practice of customer discrimination (types of proposed loyalty cards).

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Sector Retailing Service Industry

% 42 51 7

Table 1 : Repartition by sector

Country France USA GB Switzerland % 41 25 13 5 Germany 16

Table 2 : Repartition by country In order to examine, if we can find on the empirical level the above described strategies, we realized a multiple correspondences analysis (HOMALS-SPSS) on the following variables which proved to be most relevant after a phase of preselection: Network (Mono-/ Multisponsor), Immediate Reduction (Yes/No), Delayed Reduction (Yes/No), Not-Monetary Benefit / " Soft Benefit " (Yes/No), Monetary Benefit / " Hard Benefit " (Yes/No), Card Differentiation (Yes/No), Money value of the reward (0,1-2%, 2,1-6%, 6,1-24%), Mutual learning relationship (Yes/No), Cross- Selling (Yes/No), Sector (Distribution/Service/Industry)

Thereafter, a typology (Ward method) was made on the two obtained factors. 3.1. Strategic alliances

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The introduction of partners is currently one of the major axes of growth of loyalty programs. For reasons of high costs, synergies and externalities, the firms decide, to create strategic alliances, either by joining firms of the same competitive group, as it is the example of the Star Alliance or the Sky Team, or by creating alliances with distinctive competitive groups, following the examples of Air France, Accor, American Express, or Casino/ Shell/Euromaster/Kertel, or more recent the loyalty program fusion of AOL and American Airlines, having created the worlds biggest loyalty program with respectively 1,5 million and 38 million members and more than 2.000 partners. In this context, one observes the tendency of the firms, to associate to their loyalty cards the payment option. The examples are varied: the card of the French retailer E. Leclerc associated with the Edel Bank, the card Frequence Plus of Air France combined with the payment function of American Express, the cards of the Deutsche Bahn and Lufthansa associated with Visa Card or the Porsche Card associated with Master Card. Thus, the multiplication of the possibilities of use and free credits, make it possible to stimulate loyalty. One clearly finds the concept of strategic communities (Astley 1979). On the other side, firms support a controlled multi-loyalty to several firms. Another problem is that a multipartner program makes vague the level of loyalty, i.e. to the brand, the product or the company. Thus, loyalty will not be built around the brand, the product or company (Aaker 1997) but around the multi-sponsor program and the associated reward system. Thus, for little differentiated products or companies with weak involvement, as it is the case for the consumer goods sector, the reward can become the principal motivation of loyalty. And once the reward acquired, the principal reason of purchase disappears (Rothschild and Gaidis 1981). In our investigation, 70% of the loyalty programs are multi-sponsor programs. The average number of associated partners is 25, with a maximum of 2.000 for AAdvantage of American Airlines. These partners are less or more involved in the program with regard to the access and the management of the customer data. In the case of the strategic communities (Sky Team) the number of partners is more restricted and is, on average, four. 3.2. Pursued strategies: Customer relationship management versus heterogeneity management 16

The factor analysis clearly highlights the two major strategies described above (see figure 4 and table 3), one based on heterogeneity management, the other directed towards the customer relationship management, seeking a locking of the consumer. Both are not incompatible, but on the contrary complementary. Thus, we found three distinct segments.

No immediate reward 6-24% Reduction Hard Benefit Industry Card Differentiation Service Mutual Learning Relationship Immediate Reward Cross Selling Delayed Rewards 0-2% Rduction Soft Benefit Monosponsor No Card Differentiation Distribution

Figure 1 : Loyalty program strategies

SEGMENT Network Immediate Reward Delayed Reward Soft Benefit/Privileges Card differentiation Monetary Value of Reward Mutual Learning Relationship Cross-Selling Distribution Service Industrie Exemples

1 Monosponsor No Yes No No 0-2% No Yes/No 81% 7% 12% Carrefour, Champion, Leclerc, FNAC, Kiabi,

2 Multisponsor Yes Yes Yes Yes 6-24% Yes Yes 0% 100% 0% Air France, American

3 Multisponsor No Yes Yes Yes 0-2% Yes Yes 38% 52% 10% Accor, Flooz.com,

Airlines, Avis, SNCF, Jelmoli, Sainsburys

17

Real

Socit Gnrale

Table 3 : Segments description

In the first category, one finds mainly mono-sponsor loyalty programs of the retailing sector (Carrefour, Leclerc) . Their methods refer to the use of processes coming from classical promotional techniques, urging consumers to multiply and perpetuate their purchases through rewards in the form of vouchers or loyalty points. The value of the reward oscillates between 0,1 and 2% of the bought amount. These programs do not or little propose not-monetary rewards and they do not practice on a large scale discrimination according to the customer activity (big or small purchasers). Thus, information resulting from the card seems to be little used to offer additional or complementary products, with the exception except E. Leclerc and Tesco in England. The last one set up recommender systems which recall details of their last bought baskets to the card holders. This system also acts like a virtual assistant, who gives individualized councils and complementary product suggestions, established on the purchase history, which supports important possibilities of cross-selling.

In the second category, one finds the programs of the airline, car-renting and banking sector. They more clearly resort to the notion of service continuity, putting up exit barriers (miles collection, privileges and/or individualized mutual learning relationship). It is as in these sectors as one observes a tendency of creation of strategic communities. Thus, Hertzs Priority One is an example. Using the hiring history in the data base, Hertz proposes to card holders exactly the preferred type of car. In this segment one also finds companies which practise discrimination according to big or small consumers. In fact, with regard to customer heterogeneity management , airlines are the most advanced in the matter. Air France and British Airways, for example, segment according to the "miles " and propose different cards with a differentiation of the associated advantages. One example is Frequence Plus Blue and Red of Air France. In this context one should consider that the European retailers are in an intermediate phase, because they currently build significant behavioural data bases but do little practise price discrimination. In other countries, as in Germany, this practice was prohibited for a long time by the law. The value of the reward oscillates between 6% and 24% of the bought amount

18

A third segment is composed of firms of the retailing and the service sector (Accor, Monoprix, Flooz.com) . The pursued strategy is similar to that of the second segment, i.e. directed towards relationship and differed not-monetary rewards. The value of the reward oscillates between 2 and 6% of the bought amount. The companies of this segment also constitute strategic communities.

The customer management brings us to the question of the aimed targets. They can be varied according to the objectives: regular large-scale consumers in order to increase the purchase intensity and to make last the relation or occasional customers and "critical" customers, in order to encourage them to consumemore. The opinions on this subject are shared. Blattberg and Deighton (1996) recommend to direct the resources towards the large-scale consumers because the long-term relation with those will ensure the survival of the firm. If the large consumers are more rewarded the resources orientation is probably ineffective as a good purchaser is somebody of already loyal. The incentives will remain vain and all that one can hope for is a stability of loyalty. Another problem frequently met, is, that the huge customers are not inevitably those which are most loyal. Empirical studies of Gordon (1994) and Ehrenberg (1988) showed that they are in the majority of the sectors multi-loyal to a multitude of brands. That is why it seems not very probable, that a loyalty program will be able to change this behaviour, particularly in markets with strong competition. Benavent and al. (1999/2000) recommend a selective card distribution, which passes by identification of sensitive and profitable targets. The main role of the loyalty cards would be to select and identify customers, thus leading to a better adjustment of resources, the final allocation of those resources taking place as the firm assesses customers -those involved in the loyalty program- sensitiveness to customer loyalty development actions. Butscher (1998) recommends a hybrid strategy, recommending to target mainly the largescale consumers and in a minor way to undertake minimal effort towards small consumers. Two recent studies carried out in Germany (Holz and Tomczak 1996, Kirstgens 1995) show that the vast majority of the programs (44% and 52% respectively) focus at the same time, with same the means on current and prospective customers without making distinction.

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In their majority, managers wish to direct loyalty programs towards large purchasers, in order to limit their defection rate of, or towards customers with strong potential to make them switch in a segment of higher value as 80% of the incomes seem to come from only 20% of the consumers. 3.3. The benefit offered The value of the reward or the benefit offered determines the success of a loyalty program. When a consumer adheres has a program he/she considers the costs of his engagement (adhesion expenses, personal data offered to the firm, purchase obligations etc.) against the profits (benefit, financial advantages, privileges, image etc.). Only if the profits are higher than the costs he/she will become member and a relationship can be built. The panoply of the rewards is broad and goes from immediate reductions and gifts to services as well as individual recognition. One can distinguish between purely financial and tangible rewards (hard benefits ), like reductions, coupons, gifts etc..., and those which are of emotional and intangible nature (soft benefits ), like recognition, services, privileges, private sales, etc... La majority of the programs propose little differentiated rewards without real added value. Indeed, an English study reveals that, 18% of the consumers would increase their purchases, if the store proposed lower prices, against only 3% for a loyalty program (Curtis 1999). One reason for this is perhaps related to the fact that the programs benefits are not clearly visible or even non-existent. According to another investigation (Shrake 1999), carried out in the United States, more than 70% of the consumers state not to have reasons to remain loyal. The majority of the customers complain about a lack of services, of supplier relationship and individual recognition. This example shows that it is not sufficient to propose only financial and tangible advantages, which are easily imitable by competition. Thus, according to Vgele (1991), the true differentiation comes from intangible, not easily imitable and not-monetary rewards that give to the long-term customer a real, more emotional than rational, added value. These intangible benefits, like services, relationships, recognition, individualized treatment, prestige, make it possible to create a true interactive and differentiated relationship with the customer. Hertzs Priority One club is based on recognition and 20

individualization. As indicated above the company is using the marketing data base and proposes to the members the exact type of car which they prefer. Other side, it is also insufficient to propose only non-financial advantages. The rule is simple: to recruit consumers the tangible benefits with the possibility to save money must be offered. Thereafter, the non-financial benefits make it possible to build a long-term relationship with the customer (Barlow 1996). It is therefore necessary to find a good arbitration between the two rewards. O' Brien and Jones (1995) established five elements to determine the value and the interest of a loyalty program: (1) the ease of use, (2) the monetary value of the rewards, (3) the variety of the rewards, (4) the aspired variety of the reward and (5) the probability of being able to reach it:

1. The ease of use of the program: The benefits offered and the manner of how acquiring them must be clearly communicated. More the use of the program becomes simple, i.e. a banal gesture, more it will be likely to succeed. A simple example is to offer door-keys, like it does the French retailer Champion . The retailer E. Leclerc propose " electronic portfolios ", which gives the advantage to constitute a saving intended for the future purchases and that also facilitates the life of the customers.

2. The monetary value of the rewards:

This is the value ratio of the reward and the

necessary purchases to acquire it. It is obvious that, the more this ratio is significant the more the program becomes interesting from the consumers point of view. But at the same time it will be more expensive for the firm. Johnson (1999) recommends a reward value of achieving at least 2% of the amount spent by the customer. Below this amount the value is not really perceived. Table 4 shows several loyalty programs and their ratio: The financial advantages are very different according to the programs. In the case of Shell it is necessary to acquire 600 points to receive a purchase voucher of 6 Euros, representative of purchases of approximately 4.600 Euros, 100 visits and a monetary ratio of 0,13%. On the other hand, to have a free ticket at Air France having a value of 230 Euros, it is necessary to carry out 20 flights representing an expenditure of 4.600 Euros and a monetary ratio of 5%. In our sample, the service sector proposes the most interesting rewards (67% of the service firms examined have a ratio between 5% and 15%. 67% of the firms of the 21

distribution have a ratio from 0,2% to 2%). There is also a difference by country: France and the United States offer the most significant, Germany as well as Switzerland the least significant rewards (for legal constraints). The average of our sample is 4,9%.

Avis Loyalty Program Reward Variety Azur/Senior /Business Location voiture WE 112 1.000 480 24% 68 7

Air France Frquence Plus Vols/Htels/ Locations 230 20.000 4.600 5% 229 20

SFR Ssame Units Tlphone/ Equipement 25 4.400 670 3,8% 25 27

Champion Iris Catalogue produits 7 1. 000 762 1,0% 76 10

Shell Club Avantages Catalogue produits 6 600 4600 0,13% 45 100

Reward Value Points per purchase Required Points Necessary Purchases for Acquiring the Reward Monetary Value Mean Basket N of Necessary Repeat Purchases

1 point/0.46 1 point/0.23 1 point/0.15 1 point/0.76 1point/7.6

Table 4 : Comparison of loyalty programs (3) The variety of the rewards: The panoply of the products and services proposed against points, is very varied. According to a study of Kirstgens (1995), 40% to 50 % of the rewards are leisure orientated. 25% to 35% of the loyalty programs offer special events. Generally, three possibilities of points transformation are found: change against gifts, presented in a catalogue. The retailers Champion and Safeway in England are examples; change against purchase vouchers valuables at other program sponsors (Champion Casino/Shell) ; finally, exchange against price reductions at sponsor partners (Shell/Casino, Air France) . As the table 5 shows, the majority of the firms propose several exchange possibilities to correspond to the most various targets. Thus the more a loyalty program proposes an important variety of gifts the more it will have a broad customer acceptance.

Points transformation Gifts Purchase Vouchers Price Reductions at other program

% 68% 41% 62%

22

sponsors

Table 5 : Possibilities of points transformation

The retailer loyalty programs are those which propose the largest variety of rewards. On the other hand, the service providers offer in the majority of the cases their own products. Airlines, as Air France make the attempt widen their reward panoply, by seeking various partnerships (Accor, Hertz, American Express, Monoprix etc...). The company seems to imitate the attempt of American Airlines which has a network of 2000 partners.

(4) The aspired value for the reward: A free flight to an exotic destination, or a privilege has more perceived value from the consumers point of view than a purely monetary reward. Thus, a free ticket reward of Air France is naturally more interesting than a purchase voucher from the retailer Champion. In the same direction, the Mercedes loyalty program makes it possible to transform points against a flight in a MIG 29 combat aircraft or against a turn in a Formula 1 racing car. Another example is the 7 Club of Pro 7, the third German television station. The most popular reward is the V.I.P. Service offering a variety of rewards related to television, like meetings with known movie stars or playing an actor role in Sitcoms These examples go in the direction of Johnsons recommendations (1999), to propose differentiated and not very imitable benefits. Thus, a price reduction is easily imitable by competition. A not-monetary reward at equal value has a more perceived value. His empirical study for the tire producer Good Year supports his assertions. Indeed, while proposing to two identical consumers groups, respectively price reductions and personalized services, the sales of the first group increased by 20%, those of the second group by 37%. That is why more and more of sponsors propose individualized services based on a recognition and attention. In our sample 63% of the firms propose not-tangible rewards (56% in the retailing- and 67% in the service sector). There is great variance according to the countries. The Northern-European countries, like Germany or Great Britain, are the "Champions" in the offer of privileges (respectively 73% and 78% offer privileges associated to the loyalty program against only 55% in France). On this level firms can install significant entry and exit barriers, based on interpersonal relationships.

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(5) The probability to reach the reward: The more this probability is significant the more the program has chances to be used. There are two management modes: delayed and immediate rewards. Within the framework of the delayed rewards, the points system is currently used the most by all companies. Their advantages lie in their simplicity of management, their game character and their possibility of avoiding price wars. They have the advantage to create exit barriers and therefore to fight against customer defection. The immediate rewards, mainly used by retailers, are price reductions directly deduced on certain products or brands in promotion, or games and lotteries. In France however, the Galland law (1st January 1997) considerably reduced the possibility of price reductions by reducing the loss resale threshold. By delaying the rewards the firms have significant possibilities to prolong the relationship duration. From the companies point of view, it is preferable to have the programs multiplying the number of necessary repeat purchase acts which makes it possible to increase the customers " locking ". However, research in psychology affirm, that, the more the reward is delayed in time, the less it is efficient (Bootzin et al. 1991). It is obvious, that an arbitration between retention and customer motivation is necessary, in order not to decrease the programs attractivity. Girard (1999) recommends to propose, at the same time, immediate rewards, to stimulate the short-term sales, and delayed ones to increase long-term loyalty. For those which are delayed, it is preferable, not to delay them too much in time because the customer probably risks to lose his/her motivation to take part in the loyalty program. Table 6 is summarizing the repartition of our sample.
Type of rewards Total Retailing Service Immediate Price Reductions 58% 63% 56% Points Delayed Purchase Vouchers 41% 72% 17% Electronic Portfolios 5% 7% 3%

87% 80% 97%

Table 6: Rewards systems 24

In our smple, the minority ( i.e. 5% of the loyalty programs) propose only immediate reductions ( for example the German radio station SWR3 and WebMiles.com). 35% of the companies offer only delayed reductions. One can find mainly firms coming from the service sector, in particular car renting companies, airlines as well as the German retailers. The majority of the firms, (i.e. 60%), proposes the two systems at the same time. In the retailing sector, an average customer has to realize 20 repeat purchases with an associated expenditure of 1.800 Euros to have a 3% reward value. In the service sector it is on average necessary to carry out repeat 25 purchases with a value of 2.600 Euros to have a 7% reward value. 3.4. Communication Tools A loyalty program offers formidable possibilities of making individualized communication. The communication vectors can be very diverse: certain firms propose a consumer magazine which they offer to their loyal customers. In some cases it is proposed for sale to not-cardholders. In our sample, 71% of the companies offer a consumer magazine with general information, advices about beauty and health care, kitchen and children education etc...In most cases the information is associated to special in-store promotions in order to create traffic. Another communication vector are personalized mailings or newsletters (72% of our sample companies use them) which generally inform about special offers, new products. Sometimes they are sent out for members birthdays. The telephone hot-line constitutes a privileged mean of communication which encourages a spontaneous and active contact. This tool saw a spectacular rise, as in 1995 only 21% of the firms had one (Wiencke and Koke 1994, Kirstgens 1995). Today, almost every company has a hotline (91% of our sample). The increase in the popularity of Internet also opened significant opportunities for loyalty programs. The majority of program sponsors, has their own internet site. Indeed, the associated program management costs are considerably lower in the virtual than in the real world. Another advantage can be found in the quasi-instantaneity of the information flow at the four corners of the planet. Thus, the advantages generated by the loyalty program, are known quasi instantaneously by a very broad target. At the same time, the site relates advertising information and the purchasing possibility.

25

At Tesco in England the customers can recall on the Website the details of their last purchase baskets, in order to do their purchases more quickly on-line. The distributor set up virtual assistants, which give individualized advices and complementary suggestions about products. In our sample, 81% of the firms propose an access and a point management on the Internet. Once again, Northern European countries are leading (Germany 98%, the United Kingdom 98%, France 78%). The firms of the service sector propose this management mode in 86% of the cases against 75% in the retailing field. Other communication means are special events, organized for the members. Thus the Steiff Club regularly organizes for its members special exchange purses or sales auction for their famous cuddly toys. The main results are summarized in table 7.

Communication vectors

Kirstgens (1995) % 71 55 24 21 21 5

Consumer Magazine Mailings Newsletter Telephone Hotline Special Events Internet

Meyer-Waarden and Benavent (2000) % 72 89 87 93 18 81

Table 7: Communication Tools 4. Conclusion We saw that in many sectors a large a part of the promotional budget is devoted to the loyalty programs having a rather defensive strategic orientation. These programs really correspond to the actual firms need to move more towards the customers. This leads to a organisational borders broadening, long time product orientated, towards the integration of customers and a certain number of strategic partners. Thus, one can easily understand, that loyalty programs and the associated customer knowledge databases are a privileged tool to rebuild this proximity and to individualize the offers. We have as well seen the consequences of the program management strategies on the marketing activities: One is based on customer heterogeneity management, referring to differentiation and price discrimination by the. The other one seeks to 26

manage the customer relationships, while maintaining and domesticating customer groups in order to isolate them from the competitive pressures. Our international and cross-sector investigation study imposes the following conclusions: With regard to the consumer loyalty developing strategies, the Northern European retailing companies as well as the service sector companies are the most advanced, making usage of a variety of personalization techniques and not-monetary benefits. The loyalty programs of Southern European retailers are only in their launching phase and are based on traditional concepts, like the points system, as French groups like Auchan and Carrefour-Promods exported their ideas that they apply already in France .

Our theoretical reflection and our results raises considerations on the factors leading to the strategic choices about loyalty programs: in which situation it is better to apply a heterogeneity strategy based on discrimination, in which other a company should seek to reinforce the bond and the relationship with the customer, by choosing a customer relationship management approach ? This arbitration must certainly be made according to the degree of product differentiation, the customer heterogeneity, the intensity of the competition, the degree of product involvement or the purchase frequency. These factors are some of the key variables to analyse in order to optimise the application conditions for loyalty programs. They constitute also promising research perspectives.

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ANNEXES
Programme de fidlisation ABCO Carrefour Junior Carrefour Pass Champion/Stoc Auchan Coop DEA DM Drogerie Dick's Supermarket Douglas Parfumerie E. Leclerc FNAC Fred Meyer Karstadt Kiabi Marks & Spencer Mercedes Mercedes Migros Naf-Naf Norauto Norauto Plus Novotel PHAS REAL Safeway Tl 2 AOL Air France Frquence Jeune Air France Frquence Plus Air France Frquence Plus Bleue Air France Frquence Plus Rouge American Airlines Avis Club Azur Avis Club Business Avis Club Senior British Airways Blue Executive British Airways Gold Executive British Airways Silver Executive Budget Euromaster EuropCar Hertz Club Gold Hertz Club Gold Affaires Qualiflyer Affaires Qualiflyer Economique Qualiflyer Premire SFR SNCF Pays USA France France France France Switzerland Germany Germany USA Germany France France USA Germany France UK Germany Germany Switzerland France France France France France Germany UK France France USA France USA UK USA USA USA USA UK UK UK USA France UK USA USA USA France UK France France Segment 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

31

WebMiles.com (USA) Accor Air France American Express American Express Corporate Auchan Audi Casino Cegetel Crdit Lyonnais Flooz.com Galries Lafayettes Jelmoli Kertel Monoprix MyPoints.com Pro 7 SWR3 Sainsbury's Shell Socit Gnrale Total Volkswagen

USA France USA USA France GERMANY France France France USA France Switzerland France France USA GERMANY GERMANY UK France France France GERMANY

2 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3

Table 8 : Loyalty programs in the sample

32