Customer Relationship

Management
A Databased Approach

V. Kumar
Werner J. Reinartz

Instructor’s Presentation Slides

 Chapter Nine

Effectiveness of Loyalty
Programs
 Topics Discussed

• 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

 Drivers of LP Effectiveness
LP Benefits to
Demand side: Organization
Attitudinal
Loyalty 1.Commitment,
positive WOM!,
LP Design Demand side: Community,
Characteristics Behavioral True Loyalty
Loyalty 2. Efficiency
Profits:
Greater SCR*
Supply side: or retention
Cost of
Loyalty 3. Effectiveness
Customer Characteristics Program Profits:
Market Characteristics Better value
proposition
Firm Characteristics
through learning

4. Value
Alignment
!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

• Skewness 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
Repeat Purchase Probability

1
Super loyalty
0.8 brands

0.6

0.4

0.2
Double
Jeopardy Line
0
0% 100%
Market Share

Source: 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

• Reason a firm develops a LP program is 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
 LP to Achieve Competitive Advantage:
CRM at Work: Tesco
• Launched the first LP in British supermarket industry in 1995 called Club Card ;
relied on incentive aspect of the loyalty scheme

• Successful in capturing both market share and share-of category requirements in

subsequent years

• Later established segmentation scheme of its customer base

– Sends 80 different versions of its mailing to members and publishes four versions of its
clubcard magazine
– Offers tailored cards to students, families, top customers, seniors, etc

• Aligned its LP offering closely with the specific members’ needs as opposed to giving
out general incentives e.g. Tesco’s Baby club

• Tesco merges information on customer transactions within Tesco’s website and with
point of sale data to customize its product offerings and communications
 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?
 The 7-Point Check-list for Successful
LP Design and Implementation (contd.)

• 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)
 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