Customer Relationship Management: A Database Approach

1. MARK 7397 Spring 2007 Customer Relationship Management:A Database Approach Class 9 James D. Hess C.T. Bauer Professor of Marketing Science 375H Melcher Hall jhess@uh.edu 713 743-4175

2. Loyalty Programs Membership Growth 6% 3.6 1100 USA 1051 973

3. Design Elements of Loyalty Programs • Satisfaction-loyalty-profit chain • Loyalty programs • Key objectives of Loyalty Programs • Examples of Loyalty Programs • Design Characteristics of Loyalty Programs • Reward Structure Next Week: What makes a loyalty program effective?

4. Satisfaction-Loyalty-Profit Chain Product Performance Customer Retention / Revenue / Service Satisfaction Loyalty Profit Performance Employee Performance What do we know about this conceptual chain?

5. The link between Satisfaction and Retention

6. Customer Sub-Types

7. Customer Loyalty • Loyalty to a product or service by repeat purchases can be due to customer’s natural satisfaction and preference for the products’ features and benefits, but it can also be induced through marketing plans and programs from the firm. • Definitions of Brand Loyalty • Behavioral loyalty: the observed action that customers have demonstrated towards a particular product or service • Attitudinal loyalty: the perceptions and attitudes that a customer has towards a particular product or service

8. Results of Customer Satisfaction-Profit Link Studies • Direct link suggests, that as customers experience greater satisfaction with a firm’s offering, profits rise • Improving customer satisfaction comes at a cost and once the cost of enhancing satisfaction is factored in, offering “excessive satisfaction” doesn’t pay • Marginal gains in satisfaction decrease, while the marginal expenses to achieve the growth in satisfaction increase • There is an optimum satisfaction level for any firm, beyond which increasing satisfaction does not pay

9. The link between Loyalty and Profits • Reichheld’s hypotheses • Long term customers spend more per period over time • Cost less to serve per period over time • Have greater propensity to generate word-of-mouth • Pay a premium price when compared to that paid by short-term customers • Does not hold true in a non-contractual relationship • Revenue stream must be balanced by the cost of constantly sustaining the relationship and by fending off competitive attacks • Efforts at increasing customer satisfaction and retention not only consume a firm’s resources but are subject to diminishing returns

10. Lifetime Duration-Profitability Association • Reinartz and Kumar: Across the different firms, • there is a segment of customers that is loyal but not very profitable (due to excessive resource allocation) • there is a segment that generates very high profits although it has only a short tenure • Since these short-term customers can be very profitable, it is clear that loyalty is not the only path to profitability

11. Association of Profitability and Longevity of Customers

12. Loyalty Programs • 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 focal company, giving up the free choice they have otherwise • In exchange for concentrating their purchases with the focal firm, they accumulate assets (for example, ‘points’) • Points are exchanged for products and services, typically but not necessarily associated with the focal firm • CRM tool used by marketers to identify, award, and retain profitable customers

13. Key Objectives of Loyalty Programs • Building true (attitudinal & behavioral) loyalty • Efficiency profits • Effectiveness profits • Value alignment

14. Efficiency Profits • Profits that result from a change in customer’s buying behavior due to the loyalty program • Change in buying behavior can be measured, in: • Basket size • Purchase frequency acceleration • Price sensitivity • Share of category requirements (SCR) or share-of-wallet • Retention • Lifetime duration • Measured in terms of the immediate profit consequences as compared to profit consequences without loyalty programs – net of the LP cost

15. Effectiveness Profits • Measured in terms of the long-term profit consequences realized through better learning about customer preferences over time • Allows sustainable value creation for customers through customization of products or communication • Most likely to generate sustainable competitive advantage since it produces the highest profits in the long run • The strategy of using a LP to learn about customer preferences may result in impressive gains for both customers and organizations • Customers get more of what they truly want, and firms are safe in terms of not having to engage in a costly mass marketing exercise

16. Examples of Loyalty Programs • 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 • Star Alliance Frequent Flyer Program • Any flight on any Star Alliance airline counts towards a members frequent flyer program • Neimann Marcus • Offers its LP ‘InCircles’ to all customers. Using a shopping card, customers accumulate points that can be redeemed for exclusive rewards • Club Bally Member Rewards

17. Design Characteristics of Loyalty Programs • 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

18. Reward Structure • Hard vs. soft rewards Hard rewards: price reductions, promotions, free products and preferred treatment Soft rewards: psychological or emotional benefits of having special status in addition to receiving preferred customer service

19. Reward Structure (contd.) • 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 • Consumers prefer hedonic goods as opposed to utilitarian goods when receiving a LP reward • 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

20. Reward Structure (contd.) • 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 • Timing of Rewards - “Lock-in” effect - firm creates redemption rules that favor long accumulation periods, thereby impacting customer retention - Longer the timing to build up to a certain reward level, the greater the “breakage” (the amount of rewards that are never redeemed)

21. How can loyalty programs backfire? • Design can change behavior in a counter-productive way. • Reduce the profitability of top-level customers • Increase resentment of customers toward each other • Attract the wrong type of customer

22. Summary • Satisfaction-profit-chain needs to be implemented at a disaggregate (individual) level rather than aggregate (firm) level • Link between satisfaction and retention is asymmetric, i.e., dissatisfaction generally has a greater impact on retention than satisfaction, and nonlinear • Loyalty is not the only path to profitability • Most companies need to revisit their business model • to reflect on the impact of Loyalty Programs on their bottom line • to determine how customer service initiatives add value to future revenue streams