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 Organization Supply side: Cost of Loyalty Program 2. Efficiency Profits: Greater SCR* or retention Demand side: Attitudinal Loyalty Demand side: Behavioral Loyalty 3. Effectiveness Profits: Better value proposition through learning 4. Value Alignment Customer Characteristics Market Characteristics Firm Characteristics LP Design Characteristics 1.Commitment, positive WOM !, Community, True Loyalty !Word-of-Mouth *Share of Category Requirement

Loyalty Program Design Characteristics Classified according to: –Reward structure –Sponsorship (existence of partner network, network externalities) To know if an LP is effective: –From the consumer’s perspective, are rewards attainable? –From the consumer’s perspective, are rewards relevant? –From the firm’s perspective, is the LP design aligned with the desired goal(s)?

LP Customer Characteristics 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

%100% Market Share Repeat Purchase Probability 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 Super loyalty brands Double Jeopardy Line Source: Graham Dowling and Mark Uncles (1997), “Do Customer Loyalty Programs Really Work?” Sloan Management Review. Summer

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