Customer Relationship Management A Databased Approach

1
Customer Relationship ManagementA Databased
Approach

• V. Kumar
• Werner J. Reinartz
• Instructors Presentation Slides

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Chapter Nine

• Effectiveness of Loyalty Programs

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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

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Drivers of LP Effectiveness

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

• Classified according to
• Reward structure
• Sponsorship (existence of partner network,
  network externalities)
• To know if an LP is effective
• From the consumers perspective, are rewards
  attainable?
• From the consumers perspective, are rewards
  relevant?
• From the firms perspective, is the LP design
  aligned with the desired goal(s)?

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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

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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

1
0.8
0.6
Repeat Purchase Probability
0.4
0.2
0
0
100
Market Share
Source Graham Dowling and Mark Uncles (1997),
Do Customer Loyalty Programs Really Work? Sloan
Management Review. Summer 71-82.
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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)

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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

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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. Tescos Baby club
• Tesco merges information on customer transactions
  within Tescos website and with point of sale
  data to customize its product offerings and
  communications

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The 7-Point Check-list for Successful LP Design
and Implementation

• Is your LPs 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?

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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)

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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

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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 customers 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

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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 LPs 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