Title: Customer Relationship Management A Databased Approach
1Customer Relationship ManagementA Databased
Approach
- V. Kumar
- Werner J. Reinartz
- Instructors Presentation Slides
2Chapter Nine
- Effectiveness of Loyalty Programs
3Topics 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
4Drivers 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
5Loyalty 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)?
6LP 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
7Market 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.
8Firm 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)
9Achieving 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
10 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
11The 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?
12The 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)
13Loyalty 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 -
14 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
15Summary
- 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