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Customer Relationship Management A Databased Approach

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Title: Customer Relationship Management A Databased Approach


1
Customer Relationship ManagementA Databased
Approach
  • V. Kumar
  • Werner J. Reinartz
  • Instructors Presentation Slides

2
Chapter Nine
  • Effectiveness of Loyalty Programs

3
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

4
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
5
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)?

6
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

7
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.
8
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)

9
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

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

11
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?

12
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)

13
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

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

15
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
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