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Loyalty Cards & Schemes - Relationship Marketing

• Loyalty Cards & Schemes Introduction   ::   
• Research, Survey & Questionnaires

As outlined in the introduction chapter, there has been an increase in the debate about the effectiveness of loyalty cards and their usefulness to both consumers and retailers such as Tesco.

CHAPTER 2: LITERATURE REVIEW

2.1 INTRODUCTION

This section of the paper sort to discuss some of the current research findings in topic.

According Baker M (2000), loyalty schemes is the “Overt attempt of exchanging partnership to build a long term relationship association, characterised by purposeful co-operation and mutual dependence on the development of social, as well as structural bonds with consumer”.

Many marketers agree that by reducing customer’s to competitors defection by only 5 per cent, companies can improve profits by anywhere from 25 per cent to 95 per cent. There is no question this will be a great advantage and could benefit any retailer. It is for this very reason why consumer’s relationship marketing and using tools such as loyalty scheme is important to retain consumers.

The goal should be to deliver long-term value to consumers and to measure success in long-term customer satisfaction (Berelson J.G and Steiner R.A, 1964 ). This requires that the company’s departments work together as a team to serve the consumers.

However, before going into consumer’s relationship using loyalty cards it is vital to understand that every consumer is unique. Although Tesco might want to develop a consumers relationship they should understand that not all consumers are wealth while to be in a relationship with.

“When it comes to relationship marketing… you don’t want a relationship with every consumer… in fact, there are some bad customers (the objective is to) figure out which consumer are worth cultivating because you can meet their needs more effectively then anyone else” (Chisnall, P.M 1995).

Other researcher such Brian T and Peter G P (1996) argue that there is no question about the importance of returning consumers. It is the way in which retailer collect the information that is unethical. They point out that consumers give out their private information without knowing that they are doing so. Day R L (1984) also point out that the argument that retailers are using the information for the benefit of consumers in meaningless because in any case consumers will always return to make a purchase if they like the service the get from retailer such as Tesco. Therefore it would benefit retailers to focus on service to consumers in order to return them.

2.2 RELATIONSHIP MARKETING AND LOYALTY

Relationship marketing is the process of creating, maintaining and enhancing strong, value-laden relationship with customers and other stakeholder (Kotler 1997). The goal of relationship marketing is todeliver long-term value and measure of long-term customers satisfaction. This involve collecting information (using loyalty card) about how often consumers visit this the shop, what products they purchase and so on.

By so doing the company can try to deliver the products which the consumers are likely to purchase. The loyalty cards the cornerstone of this relationship marketing, as it is the one, which hold consumer data.

According to Kotler (1997), the underpinning principal business that driver’s consumer relationship marketing in royalty scheme is understanding of consumer behaviour.

2.3 CONSUMER BEHAVIOUR

Although the purpose of the study was the investigation of consumer loyalty, it would be pointless to examine only loyalty as relationship marketing involves consumer behaviour. In the marketing context, consumer behaviour refers not only to the purchasing activities but also to any pre-purchase and post purchase activities. Engel (1993), defines consumer behaviour as those acts directly involved in obtaining, using, and disposing of economic goods and services, including decision processes that precede and determine these acts as shown in the figure below.

2.4 CONSUMER BEHAVIOUR AND SELF-IMAGE

Consumer behavior does play a big part in consumer purchasing decision. Factors such as social, culture, personal and psychological will influence the consumers, as this will determine what self-image the consumers’ holds about themselves. The self-image, which the consumer holds about himself or herself, will in turn determine where they shop. According to Kotler (1997) buying decision of an individual is the results of the complex interplay of cultural, social, personal and psychological factors.

The behavior of the consumer is likely to be constantly changing and subject to numerous influences at the point in time depending on the type of purchasing. Family, reference group, role and status will affect the consumer purchasing decision, as these will be key to the perception that the consumers hold about purchasing a certain retailer, whether Tesco or the competitor.

Indeed cultural, social factors, personal factors and psychological factors are fundamental determinant of personnel’s wants and needs.

2.5 CONSUMER SATISFACTION

According to Day R L (1984) a satisfied customer will return time and time again, ensuring that one good experience becomes a lasting relationship between the customer and the marketer. The key to this is being able to learn from the transaction. At the very least the marketer knows about the customer's preferences, measurements, etc.

The next time the customer is looking for a similar product or service, he or she is able to save time by buying from the same place. The marketer is able to improve the customer experience with the second transaction through the learning already gained. Thus the second experience is better or easier than the first.

This continues with each added transaction. In the longer term it makes it increasingly difficult for a competitor to attract this customer, as it will have a significant disadvantage in the area of customer knowledge.

However, will consumers return to Tesco if the are not happy about their service provide. Furthermore, collecting information by card cards does not say “this is what the consumer want next time”. It only shows what consumers have bought. Therefore there is no certainty that consumers will buy the same product same time around (Hogg M and Michell P 1996).

Tesco is able to use the on-line retailers shopping to store vast amounts of customer data. One benefit of this is that when making a purchase, the customer does not have to fill out personal details such as name and address and even credit card number for every transaction.

2.6 CHEAPER TO KEEP EXISTING CONSUMER

At the heart of all of this is the fact that it is easier and cheaper to gain business from an existing customer than to attract a new one. Too often, it seems, greater focus is placed upon acquisition of new customers than satisfying existing ones (McDonald M 1993). This is ultimately expensive and the lack of current consumer focus inherent in the approach means that opportunities for increasing share of wallet from existing customers through cross-selling and upgrading products and services is lost.

Furthermore, this approach may frequently mean that companies are spending heavily to attract disloyal consumers and ignoring those who generate the most revenue and profits. However is collecting information by loyalty card a certainty that Tesco are attracting disloyal consumers? Keeping your consumers is vital but loyalty cards do ensure that consumers will come back. Consumers will come back to shop, not because of loyalty, but because man is a wanting animal with changing need. These changing needs makes it hard to predicate how needs will change over time (Levitt T 1989).

2.7 KNOWING YOUR CONSUMERS

One of the ways in which the consumer-focused strategy can be implemented for Tesco to recognize when consumer enter the store. Technology makes this relatively easy on the Web, for example, providing tailored recommendations to its customers as soon as they revisit the site. In a store environment this is somewhat more difficult although the use of point-of-sale kiosks at store entrances has the potential to deliver Personalised messages and offers to customers before they start shopping if they have the store's loyalty card.

This provides opportunities for marketers to reach specific consumers and groups of consumers although there is a limit to how much the offer can be tailored. It is difficult under this scenario to alter pricing to suit individual consumers.

However, the use of card-based loyalty schemes by retailers such as Tesco has enabled the stores to have an intimate understanding of their customers' buying patterns, produce individually targeted marketing communications and improve their in-store merchandising.

2.8 INCREASE REVENUE

The ability to generate and maintain customer loyalty is really about increasing revenue. The key to customer satisfaction, loyalty and thereby ensuring repeat purchase operates on a number of levels and ultimately requires fulfilling the customers' requirements (Levitt T 1989). This needs an in-depth understanding of customers and consumers that comes from analyzing buying behavior, brand preferences as well as other issues such as frequency of purchase, time of purchase, brand repertoire, mood & mindset, etc.

Marketers have much to learn from customers and this should all lead to improving the customer experience and, consequently, the sales and profits of the organization in theory that is true.

However there is little evidence to show that loyalty cards do help increase profits as the cost of managing them out weigh that benefits. This one could argue is the reason why retailers such as Asda withdraw the schemes. It is debatable to extent Asda lost its consumers by abrading the scheme.

2.9 DATA COLLECTION

Kotler points out that retailers such as Tesco have to develop a long-term strategy in order to gain genuine loyalty from their customers. This extends far beyond just lower prices. Discount vouchers tend to be a short-term strategy not providing added value for the customer.

The net result is that every retailer offers, more or less, the same scheme. This involves collecting data but not giving anything discernible back to the customer except money-off coupons. From the consumer perspective, would it not be easier to simply lower the prices in the store? Unless the loyalty card is able to give consumers some kind of added advantage, there is a danger that they will become increasingly cynical about the marketer's motives. This is especially so as they are giving the retailer valuable marketing data and the opportunity to contact them directly.

Furthermore, card operators report large numbers of unredeemed points. Customers may be collecting the points but they are not using them. Does this indicate that the level required for a reward is too high or that there is simply a lack of interest?

The main role of the loyalty cards should be to act as the basis of building a relationship with individual customers. By using the customer knowledge acquired through usage of the cards, retailers have a huge potential to focus on communicating better and learning how to add value to the individual customer relationship. This is key to moving loyalty schemes forward and exploiting the potential offered.

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2.10 BETTER CONSUMER UNDERSTANDING

Through the loyalty card, retailers have access to information on individual habits and preferences. They know that some customers go shopping twice a week or more in their store but may spend not much more than £20 each time. How do you encourage them to spend more? Others shop once a month and spend an average of £250 each time. Would you like to increase their visit frequency? Others are shopping regularly in rush hours. Could the retailers offer them a discount advantage to shop at another time of the day, during a less busy period?

Furthermore, it appears that retailers have tended to offer added value frequently to those who may not be their best customers, such as opening quick checkout lanes for those with small amounts of shopping. So the less profitable customers are rewarded while the ones you value the most are waiting in long queues.

By analyzing the database, retailers can identify shoppers who spend a lot of money on wine, for example. Value can be added through the identification of these consumers and inviting them to a wine tasting evening at the store (Kolter P, Armstrong G, Saunders J and Wong V 1998).

This not only helps to build a relationship but it also offers the opportunity for the retailer to encourage consumers to trade-up to more expensive or more profitable wines.

If Tesco can identify those who frequently purchase organic food, they can arrange lectures by an organic food specialist and show new products in that category. For the best customers, for example with children, surely it is possible to encourage them to use a home delivery option, without a delivery charge, or at least have bulky products delivered direct to the home.

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