CRM adoption and implementation proposal

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Section 1 - Loyalty Programs

Topics

• Satisfaction-loyalty-profit chain

• Loyalty programs

• Key objectives of Loyalty Programs

• Examples of Loyalty Programs

• Design Characteristics of Loyalty Programs

• Reward Structure

1. 0 Satisfaction-Loyalty-Profit Chain

Says that:

Product

Service ===> Customer ====>Retention ====== Revenue

Employee Satisfaction Loyality Profit

Performance

This is clear the most important statement in the entire course. I clearly shows the importance of CRM and the need for proper database within the database for CRM Decision Support

2.0 Results of Customer Satisfaction-Profit Link Studies

• Direct link suggests, that as customers experience greater satisfaction with a firm’s offering, profits rise

• Improving customer satisfaction comes at a cost and once the cost of enhancing satisfaction is factored in, offering “excessive satisfaction” doesn’t pay

• Marginal gains in satisfaction decrease, while the marginal expenses to achieve the growth in satisfaction increase

• There is an optimum satisfaction level for any firm, beyond which increasing satisfaction does not pay

• Link between satisfaction and retention is asymmetric:

• Dissatisfaction has a greater impact on retention than satisfaction

• Even if the level of satisfaction is high, retention is not guaranteed

• If customers are dissatisfied, other products become more enticing

• The link is nonlinear in that the impact of satisfaction on retention is greater at the extremes

• The flat part of the curve in the middle has also been called the “zone of indifference”

• Factors like the aggressiveness of competition, degree of switching cost, and the level of perceived risk influence the shape of the curve and the position of the elbows

3.0 The link between Loyalty and Profits

• Reichheld’s hypotheses

• Long term customers spend more per period over time

• Cost less to serve per period over time

• Have greater propensity to generate word-of-mouth

• Pay a premium price when compared to that paid by short-term customers

• Does not hold true in a non-contractual relationship

• Revenue stream must be balanced by the cost of constantly sustaining the relationship and by fending off competitive attacks

• Efforts at increasing customer satisfaction and retention not only consume a firm’s resources but are subject to diminishing returns

4.0 Lifetime Duration-Profitability Association

• Reinartz and Kumar: Across the different firms,

• there is a segment of customers that is loyal but not very profitable

• (due to excessive resource allocation)

• there is a segment that generates very high profits although it has only a short tenure

• Since these short-term customers can be very profitable, it is clear that loyalty is not the only path to profitability

5.0 Customer Loyalty

• Loyalty to a product or service by repeat purchases can be due to customer’s natural satisfaction and preference for the products’ features and benefits

• Loyalty can also be induced through marketing plans and programs from the firm

• Behavioral loyalty: the observed action that customers have demonstrated towards a particular product or service

• Attitudinal loyalty: the perceptions and attitudes that a customer has towards a particular product or service

6.0 Loyalty Programs

• A marketing process that generates rewards to customers based on their repeat purchasing

• Consumers who enter a loyalty program are expected to transact more with the focal company, giving up the free choice they have otherwise

• In exchange for concentrating their purchases with the focal firm, they accumulate assets (for example, ‘points’)

• Points are exchanged for products and services, typically but not necessarily associated with the focal firm

• CRM tool used by marketers to identify, award, and retain profitable customers

7.0 Building True Loyalty

• Encompasses both attitudinal and behavioral components of loyalty

• Greater commitment to the product or organization through the building of true loyalty

• Function of true value provided to the customers

• Involves degree of involvement in the product category, visibility of the product when using it, or value expressive nature of the product

• Goal of many customer clubs

• Difficult in the case of a low involvement category– e.g.: grocery shopping

8.0 Design Characteristics of Loyalty Programs

• Reward structure

• Hard vs. soft rewards

• Product proposition support (Choice of rewards)

• Aspirational value of reward

• Rate of rewards

• Tiering of rewards

• Timing of rewards

• Sponsorship (existence of partner network, network externalities)

• Single vs. multiform LP

• Within sector vs. across sector LP

• Ownership (focal firm vs. other firm)

9.0 Summary

• Satisfaction-profit-chain (SPC) needs to be implemented at a disaggregate level or individual level than aggregate, firm-level

• Link between satisfaction and retention is asymmetric, i.e., dissatisfaction has a greater impact on retention than satisfaction, and non-linear

• Reinartz and Kumar demonstrated that loyalty is not the only path to profitability

• The success or failure of a loyalty program (LP), whether contractual or motivated through incentives, is determined by profitability from the customer

• Most companies need to revisit their business model

• to reflect on the impact of Loyalty Programs on their bottom line

• to determine how customer service initiatives add value to future revenue streams