Loyalty Programs Strategies and Practice

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Loyalty Programs: Strategies and Practice

Lars MEYER-WAARDEN ([email protected])

PHD student at the university of Pau (France) and the Institute for Decision Theory of

Karlsruhe (Germany).He has created the IRGREM (International Research Group for

Relationship- and E-Marketing)

Christophe BENAVENT ([email protected] )

Professor at the university of Pau (France)

Abstract:

Few evidence come from the marketing literature about loyalty

program management. The purpose of this paper is to contribute to a better

theoretical knowledge about the strategies as well as the practical

applications of the loyalty programs which are fully positioned in customer

orientated problems. With a cross-sector sample, containing 71 loyalty

programs, we point out two principal strategic orientations and practices:

one based on clients heterogeneity management, searching discrimination.

Another one aims on the clients management, by locking and isolating

them from competitors efforts. Both are not incompatible but very

complementary.

Introduction

More and more companies make recourse to loyalty programs within the framework of

a defensive strategy (Dawkins and Reichheld 1990). The result is a multiplication of

programs with the objective to make last the relationship with the customer. They are

either focused on communication, quality and satisfaction in a transactional approach, or


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on true loyalty programs which are really considering the customers life cycles within a

relational approach. Customer retention actions appeared having for goal to avoid their

departure. Thus the detection of risky periods and signs of defection have an essential

importance in the organization of such actions (Reichheld and Sasser 1990). While

anecdotal evidence on lifetime-profitability relationship seems to be plentiful, Reichheld

and Teals study (1996) and then the one of the Reinhartz and Kumar (2000) seem to bethe only well-documented empirical investigations on this topic.

Contrary to the anecdotal evidence that long-life customers are most profitable to the

firm, Dowling and Uncles (1997) and the Reinhartz and Kumar (2000) caution that, the

contention that loyal customers are always more profitable would be a gross

oversimplification. Besides this certain authors worry about the effectiveness of the

loyalty programs (Uncles 1994, Dowling and Uncles, 1997, O' Brien and Jones 1995,

Sharp and Sharp 1997/99, Nako 1997, Benavent and Al. 1999/2000). The effectiveness

would not be guaranteed, and it would seem that it is rather weak. Wouldn't this be

whereas an effect of imitation which the absence of rigorous studies would support ? *

The authors in particular seriously doubt their effectiveness, while advancing that in a

competitive market, the initiator of such campaigns will certainly be imitated, and that, so

the total result will be a return to the former situation and will not consist like of an

increase in the costs marketing. The loyalty programs would belong then to the tools of

marketing, that can help to protect market shares with, however, like counterpart of high

marketing costs. Dowling and Uncles question the existing contentions that the costs of

serving loyal customers are really lower, that loyal customers pay higher prices, and that

loyal customers spend more with the firm. Obviously, the authors are concerned with the

widespread assumption of a positive lifetime-profitability relationship. These doubts are

confirmed by the empirical evidence of Reinhartz and Kumar (2000). Indeed the authors

found a very differentiated picture in that both long-and short life customers can be highly

profitable.

This report is all the more surprising that many companies developed them during

previous years. Indeed, if one looks at the sector of the distribution in Europe, the costs

associated with management of loyalty cards were estimated in 1999 at 2,5 billion dollars

for 350 million emitted cards1. This is why, the English retailers, like Safewayand Asda

and Wild Oats Markets Inc. and Nob Hill Foodsin the United States, decided to give up

their loyalty programs. Indeed, Safewayconsiders the savings made at 75 million dollars

per annum. However, other retailers, like E. Leclerc in France, still reinforce their

marketing expenditures by devoting approximately 18 million Euros of its marketing

budget to the animation and the management of their program. This mitigated report


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leads us to investigate about these programs, and in particular about their employed

strategies. In order to clear up this question, we will first make a short literature review

about the concept of customer orientation being fully located at the core of loyalty

programs concerns. Thereafter, we will try to contribute to a better theoretical knowledge

of the pursued strategies. Finally, the real companies practices will be presented. For

this purpose an exploratory study, was carried out on 71 loyalty programs. Thisinvestigation was done in five different countries, in the industry, services and retailing

sector.

1. A shift from a product orientated marketing to a customer orientated

marketing

The emergence of the concept of customer relationship management (CRM) is the

result of a slow evolution of firms mentality of the. This orientation customer should be

essential in the future because the firm gradually moved away from the customer in the

last 50 years. This distance was in parallel accompanied by an economic deceleration, a

product banalization and an increase in the consumers requirements combined by a

logical decrease of loyalty.

By devoting themselves to the improvement of their products and their working

procedure, the firms had ended up losing sight of the fact that the paramount component

of their goodwill are their customers. One attends since nearly one decade a return of the

beam; therefore the firms turn back today with passion and enthusiasm to their

customers. This tendency results in the creation of new words or even paradigms:

relationship marketing, one-to-one marketing " or " customer relationship management

(CRM)" are only common denominators for this new management methods directed

towards the customer. The customer and his retention become a marketing concern and

a strategic objective. The customer orientation is built through customer data bases and

other CRM tools. Since the early Nineties, research tasks seem to integrate more and

more data at the individual level (scannerized panels, mega-databases, customer data

bases). This orientation gives opportunities of behaviour followups and forecasts and

made emerge marketing data bases in a significant way. The customer orientation is a

very recent advancement and took a rise with the technical development of the

information systems; it makes it possible to store and analyse a series of characteristics,

going from household memberships, the purchased product portfolio to the responses tocompanies commercial solicitations.

1Wall Street Journal (2000), New York, June 19

th

.


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This customer focus has several notable consequences. The first consequence is

a shift from transaction orientated management based on preference, towards a

customer relationship management, including the transactional episodes. A second

consequence is the emergence of a dualism of the marketing management process by

using offensive actions aiming either at developing the customer base, or to develop the

current consumption potential of existing customers, and by focussing on defensiveactions aiming at immunizing the customer portfolios from competitors (Salerno and

Calciu, 1996). The associated research work is recent and was developed during the

Nineties. It corresponds to the firms efforts devoted to avoid the customer departure.

This approach is directed towards defensive marketing strategies with a priority to

preserve the actual customers, by founding individualized relations through loyalty

schemes (Reichheld and Sasser 1990, Jones and Sasser 1995, Heskett and Al 1997).

They are opposed to the traditional market analysis considering that the sales increase

after classical offensive marketing mix actions, i.e. advertising, promotion, price. After the

era of conquest marketing, that of the retention marketing began because it was aberrant

to reward more one volatile purchaser for a single purchase act that a faithful one (Vavra

1993).

Thus, on saturated markets with intense competition, where the recruitment costs

are higher (Bolton and Drew, 1994), than those associated to retention, the strategy of

consumer loyalty development seems to be a good alternative to develop the activity of

the firms and to defend the market shares. Therefore the attractivity of the defensive

strategies increases on competitive saturated and mature markets, with low growth rates.

That is why a basic tenet of relationship marketing is that firms benefit more from

maintaining long-term customer relationships as compared to short-term customer

relationships. Convincing conceptual evidence for this argument has been advanced by a

number of authors (Morgan and Hunt 1994, Sheth and Parvatiyar 1995). Reichheld and

Sasser state in 1990, that customer defections have a surprisingly powerful impact on

the bottom line. As a customers relationship with the company lengthens, profits rise.

Reichheld and Teal (1996) advance a positive lifetime-profitability relationship. In

this context of difficult markets, the origin of the loyalty development tools goes up to the

beginning of the Eighties when the research current of relationship marketing emerged in

the industry and service sector (Grnroos 1994). Evans and Laskin (1994) define

Relationship Marketing in the following manner: " Relationship marketing is an approach

which focus on the customer, where the firm seeks to create long term business relations

with the existing prospects and customers " . There is a shift from the product orientated

transactional paradigm, towards a customer orientated relationship marketing. The

customer and his conservation / development of consumer loyalty become a marketing


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concern and a strategic objective. The customer loyalty schemes seek to increase the

purchase frequencies and/or volumes over the longest period of time . The development

of consumer loyalty schemes became thus a principal concern of

the firms. Thus, Barlow (1992) says:

" the development of consumer loyalty is a strategy which (1) identifies,(2) maintains and(3) increase the output of the best customers through a (4) value added, interactive and

long term focused relation " .

The procedure is thus selective and requires information on the actual or potential

value of the customer. The interactivity is also interesting by taking account of the

possible in an implicit or explicit way emitted feedbacks . Finally Barlow insists on the

long-term duration and relation. The development of consumer loyalty consists thus in the

development of strategies and more or less general or selective actions likely to increase

the fidelity of the customers. The concept of retention is more attached to the not-

departure of the customer materialized by the continuation of the repeat purchases.

A first remark on the relation question is of static nature: the central point of

customer relationship management is, that fidelity and repeat purchase cannot be

reached only by brand preference nor even by product satisfaction. It is therefore the

interactive and long term focused added value relation which becomes a choice factor at

least in an emotional dimension. Trust, commitment and attachment, contribute to

reinforce the relationship (Morgan and Hunt 1994).

These three factors reinforce the customers functional dependence to the firm and

can increase the switching costs. That is why heavy purchasers with high attitudinal

loyalty are the real loyals and less vulnerable to competitors actions in the context of a

mutual relationship. On the other side heavy purchasers with low attitudinal loyalty are

very vulnerable to competitors actions because they are perhaps locked to the company

for particular reasons (i.e. monopolistic situation, particular advantages). These

prisoners may switch to competitors once the exit barriers will fall down (Jones and

Sasser 1995).

Nevertheless the relationship does not stop with these emotional or attitudinal

elements. It relates also to an informational dimension of identification: The principal

claim is the development of a learning processed and privileged relationship, tied

between a firm and its customer and which is nourished by a regular and followed

feedback between the customer and the supplier in order to reactualize their mutual

knowledge. This relation enables the firm to know more and more precisely the individual


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customer needs. A customer having invested in a learning processed and privileged

relationship will run up against a psychological and practical barrier when he plans to

switch to a competitor. This barrier can be due to the costs of research, expenses of

contracts cancellation , costs of technical systems incompatibility and the need for

starting again a learning processed and privileged relation with a new supplier by

obtaining the same level or the same convenience of service. It can be simply related tothe lost of loyalty card premiums or privileges.

Deshpand (2000) illustrates perfectly one of the major changes of the marketing

systems: the switch from transaction to dense and complex relations, the turn from a

needs analysis to an individual customer analysis. Thus, the firms offer individualized

products and services reinforcing the relation and facilitating the purchase.

This individualized approach was made possible in the Nineties, when the

customer orientation took a rise with the technical development of information systems,

giving increased the possibilities of mass customisation (i.e. the mass personalization

takes a distance from anonymous mass marketing). Thus, research tasks seem to

integrate more and more data at the individual level (scannerized panels, mega-

databases, customer data bases). This orientation gives opportunities of behaviour

follow-ups and forecasts and made emerge marketing databases in a significant way.

Blattberg and al. (1994) talk about the marketing information revolution.

Another remark is of dynamic nature and concerns the relationship duration. This

refers us to models of lifetime cycle as such as Dwyer, Schurr and Oh (1987) suggest it.

One must retain the idea of the duration and the change of the relations nature in the

course of time. The notion of the duration is perfectly contained in the concept of " life

time value ", which tries to reproduce the financial impact of retention (Rosenberg and

Czepiel 1984) and customers lifetime cycles. The development of consumer loyalty falls

under the category of rather defensive strategies and aims at maintaining customers and

market shares, by increasing the relationship duration as well as the attachment. Second

they search to intensify the sales level, the profit and the margin. In this context one

should add the concept of customer share to that of market share. By intensifying the

efforts on a established customer basis one seeks to increase the customer value by

selling a maximum of products or services. This appears through increased traffic or a

more significant frequency of use, by additional or cross selling, by increased repeat

purchases and a reduction of the brand repertory or concurrent stores. One can talk

about the passage of an extensive marketing (perpetual research for new customers) to

an intensive marketing (development of the current customers potential). In this context

one can refer to the empirical key instruments of promotion, i.e. to increase and

accelerate the purchases and consumption by the proposal of a temporary advantage


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(Neslin and Al 1985, Wansink and Deshpande 1994, Bell and Al 1999).

Finally, the last consideration made relates to the social context. The relationship

falls under a social context woven of friendly relations, circles of membership, reference

groups and communities (Semp 1998). These complex relationship networks fix us in

roles and particular positions. The customer relationship management also consists in

defining these networks of influences. The original marketing approaches of customerclubs (supporters) with a high identification level, the animation of structured

communities (consumer or users' associations, loyalty programs) testify this tendency.

Therefore we saw that the central point of customer orientation is the establishment of an

interactive and individualized value added relationship between the consumer and the

supplier which is focused on the long term. One concludes from it easily that the stake of

the competition is the establishment of a relationship before even any commercial

exchange. One can perfectly understand that in this context, loyalty programs offer the

unique possibility to establish a bridge between the methods of mass communication and

the those of direct communication. Thus, loyalty programs allow the creation of a

relationship, based on interactivity and individualization, if they are accompanied by the

techniques of direct marketing, and they become therefore a strategic tool for the

management of the customer relationship and the customers heterogeneity (Meyer-

Waarden and Benavent 2001). In the following chapter it will be explained, how loyalty

programs can collect the prospective customers and build true internal markets.

2. Pursued Strategies by loyalty programs

One of the conclusions on the efficiency of loyalty programs is that they contribute

only in a relatively weak transitory element. However, Benavent and Al (1999/2000)

wonder whether one of the reasons of the relative failure is not to seek in the absence of

precise customer segmentation. The objective would be" to lock " those which one can

retain in order to escape partially from the game of competition and imitation. In this

context, looking at the existing loyalty programs one clearly discovers two great types of

pursued strategies, corresponding to a dual model of the competition. Figure 1 shows two

ways to avoid competition: A more traditional, transactional marketing orientated one,

pursuing the strategy of differentiation and seeking to obtain the consumer's choice with

rather offensive objectives (increase penetration and purchases). The other rather

defensive strategy seeks to maintain and " lock " the customers by setting up exit barriers

and by isolating the customers from the competitive pressures. The target is to" prohibit"to some extent the free choice (Benavent 2000).


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development, or the increase of their survival time.

Three types of actions are possible:

2.1.1.) increase of the relational value 2.1.2.) increase the flood of the transactions 2.1.3)

lock the customers

One finds mainly loyalty programs of the airline or the car renting sectors. They more

clearly search the service continuity or the locking of the customer, by setting up exit

barriers.

2.1.1. Increase of the relational value

Here the company seeks to found a relationship based approach (Vavra 1993,

Morgan and Hunt 1994, Reichheld 1996), which returns (as described above) to the

development of a privileged mutual learning relationship between the company and its

customer which is nourished by a regular feedback in order to reactualize the knowledge.

In this case the

firm knows more and more precisely the individual customer needs. The result is an

increase of the exit barriers.

2.1.2. Increase the flood of the transactions

In order to increase the flood of the transactions, companies have several

possibilities:

a) By increasing the level of satisfaction for every purchase experience and beyond this

experience in order to create positive attitudes (Lababera and Mazursky 1983, Fornell

and Wernerfelt 1987, Reichheld and Sasser 1990, Rust and Zahorik 1993, Bolton and

Drew 1994, Reichheld 1993/1996, Jones and Sasser 1995, Heskett and Al 1997, Hennig-

Thurau and Klee 1997). However the relation between satisfaction and development of

consumer loyalty is far from being proven and is object of a recurring debate purpose in

marketing research. Instead of developing the state of research here, we will limit

ourselves to the following matter: " Without being a necessary and sufficient condition of

the development of consumer loyalty, one can at least estimate that satisfaction is

necessary because the non satisfaction can cause attrition of customers.


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b) By increasing and intensifying the customer value (i.e. more significant frequency of

visit or use, additional or cross sales by offering complementary products and a reduction

of the competitive brand repertory). In this context one can refer to the key impact of

instruments of promotion (i.e. purchase and consumption increase and acceleration) due

to a temporary advantage proposal (Neslin and al. 1985, Wansink and Deshpande 1994,

Bell and al. 1999).

2.1.3. Lock customers

The idea of internal, captive or " domesticated " markets, is not new. In the

marketing field this concept finds a place certain. It will thus be more and more

interesting to act on narrow but domesticated segments, because the width of these

operations remaining limited, the risks of competitors reactions of will be less important.

Having as principal concern the individualized supplier-customer relation, the evolution of

information systems, are reasons which make that loyalty programs reinforce this

movement towards a way of integration and individualization. In this context we would

wish to develop here three ideas relating to the construction of these captive markets:

The first one articulates around the term of coevolution, second one around virtual

communities and the last one around strategic groups.

(1) The term of co-evolution is proposed by Eisenhardt and Galunic (2000) but one find

the same idea in articles written by Day (2000) or Prahalad and Ramaswamy (2000). In

this context the network externalities play a significant role. There are network

externalities, when the consumer value granted to a good depends on the number of

users or partners. In the case of a loyalty program the more there are possibilities of

gaining miles in partners networks, the more the program becomes interesting. Brought

back to the problems of the loyalty programs , externalities appear through possibilities

of gaining miles in partner networks. Thus, more there is multiplication of partners,

more the program becomes interesting in a customer point of view. In this context, oneshould also consider the customer " locking " of the which can have several origins: the

more the absolute number of miles becomes significant, the more the customer is "

locked " because of switching costs (Jackson 1985, Shapiro and Varian 1999). These

switching costs are rather artificial and quite simply related to the fact that the

cumulated miles as well as the associated rewards are not transferable to another firm,

when changing the supplier, and by consequence lost. In this case the switching costs

quite simply represent the reward value.

(2) The second idea can be observed in the field of the constitution of virtual communities

(Oliver 1999). The individual and his/her self-identity are immersed in a social


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environment. Thus, loyalty would result from a favourable and inciting social environment.

For marketing strategies this fact opens the alternative between loyalty obtained by the

traditional customer satisfaction approach, or gotten by the creation of a specific bond

which is carried out in a strong feeling of trust and commitment. These strategies of

social control could aim at locking up the customers in a dense network of social bonds.

This implies naturally indirect actions, that is the construction of the consumerenvironment.

(3) The last idea leads us to the central question of the market and competition

definition. Finally, by the construction of brand alliances , and by the development of

networks, firms will be able to constitute strategic communities which are likely to be

actually the true basic units of the competition. One can wonder about the nature of

these strategic communities: will they be internal, by associating the firms of same

competitive groups (with the example of the airline alliances as theStar Allianceor the

Sky TEAM) or will they be external, by associating companies of distinct competitive

groups (for example the alliance of the loyalty program between Air France, Accor

group, American Express ..)?

2.2. The management of customer heterogeneity.

In this category one finds mainly loyalty programs searching to practise

discrimination, which was made possible thanks to the customer behaviour information

being recorded on loyalty cards. The storage of the individual operations on the ticket

level, makes it possible to segment the customer data base precisely and opens a great

number of possibilities like discrimination and individualization of the marketing mix. This

corresponds to the versioning proposed by Shapiro and Varian (1998). The principal

argument is that insofar as one can personalize services and products, it becomes

possible to practise price discrimination on a large scale.

Indeed, according to economic theory firms earn more money by not offering the

same price to all the consumers. Thus, price discrimination makes it possible to attract a

great number of consumers and to make pay each one the highest possible price without

losing too much margin. According to Woolf (1997), price discrimination can increase the

gross margin by 2% in two years. The objective of price discrimination is to determine the

optimal price strategy when a firm has a certain customer capital which is very

heterogeneous, loyal or not, price sensitive or not (Drze and Al 1994).

According to Drze and al. (1994) there are three degrees of price discrimination:

The first degree is the most effective: in this case the company offers variable prices and


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people auto-select themselves thanks to transaction costs. In this context loyalty cards

make it possible to segment the customers in at least three groups of consumers: the

occasional consumers who pay the full price, the loyal consumers, very sensitive to the

price, to which the firm should grant individualized advantages, and those which are

loyal, but not very price sensitive, which will also pay the full price.

The second degree of discrimination corresponds to negotiation: the company

make pay each customer the price which he/she considers acceptable. This form of price

discrimination is actually impossible, except in certain forms of the direct sale.

The third degree, corresponds to a discrimination according to socio-demographic

characteristics, related to price sensitivity, such as for example old people or

students.

The aptitude for being able to treat the customers individually is likely to assign thecompetition. It will be more and more interesting to engage strong offensives on narrow

segments, because of the limited width of these operations. Thus the risks of retortion will

be less important. One could thus see, competitive actions taking the form of a larval and

discrete guerrilla, using mainly hyper-targeted promotions and communications.

The above mentioned strategies as well as their impact are summarized in figure

3.

Figure 3 Loyalty programs strategies and their impact

3. Practice in the firms


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In order to compare our theoretical approach to the firms practices, we realized an

exploratory study on 71 European and American loyalty programs coming from the

service, retailing and industry sector (see Table 1 and 2). In term of consumer loyalty

development policies, Northern Europe programs are most advanced. In the retailing

sector, English and German stores are leaders. The loyalty programs of Southern Europeare only in their launching phase and are based on traditional concepts, like the points

system, taken up from French retailing groups as Auchan, Carrefour-Promods ,

exporting their knowledge from France.

This study is primarily descriptive, and aims at examining the ways in which the

companies conceive their loyalty programs. The sample choice was made according to

the availability of information and not by a quota or random selection. The selected

variables refer to the treated problems in our theoretical part, i.e. strategic alliances

(monosponsor or multisponsor program), establishment of a mutual learning relationship,

possibilities of cross-selling, customer "locking" (immediate or differed rewards),

monetary rewards or not (hard-or soft benefits), means of communication, practice of

customer discrimination (types of proposed loyalty cards).

Table 1 : Reparti tion by sector

Table 2 : Repartition by country

In order to examine, if we can find on the empirical level the above described


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strategies, we realized a multiple correspondences analysis (HOMALS-SPSS) on the

following variables which proved to be most relevant after a phase of preselection:

Network (Mono-/ Multisponsor),

Immediate Reduction (Yes/No),

Delayed Reduction (Yes/No),

Not-Monetary Benefit / " Soft Benefit " (Yes/No),

Monetary Benefit / " Hard Benefit " (Yes/No),

Card Differentiation (Yes/No),

Money value of the reward (0,1-2%, 2,1-6%, 6,1-24%),

Mutual learning relationship (Yes/No),

Cross- Selling (Yes/No),

Sector (Distribution/Service/Industry)

Thereafter, a typology (Ward method) was made on the two obtained factors.

3.1. Strategic all iances

The introduction of partners is currently one of the major axes of growth of loyalty

programs. For reasons of high costs, synergies and externalities, the firms decide, to

create strategic alliances, either by joining firms of the same competitive group, as it is

the example of theStar Allianceor the Sky Team,or by creating alliances with distinctive

competitive groups, following the examples of Air France, Accor, American Express, or

Casino/ Shell/Euromaster/Kertel, or more recent the loyalty program fusion of AOL and

American Airlines, having created the worlds biggest loyalty program with respectively

1,5 million and 38 million members and more than 2.000 partners.

In this context, one observes the tendency of the firms, to associate to their loyalty


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cards the payment option. The examples are varied: the card of the French retailer E.

Leclercassociated with the Edel Bank, the card Frequence Plus of Air France combined

with the payment function of American Express, the cards of the Deutsche Bahn and

Lufthansa associated with Visa Cardor the Porsche Cardassociated with Master Card.

Thus, the multiplication of the possibilities of use and free credits, make it possible to

stimulate loyalty.One clearly finds the concept of strategic communities (Astley 1979). On the other

side, firms support a controlled multi-loyalty to several firms. Another problem is that a

multipartner program makes vague the level of loyalty, i.e. to the brand, the product or

the company. Thus, loyalty will not be built around the brand, the product or company

(Aaker 1997) but around the multi-sponsor program and the associated reward system.

Thus, for little differentiated products or companies with weak involvement, as it is the

case for the consumer goods sector, the reward can become the principal motivation of

loyalty. And once the reward acquired, the principal reason of purchase disappears

(Rothschild and Gaidis 1981). In our investigation, 70% of the loyalty programs are multi-

sponsor programs. The average number of associated partners is 25, with a maximum of

2.000 forAAdvantage of American Airlines.These partners are less or more involved in

the program with regard to the access and the management of the customer data. In the

case of the strategic communities (Sky Team)the number of partners is more restricted

and is, on average, four.

3.2. Pursued strategies: Customer relationship management versus heterogeneity

management

The factor analysis clearly highlights the two major strategies described above

(see figure 4 and table 3), one based on heterogeneity management, the other directed

towards the customer relationship management, seeking a locking of the consumer.

Both are not incompatible, but on the contrary complementary. Thus, we found threedistinct segments.


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Table 3 : Segments description

In the first category, one finds mainly mono-sponsor loyalty programs of the

retailing sector (Carrefour, Leclerc). Their methods refer to the use of processes coming

from classical promotional techniques, urging consumers to multiply and perpetuate their

purchases through rewards in the form of vouchers or loyalty points. The value of thereward oscillates between 0,1 and 2% of the bought amount. These programs do not or

little propose not-monetary rewards and they do not practice on a large scale

discrimination according to the customer activity (big or small purchasers). Thus,

information resulting from the card seems to be little used to offer additional or

complementary products, with the exception except E. Leclerc and Tesco in England.

The last one set up recommender systems which recall details of their last bought

baskets to the card holders. This system also acts like a virtual assistant, who gives

individualized councils and complementary product suggestions, established on the

purchase history, which supports important possibilities of cross-selling.

In the second category, one finds the programs of the airline, car-renting and

banking sector. They more clearly resort to the notion of service continuity, putting up exit

barriers (miles collection, privileges and/or individualized mutual learning relationship). It

is as in these sectors as one observes a tendency of creation of strategic communities.

Thus, Hertzs Priority One is an example. Using the hiring history in the data base, Hertz

proposes to card holders exactly the preferred type of car. In this segment one also finds

companies which practise discrimination according to big or small consumers. In fact,

with regard to customer heterogeneity management , airlines are the most advanced in

the matter.Air France and British Airways, for example, segment according to the "miles

" and propose different cards with a differentiation of the associated advantages.

One example is Frequence Plus Blue and Red of Air France. In this context one

should consider that the European retailers are in an intermediate phase, because they

currently build significant behavioural data bases but do little practise price discrimination.

In other countries, as in Germany, this practice was prohibited for a long time by the law.

The value of the reward oscillates between 6% and 24% of the bought amount

A third segment is composed of firms of the retailing and the service sector (Accor,

Monoprix, Flooz.com) . The pursued strategy is similar to that of the second segment,

i.e. directed towards relationship and differed not-monetary rewards. The value

of the reward oscillates between 2 and 6% of the bought amount. The companies of

this segment also constitute strategic communities.


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The customer management brings us to the question of the aimed targets. They

can be varied according to the objectives: regular large-scale consumers in order to

increase the purchase intensity and to make last the relation or occasional customers

and "critical" customers, in order to encourage them to consumemore. The opinions on

this subject are shared. Blattberg and Deighton (1996) recommend to direct the

resources towards the large-scale consumers because the long-term relation with thosewill ensure the survival of the firm. If the large consumers are more rewarded the

resources orientation is probably ineffective as a good purchaser is somebody of already

loyal. The incentives will remain vain and all that one can hope for is a stability of loyalty.

Another problem frequently met, is, that the huge customers are not inevitably

those which are most loyal. Empirical studies of Gordon (1994) and Ehrenberg (1988)

showed that they are in the majority of the sectors multi-loyal to a multitude of brands.

That is why it seems not very probable, that a loyalty program will be able to change thisbehaviour, particularly in markets with strong competition. Benavent and al. (1999/2000)

recommend a selective card distribution, which passes by identification of sensitive and

profitable targets. The main role of the loyalty cards would be to select and identify

customers, thus leading to a better adjustment of resources, the final allocation of those

resources taking place as the firm assesses customers -those involved in the loyalty

program- sensitiveness to customer loyalty development actions.

Butscher (1998) recommends a hybrid strategy, recommending to target mainlythe largescale consumers and in a minor way to undertake minimal effort towards small

consumers.

Two recent studies carried out in Germany (Holz and Tomczak 1996, Kirstgens 1995)

show that the vast majority of the programs (44% and 52% respectively) focus at the

same time, with same the means on current and prospective customers without making

distinction.

In their majority, managers wish to direct loyalty programs towards large purchasers, inorder to limit their defection rate of, or towards customers with strong potential to make

them switch in a segment of higher value as 80% of the incomes seem to come from only

20% of the consumers.

3.3. The benefit offered

The value of the reward or the benefit offered determines the success of a loyalty

program. When a consumer adheres has a program he/she considers the costs of his

engagement (adhesion expenses, personal data offered to the firm, purchase

obligations etc.) against the profits (benefit, financial advantages, privileges, image etc.).


19/33

Only if the profits are higher than the costs he/she will become member and a

relationship can be built.

The panoply of the rewards is broad and goes from immediate reductions and

gifts to services as well as individual recognition. One can distinguish between purely

financial and tangible rewards (hard benefits ), like reductions, coupons, gifts etc..., and

those which are of emotional and intangible nature (soft benefits ), like recognition,

services, privileges, private sales, etc... La majority of the programs propose little

differentiated rewards without real added value. Indeed, an English study reveals that,

18% of the consumers would increase their purchases, if the store proposed lower prices,

against only 3% for a loyalty program (Curtis 1999). One reason for this is perhaps

related to the fact that the programs benefits are not clearly visible or even non-existent.

According to another investigation (Shrake 1999), carried out in the United States, more

than 70% of the consumers state not to have reasons to remain loyal. The majority of thecustomers complain about a lack of services, of supplier relationship and individual

recognition.

This example shows that it is not sufficient to propose only financial and tangible

advantages, which are easily imitable by competition. Thus, according to Vgele

(1991), the true differentiation comes from intangible, not easily imitable and not-

monetary rewards that give to the long-term customer a real, more emotional than

rational, added value. These intangible benefits, like services, relationships,

recognition, individualized treatment, prestige, make it possible to create a true

interactive and differentiated relationship with the customer. Hertzs Priority One club is

based on recognition and individualization. As indicated above the company is using

the marketing data base and proposes to the members the exact type of car which they

prefer. Other side, it is also insufficient to propose only non-financial advantages. The

rule is simple: to recruit consumers the tangible benefits with the possibility to save

money must be offered. Thereafter, the non-financial benefits make it possible to build

a long-term relationship with the customer (Barlow 1996). It is therefore necessary to

find a good arbitration between the two rewards.

O' Brien and Jones (1995) established five elements to determine the value and

the interest of a loyalty program: (1) the ease of use, (2) the monetary value of the

rewards, (3) the variety of the rewards, (4) the aspired variety of the reward and (5) the

probability of being able to reach it:

1 The ease of use of the program: The benefits offered and the manner of how

acquiring them must be clearly communicated. More the use of the program becomes


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simple, i.e. a banal gesture, more it will be likely to succeed. A simple example is to offer

door-keys, like it does the French retailer Champion . The retailer E. Leclerc propose "

electronic portfolios ", which gives the advantage to constitute a saving intended for the

future purchases and that also facilitates the life of the customers.

2 The monetary value of the rewards: This is the value ratio of the reward and thenecessary purchases to acquire it. It is obvious that, the more this ratio is significant the

more the program becomes interesting from the consumers point of view. But at the

same time it will be more expensive for the firm. Johnson (1999) recommends a reward

value of achieving at least 2% of the amount spent by the customer. Below this amount

the value is not really perceived. Table 4 shows several loyalty programs and their ratio:

The financial advantages are very different according to the programs. In the case of

Shell it is necessary to acquire 600 points to receive a purchase voucher of 6 Euros,

representative of purchases of approximately 4.600 Euros, 100 visits and a monetary

ratio of 0,13%. On the other hand, to have a free ticket at Air France having a value of

230 Euros, it is necessary to carry out 20 flights representing an expenditure of 4.600

Euros and a monetary ratio of 5%.

In our sample, the service sector proposes the most interesting rewards (67% of

the service firms examined have a ratio between 5% and 15%. 67% of the firms of the

distribution have a ratio from 0,2% to 2%). There is also a difference by country: France

and the United States offer the most significant, Germany as well as Switzerland the least

significant rewards (for legal constraints). The average of our sample is 4,9%.

Avis Ai r France SFR Champion Shell

Loyalty

Program

Azur/Senior

/Business

Frquence

PlusSsame Iris Club

Avantages

Reward

Variety

Location

voiture WE

Vols/Htels/

Locations

Units

Tlphone/

Equipement

Catalogue

produits

Catalogue

produits

Reward

Value112 230 25 7 6

Points per

purchase

1point/0.46

1 point/0.23

1 point/0.15

1point/0.76

1point/7.6


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Required

Points1.000 20.000 4.400 1. 000 600

Necessary

Purchases

for

Acquiringthe

Reward

480 4.600 670 762 4600

Monetary

Value24% 5% 3,8% 1,0% 0,13%

Mean

Basket68 229 25 76 45

N ofNecessary

Repeat

Purchases

7 20 27 10 100

Table 4 : Comparison of loyalty programs

(3) The variety of the rewards: The panoply of the products and services proposed

against points, is very varied. According to a study of Kirstgens (1995), 40% to 50 % of

the rewards are leisure orientated. 25% to 35% of the loyalty programs offer special

events. Generally, three possibilities of points transformation are found: change against

gifts, presented in a catalogue. The retailers Champion and Safeway in England are

examples; change against purchase vouchers valuables at other program sponsors

(Champion Casino/Shell) ; finally, exchange against price reductions at sponsor partners

(Shell/Casino, Air France) . As the table 5 shows, the majority of the firms propose

several exchange possibilities to correspond to the most various targets. Thus the more a

loyalty program proposes an important variety of gifts the more it will have a broad

customer acceptance.

Points transformation %

Gifts 68%

Purchase Vouchers 41%Price Reductions at other

program62%


22/33

Table 5 : Possibil ities of points transformation

The retailer loyalty programs are those which propose the largest variety of

rewards. On the other hand, the service providers offer in the majority of the cases theirown products. Airlines, as Air Francemake the attempt widen their reward panoply, by

seeking various partnerships (Accor, Hertz, American Express, Monoprix etc...). The

company seems to imitate the attempt ofAmerican Airlines which has a network of 2000

partners.

(4) The aspired value for the reward: A free flight to an exotic destination, or a

privilege has more perceived value from the consumers point of view than a purely

monetary reward. Thus, a free ticket reward of Air France is naturally more interesting

than a purchase voucher from the retailer Champion. In the same direction, the Mercedes

loyalty program makes it possible to transform points against a flight in a MIG 29 combat

aircraft or against a turn in a Formula 1 racing car. Another example is the 7 Club of Pro

7, the third German television station. The most popular reward is the V.I.P. Service

offering a variety of rewards related to television, like meetings with known movie stars or

playing an actor role in Sitcoms These examples go in the direction of Johnsons

recommendations (1999), to propose differentiated and not very imitable benefits. Thus,

a price reduction is easily imitable by competition. A not-monetary reward at equal value

has a more perceived value. His empirical study for the tire producer Good Year supports

his assertions. Indeed, while proposing to two identical consumers groups, respectively

price reductions and personalized services, the sales of the first group increased by 20%,

those of the second group by 37%. That is why more and more of sponsors propose

individualized services based on a recognition and attention.

In our sample 63% of the firms propose not-tangible rewards (56% in the retailing-

and 67% in the service sector). There is great variance according to the countries. The

Northern-European countries, like Germany or Great Britain, are the "Champions" in the

offer of privileges (respectively 73% and 78% offer privileges associated to the loyalty

program against only 55% in France). On this level firms can install significant entry and

exit barriers, based on interpersonal relationships. *

(5) The probability to reach the reward: The more this probability is significant the

more the program has chances to be used. There are two management modes: delayed

and immediate rewards.


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Within the framework of the delayed rewards, the points system is currently used

the most by all companies. Their advantages lie in their simplicity of management, their

game character and their possibility of avoiding price wars. They have the advantage to

create exit barriers and therefore to fight against customer defection.

The immediate rewards, mainly used by retailers, are price reductions directly deduced

on certain products or brands in promotion, or games and lotteries. In France however,

the Galland law (1st January 1997) considerably reduced the possibility of price

reductions by reducing the loss resale threshold.

By delaying the rewards the firms have significant possibilities to prolong the

relationship duration. From the companies point of view, it is preferable to have the

programs multiplying the number of necessary repeat purchase acts which makes it

possible to increase the customers " locking ". However, research in psychology affirm,

that, the more the reward is delayed in time, the less it is efficient (Bootzin et al. 1991). It

is obvious, that an arbitration between retention and customer motivation is necessary, in

order not to decrease the programs attractivity.

Girard (1999) recommends to propose, at the same time, immediate rewards, to

stimulate the short-term sales, and delayed ones to increase long-term loyalty. For those

which are delayed, it is preferable, not to delay them too much in time because the

customer probably risks to lose his/her motivation to take part in the loyalty program.

Table 6 is summarizing the repartition of our sample.

Type of

rewards

Immediate

Price

Reductions

Points

Delayed

Purchase

Vouchers

Electronic

Portfolios

Total 58% 87% 41% 5%

Retailing 63% 80% 72% 7%

Service 56% 97% 17% 3%

Table 6: Rewards systems

In our smple, the minority ( i.e. 5% of the loyalty programs) propose only

immediate reductions ( for example the German radio station SWR3 and WebMiles.com).

35% of the companies offer only delayed reductions. One can find mainly firms coming

from the service sector, in particular car renting companies, airlines as well as the

German retailers. The majority of the firms, (i.e. 60%), proposes the two systems at the

same time.


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In the retailing sector, an average customer has to realize 20 repeat purchases with an

associated expenditure of 1.800 Euros to have a 3% reward value. In the service sector it

is on average necessary to carry out repeat 25 purchases with a value of 2.600 Euros to

have a 7% reward value.

3.4. Communication Tools

A loyalty program offers formidable possibilities of making individualized

communication. The communication vectors can be very diverse: certain firms propose a

consumer magazine which they offer to their loyal customers. In some cases it is

proposed for sale to not-cardholders. In our sample, 71% of the companies offer a

consumer magazine with general information, advices about beauty and health care,

kitchen and children education etc...In most cases the information is associated to special

in-store promotions in order to create traffic.

Another communication vector are personalized mailings or newsletters (72% of

our sample companies use them) which generally inform about special offers, new

products. Sometimes they are sent out for members birthdays. The telephone hot-line

constitutes a privileged mean of communication which encourages a spontaneous and

active contact. This tool saw a spectacular rise, as in 1995 only 21% of the firms had one

(Wiencke and Koke 1994, Kirstgens 1995). Today, almost every company has a hotline

(91% of our sample).

The increase in the popularity of Internet also opened significant opportunities for loyalty

programs. The majority of program sponsors, has their own internet site. Indeed, the

associated program management costs are considerably lower in the virtual than in the

real world. Another advantage can be found in the quasi-instantaneity of the information

flow at the four corners of the planet. Thus, the advantages generated by the loyalty

program, are known quasi instantaneously by a very broad target. At the same time, the

site relates advertising information and the purchasing possibility.

At Tesco in England the customers can recall on the Website the details of their

last purchase baskets, in order to do their purchases more quickly on-line. The

distributor set up virtual assistants, which give individualized advices and complementary

suggestions about products.

In our sample, 81% of the firms propose an access and a point management on

the Internet. Once again, Northern European countries are leading (Germany 98%, the

United Kingdom 98%, France 78%). The firms of the service sector propose this

management mode in 86% of the cases against 75% in the retailing field. Other

communication means are special events, organized for the members. Thus the Steiff


25/33

Club regularly organizes for its members special exchange purses or sales auction for

their famous cuddly toys. The main results are summarized in table 7.

Communication

vectors

Kirstgens (1995)

Meyer-Waarden

and Benavent

(2000)

% %

Consumer Magazine 71 72

Mailings 55 89

Newsletter 24 87

Telephone Hotline 21 93

Special Events 21 18

Internet 5 81

Table 7: Communication Tools

4. Conclusion

We saw that in many sectors a large a part of the promotional budget is devoted to

the loyalty programs having a rather defensive strategic orientation. These programs

really correspond to the actual firms need to move more towards the customers. This

leads to a

organisational borders broadening, long time product orientated, towards the integration

of customers and a certain number of strategic partners. Thus, one can easily

understand, that loyalty programs and the associated customer knowledge databases are

a privileged tool to rebuild this proximity and to individualize the offers. We have as well

seen the consequences of the program management strategies on the marketing

activities: One is based on customer heterogeneity management, referring to

differentiation and price discrimination by the. The other one seeks to manage the

customer relationships, while maintaining and domesticating customer groups in order to

isolate them from the competitive pressures.

Our international and cross-sector investigation study imposes the following

conclusions:

With regard to the consumer loyalty developing strategies, the Northern European

retailing companies as well as the service sector companies are the most advanced,

making usage of a variety of personalization techniques and not-monetary benefits.


26/33

The loyalty programs of Southern European retailers are only in their launching phase

and are based on traditional concepts, like the points system, as French groups like

Auchan and Carrefour-Promods exported their ideas that they apply already in France .

Our theoretical reflection and our results raises considerations on the factors leadingto the strategic choices about loyalty programs: in which situation it is better to apply a

heterogeneity strategy based on discrimination, in which other a company should seek to

reinforce the bond and the relationship with the customer, by choosing a customer

relationship management approach ?

This arbitration must certainly be made according to the degree of product

differentiation, the customer heterogeneity, the intensity of the competition, the degree of

product involvement or the purchase frequency. These factors are some of the key

variables to analyse in order to optimise the application conditions for loyalty programs.

They constitute also promising research perspectives.

This empirical investigation, which was voluntarily limited to a theoretical

clarification

and an empirical description, has above all the goal to show that loyalty programs have

larger of activity spheres than the ones usually described by a lot of anecdotic evidence.

The measurement of their efficiency passes by a better comprehension of the considered

strategies.

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ANNEXES

Programme de

fidlisationPays Segment

ABCO USA 1

Carrefour Junior France 1

Carrefour Pass France 1

Champion/Stoc France 1Auchan France 1

Coop Switzerland 1


31/33

DEA Germany 1

DM Drogerie Germany 1

Dick's Supermarket USA 1

Douglas Parfumerie Germany 1

E. Leclerc France 1

FNAC France 1

Fred Meyer USA 1

Karstadt Germany 1

Kiabi France 1

Marks & Spencer UK 1

Mercedes Germany 1

Mercedes Germany 1

Migros Switzerland 1

Naf-Naf France 1

Norauto France 1

Norauto Plus France 1

Novotel France 1

PHAS France 1

REAL Germany 1

Safeway UK 1

Tl 2 France 1

AOL France 2

Air France

Frquence JeuneUSA 2

Air France

Frquence PlusFrance 2

Air FranceFrquence Plus

Bleue

USA 2

Air France

Frquence Plus

Rouge

UK 2

American Airlines USA 2

Avis Club Azur USA 2Avis Club Business USA 2

Avis Club Senior USA 2


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British Airways Blue

ExecutiveUK 2

British Airways Gold

ExecutiveUK 2

British Airways

Silver Executive

UK 2

Budget USA 2

Euromaster France 2

EuropCar UK 2

Hertz Club Gold USA 2

Hertz Club Gold

AffairesUSA 2

Qualiflyer Affaires USA 2Qualiflyer

EconomiqueFrance 2

Qualiflyer Premire UK 2

SFR France 2

SNCF France 2

WebMiles.com (USA) USA 2Accor France 3

Air France American

ExpressUSA 3

American Express

CorporateUSA 3

Auchan France 3

Audi GERMANY 3Casino France 3

Cegetel France 3

Crdit Lyonnais France 3

Flooz.com USA 3

Galries Lafayettes France 3

Jelmoli Switzerland 3

Kertel France 3Monoprix France 3

MyPoints.com USA 3


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Pro 7 GERMANY 3

SWR3 GERMANY 3

Sainsbury's UK 3

Shell France 3

Socit Gnrale France 3

Total France 3

Volkswagen GERMANY 3

Table 8 : Loyalty programs in the sample

Documents

Loyalty Programs Strategies and Practice