Embed Size (px)
Citation preview
Customer Retention and Loyalty Programs; Do They Work?
Daniel Spezzano, Brandon Maisonet, Matthew Crowley, and Connor Monaghan
Southern New Hampshire University
2016
1
Introduction
1. Statement of Research
Upon looking for the effectiveness of CLP’s, the four variables we chose to use in our
model are Consumer Commitment, Resisting Competition, Store Environment, and Emotional
Attachment. In consumer commitment we will be looking at what keeps a customer loyal to a
firm or product. In resisting competition we will be explaining why a customer changes firms or
products and how to get them to resist competitors. Store environment will involve looking at
how a store’s atmosphere, aesthetic and customer service, appeals to the customer. In emotional
attachment, we will describe how a customer obtains an emotional attachment to a product or
firm.
1.2 Purpose of Study
The purpose of our study is to determine if customer loyalty programs work effectively as
a business strategy in retaining customers.
1.3 Importance of Study
“Companies lose money on time and effort, and customers get no more value from the
businesses to which they are “loyal.” (Kolowich L., 2015) Customer retention research will
benefit current firms, and researchers who would like to understand more on how to obtain
2
repeat customers and if loyalty programs work. Firms will benefit as they can see what makes an
effective CLP. Customers would also benefit from the research as they can understand what
makes a good CLP and when to take advantage of them.
Body
1. Literature Review
1.1. Loyalty Programs
Prior studies upon the effectiveness of loyalty programs have mentioned companies’
hesitance to adopt them. A common concern for the business looking to adopt a loyalty program
is the costbenefit situation. A loyalty program can lead to customers who regularly visit the
business anyway to develop consumer commitment or possibly an emotional attachment. The
problem arrives when the loyalty program ends up rewarding the unloyal. In an example said by
Taddy Hall from Business Insider, “...I’m traveling more this year than last year. It’s possible
both hotel companies I patronize think that I’m being more loyal because I’m giving them more
business.” A company can see their loyalty program as a way to find out who frequents their
business, but if not set up correctly they could be rewarding those who just happen to go to that
business every so often and really aren’t loyal at all.
Another problem that relates to the advance in technology is that most people tend to
simply forget that they have a loyalty card. With new developments in technology allowing for
apps to take place of physical cards, “21% of think that loyalty cards should be stored in a
smartphone app” as represented by Vaughn Highfield in his infographic. Capital One’s slogan
3
“What’s in your wallet?” sums up this situation. What IS in your wallet? Do you really know
ALL of the membership cards that you have on your person?
The question that is left unanswered is “based on what evidence do loyalty programs not
work?” In all of the articles read by our group, none of them have contained any statistical facts
showing that loyalty programs don’t work or end up in the adopting business losing money. Put
it this way, no matter the dwindling interest in loyalty programs, the only thing that's negatively
affected (by no more than inconvenience when going through their wallet I might add) is the
customer. As long as a business can keep a customer coming back rather than trying to gain new
ones, the program is effective.
Consumers and businesses alike would benefit from research done upon loyalty
programs. After reading the research, a customer or business will be more informed upon the
effectiveness of a loyalty program and whether to adopt (or take part in consumer wise), because
let’s face, they may be changing but they aren't going anywhere. Business strategies on the other
hand are viable to be changing often. The purpose of this research is to explicitly show once and
for all if loyalty programs as a business strategy work in retaining customers and should be
adopted by a business.
Our hypothesis for loyalty programs is that as long as they are implemented effectively,
they are a viable strategy in retaining customers. This is important as it is essentially our main
research question of if loyalty programs work.
4
1.2. Customer Retention
The overall goal of these loyalty programs is to create a strong connection with
consumers, or gaining consumer commitment. This act isn’t executed overnight, instead it takes
days, months, and even years to gain a strong level of commitment from your consumers. The
major key to gaining this strong level of commitment from consumers is to create a strong sense
of trust, or make the customer feel as if they are buying their goods from a close friend. In this
situation, businesses need to reach out to their consumers as if they are old pals.
Nowadays, almost every brick and mortar store seems to have some sort of loyalty
program. With that being said, it is important for businesses to make their loyalty program stand
out, or showcase a distinctive competency. Since every store seems to implement a loyalty
program, having one that sticks out and provides great incentives is the only way to gain a strong
sense of consumer commitment. Getting consumers to be enrolled in the loyalty program is just
the first step to strong consumer commitment, the next step requires patience, determination, and
persistence.
Since this is a relationship, it is important that the businesses implementing the loyalty
programs pays a great deal of attention to the customer. One way in which this can be done is by
observing what the consumers typically purchase from the business, as well as how much money
they typically spend on each purchase. Having that information alone is a great advantage to the
business. Using that consumer report, businesses can pick out certain incentives for particular
5
types of consumers. This makes the consumertobusiness relationship stronger because it
implies a form of personalization, instead of receiving a mass promotional email from a business.
Simply put, it makes consumers feel like they matter.
According to Vaughn Highfield (2014), one out of every three consumers enrolled in
loyalty programs gain no benefit from loyalty programs, simply because they forget that they are
enrolled in them (Highfield 2014). That is 33% of consumers that miss out on the great deal of
savings that they could be gaining. For businesses, however, this news is sad because it means
they are really only gaining about 66% of consumer retention. That is why creating a strong
relationship with consumers is so very important. In order to do that, businesses need to stay in
contact with their consumers, whether it be via social media, email, or television ads.
Additionally, businesses that want to have a strong customer loyalty program should continue to
market their programs, so that current subscribers don’t forget and so that the business gets more
members into their loyalty program.
Our hypothesis is that if loyalty programs are implemented effectively, then there will be
greater customer retention as opposed to not implementing a loyalty program.This is important
as it relates directly our question of if loyalty programs work as a business strategy.
1.3. Resisting Competition
In the face of similar business, the customer refuses to give them business due to factors
such as emotional attachment, better prices, no risk from switching to another business,
exceptional and personal customer service, and loyalty programs. When a customer becomes
6
satisfied with a brand, they grow trust towards the brand. They become loyal to the brand. When
a customer feels strongly towards a brand, they resist competition and become defensive to their
brand. When the customer becomes defensive they will resist the competitors marketing
strategies. They are already very confident in their brand.
Being loyal to a brand means that you love it and believe in it. The customers that are
loyal to a brand build a community. If a brand is facing hard times, the customers will become
silent about it. Trust is the biggest thing to keep loyal customers. Loyal customers are willing to
pay the premium prices set by their brand. The customers will even spread the word. Spreading
the word makes the brand have a positive image in a potential customer’s mind. The customers
will recommend the brand and try to buy from it as frequently as possible.
Loyal customers are customers for life, so they are constant sources of revenue. Loyalty
programs give the customers an extra reward for purchasing their products. The people selling
the brand need to be as positive with the customer as possible. Customers who flipflop from
brand to brand are a huge loss of potential revenue. “In an article about consumer loyalty on
Access Development, it says that $1.6 trillion is up for grabs due to consumers switching brands.
This number has been increased 29% from 20102015.”(Carter.) This is already a huge number
and it is increasing every year. Loyalty programs are a good form of barrier to switching brands.
We hypothesised that if a customer is enrolled in a CLP, then they will be more likely to
resist competition. This is important as it answers the question of what helps in maintaining
customer retention.
7
1.4. Emotional Attachment
The article, “Brand Attachment vs. Brand Loyalty” on Meltwater.com, defines brand
attachment as the emotional connection between humans and brands. That being said, an
emotional attachment can be formed between a customer and a brand, just like it can be formed
between one person and another person, pet, or place. Three big factors that can contribute to
one’s emotional attachment to a brand are affection, connection and passion. If a brand can be
effective with these three factors, will be successful in building emotional attachments with its
customers. “More than brand loyalty, brand attachment almost becomes a part of you” (C.
Oneto)
The real question is, how can a company create this emotional attachment between their
customers and their brand. Marketing has a big impact on this emotional brand attachment.
Christine Oneto mentions that “Whatever it is that attracts you to a brand to begin with most
likely has to do with the way PR and advertising have served up the content about that brand.”
Oneto wrote the article about brand attachment VS. brand loyalty on Meltwater.com. In the same
article, JoAnn Sciarrino, Knight Chair in Digital Advertising and Marketing at UNC School of
Media and Journalism, was quoted “There are three specific phases for the brand, which follow
along this path...Advertising & Marketing to Brand Attachment to Financial Performance.” (C.
Oneto) If a consumer is attached, they will go to that brand frequently, which will make a small,
but definite impact on the brand’s financial improvements.
Christine Oneto goes on to explain that a benefit of building customer attachment is that
the customer will rub off their feelings on the people around them and influence others to lean
8
towards that brand. These “brand advocates,” help increase the customer base for a company. An
article called “What is emotional branding?” on smartinsights.com suggests that to get emotional
attachment you need to put the customers first. “Decide which emotion you want to target in
your audience, encourage customers to reach the desired emotionally bonded state, create
consistent communications centered on customers’ emotional needs.” (smartinsights.com)
To summarize emotional brand attachment, Oneto suggests that a brand should “find out
what your customers’ passions, connections and affections are. Target your PR with that in mind,
and see how they follow by becoming attached to your brand – not just showing loyalty, but true
attachment.” With true attachment, customer retention will come naturally.
We hypothesised that if a consumer is attached, then they will go to that brand frequently
which will make a small, but definite impact on the brand’s financial improvements. If a store
can retain customers by reaching them through emotional attachment, they will likely feel a need
or a desire to go back to that company or brand, which in return will help improve that
company’s finances.
1.5. Store Environment When talking about customer retention, the environment of the store is often overlooked.
"Store environment is an important element in retailing given that 70% of the purchase was an
impulse buying or unplanned purchases", as said by Dunne and Lusch in Definition of a Store
Environment. When you walk into a store knowing what you want to purchase do the signs or
displays make it easy to locate it? How about when you're in the aisle of products that you would
like to purchase from, does the organization of the aisle hinder you from finding what you're
9
looking for? Does the music create a pleasant or exciting atmosphere in the store? All of these
are questions related to store environment.
Shun Yin Lam (2001) from Association for Consumer Research created a figure that
helps explain store environment effects. Essentially, the figure categorizes the store environment
into three factors, which are the ambient factor, the design factor, and the social factor. The
ambient factor encompasses the lighting, temperature, music, and even smell. The design factor
encompasses architecture, color, etc. The social factor encompasses the amount, type, and
behavior of customers and employees in the store.
But how does the store environment relate to the research topic? When considering
loyalty programs, it’s easy to relate the idea to purchasing rewards, and rewarding systems. It’s
often skimmed over that you can effectively entice someone to purchase more and more often by
providing an optimal experience for the customer while they shop, making them actually care to
purchase a membership card or take part in a loyalty program.
Take into consideration when the last time you were offered a membership card; often
times they’re free and enticing as you're already purchasing from the store and could save money
at that purchase. After your purchase, you've walked out of the store and realized that you've just
added more clutter to your wallet or purse by adding a card for a store you really don't go to that
often. The loyalty card that you signed up for becomes a nuisance, or will eventually be
forgotten. “The bulk of my loyalty has nothing to do with loyalty cards.” as stated by Taddy Hall
from Business Insider. This statement is important in that if you can get a customer to be truly
loyal, they will care to sign up for and avidly participate in a loyalty program creating customer
retention.
10
Our hypothesis for Store Environment is that if ease of access and aesthetic appeal relate
to a customer's interests and preferences, then they will be more likely to return to the store. This
is important as store environment plays a big variable in customer retention based on the surveys
we conducted.
2. Methodology
In this experiment we surveyed 100 students and faculty at Southern New Hampshire
University. The survey offered eight questions about demographics and twenty questions related
to our research. We created four questions for each of our variables. We used IBM’s SPSS to
analyze our data and generate reliability scores and regression results.
3. Results
3.1 Reliability Scores
For our study we ran a reliability test to determine how much our survey participants
understood the questions they were asked. To explain, any Alpha score of 0.4 or lower means
that the participant did not understand the question, while an Alpha score of 0.7 or higher meant
that the surveyee fully understood the question. After running our tests and coming up with the
Alpha scores for each model variable, the results were that participants understood all but one.
For customer service, the Alpha score was .65; store environment was .46, loyalty programs .53,
11
customer retention .48, and customer satisfaction .33. Based on this data, the surveyees did not
understand the questions asked to them that fell in the customer service variable. The survey
participants most understood the questions asked to them that fell in the customer satisfaction
variable.
Table 3.1 Alpha Scores
Survey Variables Alpha Score
Customer Service .65
Store Environment .46
Loyalty Programs .53
Customer Retention .48
Customer Satisfaction .33
3.2 Demographic Results
We ran a test to observe what the demographic results of our study were. From this data
we observed that 62% of our survey participants were male, while 38% were female.
About 38% of our survey participants were 19 or younger; about 54% of participants
were 20 through 24 years old, which was the main age range; and about 7% were 25 or older.
Finally, the majority of our survey participants, or 86% to be exact, were caucasian; this
means that 14% of our participants were either african american, hispanic, asian american, etc.
Table 3.2
Gender Frequency Relative Frequency
12
Male 62 62%
Female 38 38%
Totals: 100 100%
Age Frequency Relative Frequency
19 and Younger 38 38.38%
2024 54 54.54%
25 and Older 7 7.07%
Totals: 99 100%
Race Frequency Relative Frequency
African 4 4%
African American
1 1%
Asian 5 5%
Caucasian 86 86%
Hispanic 3 3%
Other: Arabic 1 1%
Totals: 100 100%
13
3.3 Regression Results The last test we put our data through was regression tests. Regression tests are done to
test the significance of the variables in an experiment. The closer the result is to 0.000, the
stronger the relationship between the two variables. If the result comes out to be anything above
0.050, then there is no relationship between the two variables tested.
First, we tested our three independent variables: customer service, store environment, and
loyalty programs, and their relationships with our dependent variable, customer satisfaction. The
results showed that customer service had no relationship with customer satisfaction, with a
number or 0.130. Store environment and loyalty programs both held strong relationships with
customer satisfaction, with results of 0.000 and 0.002, respectively.
Table 3.3A
Independent Variables Significance of Independent Variables
Customer Service 0.130
Store Environment 0.000
Loyalty Programs 0.002
Next, the relationship between customer satisfaction and customer retention was tested.
The results showed that customer satisfaction has a strong relationship with customer retention.
Table 3.3B
Dependent Variable Significance of Dependent Variable:
Customer Retention 0.000
14
4. Discussion Based on the results from our regression analysis, we were surprised to see that customer
service had almost no relationship to customer satisfaction, while store environment held the
strongest relationship. As much as this was a surprise to us, we had to stay objective and settle
with the idea that customer service was not significant to customer satisfaction. We noted that
our demographic mainly consisted of college students and some faculty at SNHU, which
funneled the results to only college students and some SNHU faculty. We also noted that a large
portion of our demographics were caucasian and of age twenty through twentyfour. This may
lead results that would be less accurate than if we were able to survey a more diverse people.
Conclusion
This research held some limitations, as we only surveyed 100 participants in a select
location. There was a sampling size limitation. A sampling error may have also occurred with the
inaccuracy of the participants responses on the surveys. Some participants may have rushed
through the surveys and not answered the questions truthfully or thoughtfully. Our demographics
showed that our participants were largely caucasian males under the age of 25. Another possible
error may have been the possible group bias as a large portion of the surveys were handed out to
the Men’s Soccer team and the Phi Delta Theta’s New Hampshire Beta chapter at Southern New
Hampshire University. As these participants were not sharing answers, they might have
developed a group bias from being a part of an organization together.
In conclusion to our research we’ve determined that Customer Loyalty Programs work
15
when implemented effectively as a business strategy. In order to effectively accommodate
customer satisfaction a firm must take into string consideration the store environment and loyalty
programs.
References
Bartone, C. (2011, July). Emotional Brand Attachment and Brand Personality: The
16
Relative Importance of the Actual and the Ideal Self. Retrieved February 29, 2016, from
https://archive.ama.org/archive/AboutAMA/Pages/AMA Publications/AMA
Journals/Journal of Marketing/TOCs/SUM_2011.4/emotional_brand_personality.aspx.
Birchall, C. (n.d.). Rewards programs and loyalty programs, do they work? Retrieved
February 29, 2016, from
http://www.kerchingretail.com/rewardsprogramsandloyaltyprogramsdotheywork.
Carter, B. (2015, December 31). Customer Loyalty Statistics: 2015 Edition. Retrieved
March 02, 2016, from
http://blog.accessdevelopment.com/customerloyaltystatistics2015edition.
Definition of Store Environment. (2014, March 10). Retrieved February 29, 2016, from
http://neweconomicseducation.blogspot.com.br/2012/02/definitionofstoreenvironment.
html.
Highfield, V. (2014, April 17). The Problem With Customer Loyalty. Retrieved February
29, 2016, from
http://www.totalcustomer.org/2014/04/17/infographicproblemcustomerloyalty/.
Kolowich, Lindsay. "7 Customer Loyalty Programs That Actually Add Value." Hubspot.
Hubspot, 1 July 2015. Web. 26 Apr. 2016.
Oneto, C. (2014, September 18). Brand Attachment vs. Brand Loyalty: What is the
Difference & Why Does It Matter? Let's Talk Ice Cream. — Meltwater. Retrieved from
http://www.meltwater.com/blog/brandattachmentvsbrandloyalty/
Shun Yin Lam (2001) ,"The Effects of Store Environment on Shopping Behaviors: a
17
Critical Review", in NA Advances in Consumer Research Volume 28, eds. Mary C.
Gilly and Joan MeyersLevy, Valdosta, GA : Association for Consumer Research, Pages:
190197.
Walter, A., Mueller, T. A., Helfert, G., & Wilson, D. T. (2002). “Delivering Relationship
Value: Key Determinant for Customers' Commitment.”. Retrieved February 29, 2016,
from
http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.202.2179&rep=rep1&type=pdf
Watson, G. F., Beck, J. T., Henderson, C. M., & Palmatier, R. W. (2015, April 29).
Building, measuring, and profiting from customer loyalty. Retrieved February 29, 2016,
from
http://link.springer.com/article/10.1007/s1174701504394/fulltext.html#copyrightInfor
mation.
What is emotional branding? Smart Insights. (2012, February 20). Retrieved February
29, 2016, from
http://www.smartinsights.com/onlinebrandstrategy/emotionalbrandingmeanscustome
rsstayloyalforthelonghaul/.
