INTERNATIONELLA HANDELSHOGSKOLAN HOGSKOLAN I JONKOPING Customer Loyalty Research – Can customer loyalty programs really build loyalty? Bachelor thesis within Business Administration Author: Kellgren Cecilia Moradi Ladan Romppanen Maiju Tutor: Jonkoping Johansson Anette, Raviola Elena January 2007 JONKOPING INTERNATIONAL BUSINESS SCHOOL Jonkoping University Kundlojalitets forskning – Kan lojalitetsprogram verkligen skapa lojalitet? Kandidat uppsats inom Foretagsekonomi Forfattare: Kellgren Cecilia Moradi Ladan Romppanen Maiju Handledare: Jonkoping Johansson Anette, Raviola Elena January 2007
Acknowledgements The authors would like to thank their supervisors Anette Johansson and Elena Raviola for their guidance and support during the writing process of this thesis. The authors, are also very grateful towards Pernilla Nimmermark, INTERSPORT Customer club coordinator and Patrik Linddahl, the owner of INTERSPORT Jonkoping, for their contribution of valuable information and making it possible for us to write this thesis. The authors, further want to thank the interviewed club card members that provided us with crucial information needed in order to conduct this research.
Jonkoping, January 2007 Cecilia Kellgren Ladan Moradi Maiju Romppanen i Bachelor Thesis within Business Administration Title: Author: Customer Loyalty research Kellgren Cecilia Moradi Ladan Romppanen Maiju Tutor: Johansson Anette Raviola Elena Date: Subject terms: 2007-01-15 Customer Relationship Management, Customer Loyalty Program, Customer loyalty, Loyalty, Retail business Abstract Background: During the last decades the efforts to foster customer relationships have become important due to increased competition in the consumer markets.
One of the most popular strategies has been to introduce customer loyalty programs which are believed to enhance customer loyalty. The popularity of the customer loyalty programs is based on the beliefs that loyal customers are lucrative and these programs would bond the customers to the company. More recently however, the discussion whether these statements are accurate has started to blossom. Loyal customers are not necessarily as profitable as believed. Moreover, it is not easy for companies to gain competitive advantage through loyalty programs because almost all companies have similar ones.
Purpose: This thesis evaluates, through a case study of a Swedish retail company, whether customer loyalty programs manage to create loyalty among their members. Different types of customer loyalty will be examined and evaluated with the aim to find out if any of them can be created by the use of such programs. A qualitative study was conducted to answer the purpose of the thesis. Within the case study several semi-structured interviews were carried out with INTERSPORT and 20 telephone interviews with INTERSPORT customers. Empirical material was analyzed with a reflection to the theoretical framework and the research questions.
Customer loyalty programs can support the creation of loyalty, but should be seen as a complement to other aspects of the business, namely, the product line, the customer service and the store concept. However, sustainable customer loyalty is difficult to obtain because many customers today are loyal to several companies instead of one. Method: Conclusions: ii Kandidat uppsats inom Foretagsekonomi Titel: Forfattare: Kundlojalitets forskning Kellgren Cecilia Moradi Ladan Romppanen Maiju Handledare: Johansson Anette Raviola Elena Datum: Amnesord 2007-01-15 Relationsmarknadsforing, Kundlojalitets program, Kundlojalitet, Lojalitet, Detaljhandel.
Sammanfattning Bakgrund: Manga foretag har under de senaste aren insett vikten av att varda sina kundrelationer pa grund av den okade konkurrensen pa marknaden. En av de popularaste strategierna for att tillgodose detta behov har varit med hjalp av lojalitetsprogram. Dessa program okar i popularitet och en av anledningarna till detta grundar sig i asikter om att lojala kunder ar mer fordelaktiga, samt att man med hjalp av dessa program har mojlighet att knyta kunderna till foretaget. Pa senaste tiden har dessa pastaenden om att lojala kunder ar lonsammare emellertid borjat ifragasattas.
Dessutom ar det inte langre latt for foretagen att vara konkurrenskraftiga genom att introducera lojalitetsprogram da det har blivit ett alltfor vanligt fenomen. Med hjalp av en fallstudie av ett Svenskt detaljhandelforetag utvarderar den har uppsatsen huruvida kundlojalitetsprogram lyckas skapa lojala kunder bland dess medlemmar. Olika typer av kundlojalitet kommer att undersokas och utvarderas med syfte att ta reda pa ifall nagon av lojalitets typerna kan skapas genom anvandning av lojalitets program. For att svara pa uppsatsens syfte genomfordes en kvalitativ studie.
Flera intervjuer med ansvariga pa INTERSPORT utfordes samt tjugo telefon intervjuer med ett urval av deras kunder. Den empiriska data som samlades in med hjalp av intervjuer ligger till grund for analysen tillsammans med teoretiska relevanta teorier samt forsknings fragorna. Kundlojalitetsprogram kan understodja skapandet av lojalitet och borde betraktas som ett komplement till andra mer vitala delar av verksamheten, narmare bestamt produkterna, servicen och affarskonceptet. Det ar emellertid svart att skapa langvarig kundlojalitet i dagens lage da manga kunder ar lojala mot flera foretag istallet for bara ett.
Syfte: Metod: Slutsats: iii Table of Content 1 Introduction…………………………………………………………………. 1 1. 1 1. 2 1. 3 1. 4 1. 5 2. 1 2. 2 Background ……………………………………………………………………….. 1 Problem discussion …………………………………………………………….. 2 Purpose…………………………………………………………………………….. 2 Delimitation ……………………………………………………………………….. Disposition…………………………………………………………………………. 2 Customer relationship management (CRM) ……………………………. 5 Customer loyalty programs ………………………………………………….. 7 2. 2. 1 The objective of customer loyalty programs ………………….. 7 2. 2. 2 Types of loyalty programs…………………………………………… 8 Customer loyalty…………………………………………………………………. 8 2. 3. 1 Three drivers of retention……………………………………………. 2. 3. 2 Relative attitude and behavior relationship ……………………. 8 2. 3. 3 Conceptualization of customer loyalty ………………………… 10 2. 3. 4 Conclusion of customer loyalty theories ……………………… 12 Consequences of customer loyalty………………………………………. 13 Research questions…………………………………………………………… 15 Quantitative and qualitative methods …………………………………… 16 3. 1. 1 Choice of method…………………………………………………….. 6 Case study ………………………………………………………………………. 17 3. 2. 1 Choice of case study ……………………………………………….. 17 Interviews ………………………………………………………………………… 18 3. 3. 1 Choice of interview ………………………………………………….. 18 Selection …………………………………………………………………………. 18 Data interpretation and analysis ………………………………………….. 9 Quality of the qualitative research ……………………………………….. 20 Part 1 – the Company ……………………………………………………….. 22 4. 1. 1 Company overview ………………………………………………….. 22 4. 1. 2 The aim of the loyalty program ………………………………….. 23 4. 1. 3 The development of the program……………………………….. 24 4. 1. 4 The Content of the program………………………………………. 25 4. 1. 5 Loyalty in the context of Club INTERSPORT……………….. 6 Part 2 – the Customers ……………………………………………………… 28 4. 2. 1 Customers’ perception on customer loyalty programs …………………………………………………………………………. 28 4. 2. 2 Customers’ expectations of the customer loyalty program…………………………………………………………………………… 30 4. 2. 3 Customers’ perception on loyalty……………………………….. 31 4. 2. 4 Creating loyalty through customer loyalty programs ……… 32 4. 2. Customers’ reflections on the benefits of loyal customers………………………………………………………………………… 33 2 Frame of reference ………………………………………………………. 5 2. 3 2. 4 2. 5 3. 1 3. 2 3. 3 3. 4 3. 5 3. 6 4. 1 3 Method………………………………………………………………………. 16 4 Empirical findings – a Case study ………………………………. 22 4. 2 iv 5 Analysis…………………………………………………………………….. 35 5. 1 5. Customer loyalty programs ………………………………………………… 35 5. 1. 1 Enhancing the relationship ……………………………………….. 35 Customer loyalty……………………………………………………………….. 36 5. 2. 1 Attitudinal loyalty……………………………………………………… 37 5. 2. 2 Behavioral loyalty…………………………………………………….. 38 5. 2. 3 Situational loyalty…………………………………………………….. 40 Consequences of customer loyalty………………………………………. 1 Conclusion of the research questions and the purpose…………… 48 Limitation…………………………………………………………………………. 49 Future studies ………………………………………………………………….. 49 5. 3 6. 1 7. 1 7. 2 6 Conclusion ………………………………………………………………… 46 7 Final Discussion ………………………………………………………… 49 8 References ………………………………………………………………… 50 Figure Figure 1 The disposition of the thesis……………………………………………………. 3 Figure 2 Outline of the thesis ………………………………………………………………. 5 Figure 3 Relative Attitude-Behavior Relationship. Dick and Basu (1994) p. 1019 Figure 4 The links between the theories ……………………………………………… 12 Figure 5 Why loyal customers are more profitable (Reichheld and Teal, 1996)13 Figure 6 Company overview, English version in Appendix 5…………………… 23 Tabel
Table 1Customer overview ……………………………………………………………….. 28 Appendix Appendix 1 ……………………………………………………………………………………… 52 Appendix 2 ………………………………………………………………….. …………………. 53 Appendix 3 ……………………………………………………………………………………… 54 Appendix 4 ……………………………………………………………………………………… 5 Appendix 5 ……………………………………………………………………………………… 57 vi Introduction 1 Introduction This thesis is an empirical study within the field of customer loyalty. The aim is to evaluate if customer loyalty programs manage to create loyalty among their members. The first chapter will introduce the background of the field of Customer Loyalty Programs and previous research done in the area. With the background as a basis, the chapter will continue with a problem discussion, which will lead to purpose of this thesis. 1. 1 Background
The consumer market is getting more competitive, and the fundamental question is; what should the companies do in order to gain new customers and sustain the existing ones? Primary attempt has been to offer price discounts and special deals to the customers. However, according to Peppers and Rogers (1997) this attempt is not working properly and the efforts should be reinforced into techniques to satisfy the customers’ needs. Many companies have tried to solve this by creating mass-customized products, enhancing customer service, communication and by continuing product differentiation (Pitta, 1998).
The most frequent technology that is being used is the customer loyalty programs, which is build on a traditional customer database (Pitta, 1998). During the last decades we have seen the customer clubs blooming, the companies have practiced one of marketing’s most popular strategies –if you see a good idea, copy it (Dowling and Uncles, 1997). In Sweden, the grocery chains ICA, Coop and Konsum have their own customer clubs. Lindex, H&M, MQ, Ahlens among others are competing for the fashion-interested consumers’ loyalty. In the sports industry, Stadium, INTERSPORT and TeamSportia have created their own customer clubs to retain their customers.
The popularity of customer clubs is based on the beliefs that these programs would bond the customer to the company and increase the customer loyalty. A proportion of the customers are believed to be hard-core loyal –both profitable and buying frequently. The assumption is that it is possible to encourage the customers up a ‘loyalty ladder’ and make them buy more (Dowling and Uncles, 1997). Further, it is widely accepted that loyal customers are supposed to be less price sensitive, spend more, spread positive word-of-mouth, and reduce servicing costs (Reinarz and Kumar, 2002).
Moreover, it is often mentioned that it is cheaper to retain existing customers than to procure new ones (Downing and Uncles, 1997). More recently however, the discussion whether these statements are accurate has started to blossom. Research has proven that these assumptions about loyalty being something positive and lucrative may not always be true. Rather there are several reports pointing in the other direction (Downing and Uncles, 1997; Reinartz and Kumar, 2000). Then the interesting question arises if loyal customers are worth the effort of acquiring?
Is then a customer loyalty program really something useful and profitable for the business, or rather a costly service which the company has little use for (Reinartz and Kumar, 2000)? In fact, many studies have adopted a market focus to conduct research in this area. However, very few studies have actually been examining the individual attitudes of the members towards such programs (Dowling, Uncles and Hammond, 2003). 1 Introduction 1. 2 Problem discussion Customer clubs, especially in the retail business have increased enormously during the last decades (Dowling and Uncles, 1997).
Almost all consumers belong to some kind of club and are familiar with the problem of wallets bursting of different kinds of clubcards. At times, customers join the clubs just in order to receive a special offer or a price discount. Their intention of joining the memberships might even be to play-out the companies against each other, for their own benefit. The perception is that consumers seem to run after the best offer and price rather than concentrating the purchases in a specific company simply because they have a positive attitude towards it.
These customer clubs are known as customer loyalty programs, but do they really have anything to do with loyalty? There is a risk that rather than companies concentrating on building strong and long-lasting customer relationships, they seem to use the customer clubs to attract new customers and to collect a wide customer base to use it for direct marketing (Kotler et al. 2001). The problem with loyalty programs is that every company has one and it has become difficult to gain sustainable competitive advantage from it.
If every firm has similar customer clubs, it means that the customer who is a member of one club is probably a member of the competing firm’s club as well (Dowling and Uncles, 1997). The companies need to evaluate if the high investment has changed the behavior of the customers, or if it is only trigging them to join a majority of customer clubs in order to collect discounts (Raphel, 1996). This implies that the companies should consider how they could use the customer club more effectively than competitors, in order to gain competitive advantage. 1. 3 Purpose This thesis evaluates, through a case study of a Swedish retail company, hether customer loyalty programs manage to create loyalty among their members. Different types of customer loyalty will be examined and evaluated with the aim to find out if any of them can be created by the use of such programs. 1. 4 Delimitation The delimitation of this thesis concerns the geographical area that is studied. INTERSPORT has more than 130 stores in Sweden and the customer club activity comprises the whole country. The authors of the thesis have solemnly chosen to concentrate to the Jonkoping area and more specifically to the A6 store and its customers. 1. 5 Disposition
The disposition of the thesis is shown in the figure below (fig 1). The authors have divided the thesis from the background towards the point where they narrow down the subject gradually to answer the purpose of the thesis. 2 Introduction Background Problem Purpose Empirical Part Frame of Reference Company Part 1 Method Res. Questions Customers Part 2 Analysis Conclusion Discussion Figure 1 The disposition of the thesis The second chapter will present the thesis’ frame of reference. The authors begin by giving a general view of customer relationship management, which has been the ground for the creation of customer loyalty programs.
Next, the authors present the theories of customer loyalty and end the chapters with the consequences of customer loyalty. The frame of reference chosen leads to the research questions that will be used as a tool for the authors to collect and analyze the data of the empirical findings. The method chapter presents the approach taken in order to collect and analyze the data for the thesis. The authors start of with a general view of quantitative and qualitative method studies and explain the outline of the chosen methods for the thesis, as well as the quality of the study.
The empirical chapter of the thesis is divided into two parts, the companies and the customer’s perceptions. The authors intend to bring forward two different perspectives in order to answer the purpose, as well as the research questions of the thesis. The fifth chapter is the analytical part of the thesis where the authors draw links between the theoretical part and the empirical findings. This is done with the aim to discuss the problem of the thesis and grasp if the theoretical parts are inline with reality. The authors try to build a discussion around the research done in the area. Introduction The sixth chapter is the conclusion of the thesis, where the authors are trying to answer the research questions created out of the frame of reference. Here, the authors intend to draw conclusions on the analysis part of the study by answering the research questions and the purpose. The thesis finishes of with a final discussion about the future studies and the limitations of the thesis. 4 Frame of reference 2 Frame of reference The authors will in this chapter present the theoretical framework and end the chapter with the research questions derived from theories.
This will build the base for how the empirical data will be collected and analyzed. This thesis is taking into account both the companies and the customers’ perspective. That is why the authors begin the theories by explaining that customer loyalty clubs have been generated as a part of the companies’ customer relationship management strategy. The main reason why companies apply customer relationship management is to nurture the relationships with their customers. Lately, customer loyalty programs have become a central way for many companies to manage the customers.
In order to know whether customer loyalty programs fulfill their purposes, as one of them creating customer loyalty, one needs to get deeper comprehension of the concept of customer loyalty. Customer loyalty should naturally result in improved profitability for the company and in increased value for the customer. Finally, to review whether customer loyalty is an appropriate objective, the theoretical framework ends by discussing the consequences of customer loyalty. How? 2. 1 CRM •Is used to nurture the relationships 2. 2 Customer loyalty programs •Are widelyutilized method of conducting CRM. Motivates To gain 2. Consequences of Customer loyalty •Improved profitability 2. 3 Customer loyalty •Is the objective Why? of both CRM and customer loyalty programs Figure 2 Outline of the thesis 2. 1 Customer relationship management (CRM) In the past, the limited competition and increasing consumer demand allowed companies to neglect the relationship thinking since consumers were buying anyway. The traditional view on marketing had an emphasis on acquiring new customers and by doing so, gaining market share. Today, however, the competition is intensive, customers have more buying options and their tastes are highly fractionized.
In other words, customers have become more demanding and harder to satisfy. The view on traditional marketing 5 Frame of reference has shifted to a marketing philosophy where sustainable competitive advantage is gained through the development of company’s customer relations, not necessarily through the acquisition of new customers as the traditional view suggests (Blomqvist, Dahl and Haeger, 2000). CRM – managing the customers, has become one of the central ways to make the companies’ operations more effective and profitable (Raulas, 2005).
Customers should be seen as investments, because without customers a company will not have any profits, no revenues and consequently no market value. Customers are without a question the lifeblood of any organization (Gupta and Lehmann, 2005). The underlying assumption of CRM is that by nurturing the existing customer relationships and keeping the lucrative customers satisfied and loyal it is possible to make the business more profitable. The relationship should however benefit both the company and the customers, so that a mutually beneficial relationship is generated (Raulas, 2005).
Nowadays, the concept of CRM is often associated with software solutions, which enable the company to gather and integrate important customer data. The purpose is that companies can gain better understanding and profit from each and every customer relationship (Lancaster and Reynolds (2004). In order to exploit customer management there are certain criterions that companies need to consider. First of all, without knowledge of customers there cannot be functioning customer management. With database technology it is now possible to assess large numbers of customers and distinguish who the active customers are (Raulas, 2005).
Blomqvist et al. (2000) argues that it is essential to select the right kind of customers to build the relationship with. It is not desirable or even possible to create a relationship with all customers. Further, it may not always be the best strategy to find the biggest spenders, but rather identify those who are the loyal ones. The selection is done by segmenting the customers into distinctive groups with different preferences, characteristics or behavior. The reasoning behind segmentation is the dissimilarity of customers’ values and behaviors that needs to be taken into consideration when managing customer relationships.
Segments may perhaps require differing incentives, pricing, products and level of service. Essentially, CRM -strategy should engage the whole customer base, however, it should be adjusted depending on the customers activity and profitability (Blomqvist et al. 2000). Raulas (2005) underlines, that regular contact is the critical factor in the development of the relationship. There is a positive effect on customer relationships if the company manages to keep the optimal contact with its customers.
One of the cornerstones of CRM is to perform intentional, measurable and an adequate amount of communication that is conducted in right time, and with the right customization and through the right channel. Previous research has proved that the most important reason why customers switch to competitors is the lack of contact or insufficient communication from the company (Raulas, 2005). As a conclusion, CRM is a strategic issue that needs to be aligned with the company’s business idea and competitive strategy and therefore, requires comprehension through the whole organization.
Companies in our day have created different means of carrying out CRM and customer loyalty programs are constantly in present when companies are planning how to enhance the loyalty among their customers (Blomqvist et al. 2000). 6 Frame of reference 2. 2 Customer loyalty programs Blomqvist et al. (2000) explains the concept of a loyalty program to be a formalized association of customers who fill a certain criteria that the company has set. Customers make some kind of effort to acquire the membership and in return they receive benefits that are only available for the members of the loyalty program.
Johnson (1998) describes a loyalty program as any marketing program that through a long-term interactive relationship improves the lifetime value of current customers. There are five elements that can typically be detected in loyalty programs, namely a database, an enrolment process, rewards, value-added or soft benefits and customer recognition. Generally, the definitions of customer loyalty have three things in common. Firstly, they recognize a group of customers that form the target and the membership of the program. Secondly, members should be rewarded or gain benefits through the program. Thirdly, they emphasize he interaction between the marketer and the member. Butscher (1998) adds that some clubs are assigned to establish emotional relationships, while others are content with to build long and profitable relationships without dimensional requirements. 2. 2. 1 The objective of customer loyalty programs The introduction of the loyalty program back in the 1970s had the intention to build a stronger relation between the supplier/retailer and its customers. The concept was driven by the vision of creating “better” customers and differentiating the organization from the competitors on the market (Hakansson, 1982).
The underlying assumption is that the cost of getting a current customer to buy again is lower than the cost of recruiting new customers (Dowling and Uncles, 1997). Firms usually have common expectations of the outcomes for the loyalty program, which has to do with maximizing the profit. Dowling and Uncles (1997, p. 4) divides the expected outcomes into three parts: I. Maintain sales levels, margins and profits (a defensive outcome to protect the existing customer base) II. Increase the loyalty and potential value of existing customers (an offensive outcome to provide incremental increases in sales, margins and profits) III.
Induce cross-product buying by existing customers (either defensive or offensive) The above listed outcomes usually refer to specific target markets, namely heavy buyers, or profitable customers. This is explained by the belief that a small percentage of customers generate large part of the sales. The “80/20 Law” suggests that about 80% of the revenue is obtained form just 20% of the customers (Dowling and Uncles, 2002). Butscher (1998) also divides the goal of a loyalty program into three sections –core goals, main goals and secondary goals.
Core goals are to increase revenue, profit or market share. Main goals could be such as building a strong database, to win new customers and to enhance the communication between the company and the customers. Secondary goals as Butscher (1998) describes could be to increase visit, purchase and usage frequency or to improve product, brand and company image. 7 Frame of reference 2. 2. 2 Types of loyalty programs There is a big variety of different kinds of customer loyalty programs that are usually adapted to and dependent on the nature of the business the company finds itself in.
However, a majority of the loyalty programs can be divided into two main categories. In the first one, the programs have the intention to offer increased value, for example extra service or faster service. The second category of customer loyalty programs is based on price discounts, bonuses, rebates and special offers. In both cases, the objective is to keep the customer in the company, but with different methods. There are few loyalty programs that completely belong to one category; rather they are usually a mix of both types.
One of the disadvantages of entirely relying on monetary benefits is that the company may be successful in attracting new customers, but does not gain sustainable advantage (Blomqvist et al. , 2000). 2. 3 Customer loyalty In simple terms, customer loyalty from Czepiel’s (1990) perspective is a notion to describe the end result of a relationship between the company and the customer. In order to gain loyalty, the company can provide incentives that will increase the value for the customers and in that manner create buying fidelity among them (Blomqvist et al. , 2000).
From that point of view, a loyal customer engages the company over a long-term to satisfy his/her needs or a part of the need (Blomqvist et al. , 2000). Customer loyalty is although a more complex concept than that. By screening the theories, the authors have chosen to focus on three different theories: Three drivers of retention (Gustavfsson, Johansson and Roos, 2005), Relative attitude and behavior relationship (Dick and Basu, 1994) and the Conceptualization of customer loyalty (Dowling et al. , 2003). 2. 3. 1 Three drivers of retention According to Gustavfsson et al. 2005), the complexity of customer loyalty can be explained through focusing on three prominent drivers of retention: overall customer satisfaction, affective commitment, and calculative commitment. Customer satisfaction is an overall evaluation of the company’s performance over time. It typically derives from product and service quality and the price. As expected, positive overall satisfaction has a strong effect on customer loyalty. Historically, marketing scholars have identified commitment as a desire to maintain a relationship. Commitment can however, occur from either affective or calculative grounds.
Affective commitment is an emotional factor that the customer creates with the retailer through repeated product or service usage and results in a higher level of trust. Calculative commitment, on the other hand, contains a rational view and is based on the economic dependence of a product due to a lack of choice or switching cost, which in turn creates loyalty (Gustavfsson et al. 2005). 2. 3. 2 Relative attitude and behavior relationship Loyalty from behavioral perspective has traditionally used measures such as proportion of purchase, purchase sequence and probability of purchase.
These measures have been criticized of being static and not taking into consideration the factors underlying the repeat purchase. The behavioral definitions alone are therefore insufficient to identify why loyalty is developed (Dick and Basu, 1994). 8 Frame of reference Dick and Basu (1994) argues that there are two issues that are required for loyalty, which are favorable attitude that is high compared to potential alternatives and repeated patronage (repeat purchase behavior/re-investment). Thus, the most important matter is to consider loyalty as the relationship between the relative attitude toward an entity and patronage behavior.
Attitudes have commonly been related to behaviors, but it is essential to notice that a consumer may hold a favorable attitude toward a brand, but not repetitively purchase it because of greater relative attitude toward other brands. To further point out, both relative attitude and repeat patronage can be at two levels – high and low. By cross-classifying relative attitude with repeat patronage, four separate conditions of loyalty can be detected: Repeat Patronage Repeat Patronage High Low High Relative Attitude Low Loyalty Latent loyalty Spurious loyalty No loyalty
Figure 3 Relative Attitude-Behavior Relationship. Dick and Basu (1994) p. 101 No Loyalty Here, the customer has both low relative attitude and low repeat patronage which results in no loyalty at all. Spurious loyalty This is where the customer has high repeat patronage accompanied by low relative attitude. Spurious loyalty may stem from situational cues, such as the repeat purchase occurs due to familiarity. In addition, social influence might lead to spurious loyalty. Essentially, spurious loyalty is characterized by situational influences on loyalty rather than attitudinal. 9 Frame of reference
Latent loyalty Customer possesses high relative attitude, but for some reason it does not result in high repeat patronage. Subjective norms and situational effects, which are non-attitudinal sources of variance in purchase behavior, are determining patronage behavior more strongly than attitudes. Analyzing the relative attitude along with the norms and situational factors, gives a good overview for the strength of a relative attitude-repeat patronage relationship, namely loyalty. Loyalty This condition is the most preferred one because of the positive correlation between favorable relative attitude and repeat patronage.
The customer has high relative attitude, which also results in repeat patronage. Further, a high relative attitude influences considerably the long-term maintenance of loyalty. 2. 3. 3 Conceptualization of customer loyalty Dowling et al. (2003) claims that customer loyalty is such a complex concept, that there is no universally agreed definition about it. Yet, customer loyalty can be divided into three conceptualizations: I. Loyalty as primarily an attitude that sometimes lead to a relationship with a brand. Also seen as a single-brand loyalty – monogamy II. Loyalty mainly expressed in terms of behavior.
This is explained as divided loyalty to few brands – polygamy. III. Buying moderated by the individual’s characteristics, circumstances and/or the purchase situation. Primarily seen as weak loyalty or no loyalty at all – promiscuity. Monogamy This stage is explained by Dowling et al. (2003) as single-brand loyalty –monogamy. Customers have strong attitudes and beliefs toward the brand and are deeply committed to re-buy or re-patronize the specific brand now and in the future. Many researchers argue that attitudinal commitment is crucial in order to create ‘true loyalty’.
However, there are very few customers that are monogamous, i. e. 100% loyal. In practice, for example by using customer loyalty programs, the company should aim to escalate sales by strengthening the commitment and bond the customer to the brand. This can be done by enhancing the beliefs about the brand and focusing on emotional factors that drive the commitment (Dowling et al. 2003). Polygamy Dowling et al. (2003) argues that loyalty in this case is defined by the pattern of past purchases with only secondary regard to underlying attitudes toward the brand.
These customers, who have behavioral-loyalty to the brands, are considered to be polygamous –their loyalty is divided between a few brands. Polygamous consumers keep on buying the brand, not because of strong positive attitude towards it, but rather because it is not 10 Frame of reference worth the effort of searching for other alternatives, and since they are actually satisfied with the brand. Still, the satisfaction does not mean that the customers are committed to the brand since they would switch if the usual brand were out of stock or unavailable for some reason.
The majority of consumers are considered to be polygamous –they have split loyalty portfolios of habitually-bought brands. These costumers are less influenced of customer loyalty programs than ‘monogamous’ costumers are, but they still may participate in such programs. For managers to influence these customers, they should attempt to sustain their share of category sales by responding to competitors initiatives and avoiding stock run-outs and gaining growth by boosting market penetration (for instance, by guaranteeing wider distribution).
Under these circumstances, the customer loyalty programs may be designed to take the defensive approach by a bid to match competitors, but not as an intention to generate dramatic changes in customers’ attitudes and behavior (Dowling et al. , 2003). Polygamous loyalty is mistakenly confused with switching; therefore, the difference will be enlightened in the following section. Polygamous loyalty vs. switching A disloyal customer is one that switches brands or retailers after not feeling satisfied with the offer (Stone, Woodcock and Machitynger, 2000).
The dissatisfaction can be due to such things as price, brand, quality, service or the salesperson. Switching means that a customer would “once-and-for-all” switch from one brand or retailer to another. However, customers do not necessarily have to switch brand for good, this could also be a temporary change of brand or retailer, or they are simply consuming several brands simultaneously and the behavior would thereby be explained by polygamy (Dowling and Uncles, 1997). As previously discussed, it is common for customers to be a member of several loyalty programs.
An example of multiple memberships is the airline loyalty schemes, where surveys among European business airline travelers show that more than 80 percent are loyal to more than one scheme. Many times this might be seen as a problem, however according to Dowling and Uncles (1997) this is called polygamous loyalty and suggests that a customer can actually be loyal to more than one brand. Thus, the fact that a customer switches to a different brand does not have to imply that this customer will be disloyal and lost forever.
It could instead be a temporary switch caused by special circumstances such as special price deals, or that the customer’s usual brand was not in stock or perhaps that another brand was better suited for this special occasion. Customers are therefore not necessarily switching from one brand to another permanently, but rather their customer loyalty is divided between different brands (Dowling and Uncles, 1997). Promiscuity According to Dowling et al. (1997) weak loyalty or no loyalty at all could be justified by promiscuity of customers.
Strong attitude towards the brand is insufficient to determine the behavior because there are a number of factors that influence the buying behavior. These factors are divided into three main topics; • • • Individual circumstances –budget effects and time pressure Individual characteristics –desire for variety, habits and the need to conform Purchase situation –product availability, promotions, particular use occasion. 11 Frame of reference ‘Promiscuous’ customers might be a hard target for customer loyalty programs because their impact to affect demand is limited.
Indeed, the customer loyalty of these customers could be increased by responding to factors that determine the buying behavior, for example promotions, particular use occasions or extending the product line. 2. 3. 4 Conclusion of customer loyalty theories As can be recognized customer loyalty is a complex concept and it is hard to find a general definition about it. By comparing different theories, the authors have observed that customer loyalty often is determined by three different attributes; attitudinal-, behavioral- and situational loyalty.
Attitudinal loyalty contains emotional factors, positive and strong attitudes and beliefs toward a brand. Behavioral loyalty encloses overall satisfaction on the company’s performance overtime and situational or habitual factors that determines the repeat purchase behavior. Situational loyalty occurs due to lack of choices or switching costs, subjective norms and situational and individual factors. The authors have therefore chosen to link the different theories with the three attributes to clarify the connection between them:
Three Drivers of Retention Relative Attitude and Behavior Relationship The conceptualization of Customer Loyalty Attitudinal loyalty Affective commitment Loyalty Monogamy Behavioral loyalty Overall customer satisfaction Spurious loyalty Polygamy Situational loyalty Calculative commitment Latent loyalty Promiscuity Figure 4 The links between the theories 12 Frame of reference 2. 4 Consequences of customer loyalty An interesting and fundamental question for companies is why should customer loyalty be an objective?
Once again we fall back to the basic assumption of CRM; it is less costly to serve existing customers than to acquire new ones (Raulas, 2005; Dowling and Uncles, 1997). Reichheld and Teal (1996) verifies the effects of loyal customers on company’s profit from six different aspects: Price premium Referrals Cost Savings Annual Customer Profits Revenue growth Base profit Acquisition costs 0 1 2 3 4 Year 5 6 7 Figure 5 Why loyal customers are more profitable (Reichheld and Teal, 1996) Acquisition costs: Almost every firm needs to invest in acquiring new customers at some point of time.
The costs that arise from acquiring new customers can be based on tangible costs such as advertising costs and intangible costs, for example the time that managers and sales people use for persuading new customers. Whatever the business, you have to count all the expenses to find out what the true costs are of customer acquisition. Base profit: We can assume that in normal businesses, the price that a customer pays for the product is higher than its costs, which in turn create profits. This basic profit on purchases is called base profit.
The conclusion is that the longer you keep a customer, the longer you will earn the base profit, and consequently, the up-front costs of acquiring them are amortized over a large number of transactions. Per-customer revenue growth: As in most businesses, customer spending has a propensity to accelerate over time. This phenomenon is explained by the fact that an old customer becomes familiar with the store’s whole product line, and extends the purchases to include other product categories as well.
This implies that loyal customers spend more in the company and the relationships with them should therefore be reinforced. 13 Frame of reference Operating costs: As customers get more familiar with the company they will learn to be efficient. For example, when customers know the company’s products, they demand less information and advice from the employees which results in a direct cost reduction for the company. Over time, when you consider the number of customers, this collaborative learning between the customer and the company leads to productivity advantages that convert directly into lover costs.
Referrals: An additional advantage of long-term customers is that satisfied customers tend to recommend the business to others, so called positive word-of-mouth. For example, Lexus and many insurance agents claim that they get more new customers from referrals than from other channels. Furthermore, customers who recommend to others are perceived to be of higher quality –more profitable and stay in business for a longer period compared to those customers that usually respond to advertising or price promotions. Price premium: It is argued that old customers would pay higher prices than new customers.
This is partly because of new customers have to be attracted by offering pricediscounts or other kinds of introductory offers. The other explanation has to do with switching costs. Customers stick to a company because the costs of switching to another company would be too high. They will therefore, pay higher prices to avoid making a switch. Further, as old customers have been around for a longer time they get higher value from the relationship and are consequently less price-sensitive on individual items. To conclude, Reichheld et al. 1996) suggests that a lifecycle profit pattern for old, loyal customers is higher than for new customers due to accelerating spending over time, reduced operating costs, positive referrals and less price-sensitiveness. As company’s relationship with a customer lengthens, the profits rise. Relationship marketing puts emphasis on maintaining long-term relationships with customers. However, Reinartz and Kumar (2000) questions whether this only is beneficial to contractual relationships, or if it can be applied to non-contractual settings as well i. e. retail business, catalogue marketing.
Lifetime profit patterns can be detected fairly accurately in contractual settings, while in non-contractual settings the problem arises from consumers spreading their category expenses over several firms. Reinartz and Kumar (2000) conducted a study in non-contractual settings to test the hypothesis of the following claims that also Reichheld et al. (1996) pointed out: It costs less to serve loyal customers, loyal customers pay premium prices and loyal customers market the company. The findings were hardly supporting the basic assumptions of loyalty.
Reinartz and Kumar (2000) found out that there is no correlation between customer longevity and reduced costs. In fact, in some businesses they were more expensive to satisfy. There was neither any evidence that loyal customers would pay higher prices than other customers in consumer markets would. Moreover, some long-term customers were discovered to demand lower prices and were more price-sensitive than other spectrum of customers. Finally, the authors found intriguing results when scrutinizing whether loyal customers actually are prone to spread positive word-of-mouth.
Those customers who were considered as possessing attitudinal loyalty were more likely to be active word-of-mouth practitioners, while those who scored high on behavioral loyalty were more likely to be passive word-of-mouth marketers. The task for a company would be to identify the true apostles by looking at attitudes rather than behavior. 14 Frame of reference To wrap up Reichheld’s et al. (1996) and Reinartz & Kumar’s (2000) views on customer loyalty, they seem to have reached opposing conclusions whether loyal customers are profitable from a company’s perspective.
Reinartz and Kumar (2000) although mentions that profitability of loyal customers are very business specific and should be considered individually by each company. 2. 5 Research questions I. How can a customer loyalty program create customer loyalty? II. How loyal with regard to the theories are the frequent and heavy buyers, which INTERSPORT estimates as their loyal customers? III. Are there reasons for companies to question if loyalty is an appropriate objective of the customer loyalty programs, and if yes – why? 15 Method 3
Method In this chapter the authors will present the approach that has been taken in order to collect and analyze data for this thesis. Some general approaches will be discussed, followed by the presentation of the chosen method. Finally, the chapter presents a depiction of how the information is interpreted and analyzed to assure the quality of the research. 3. 1 Quantitative and qualitative methods Research is a process of solving a problem by finding information and investigating the unknown (Lancaster and Reynolds, 2004).
In this chapter the authors will discuss different methods of research and present how the authors are planning to carry out this study. There are many different methods of conducting research, and two well-known methods of doing this is qualitative and quantitative research. Quantitative research involves data collection and can most often be described in a numerical form and then be summarized and arranged in tables (Have, 2004). Some of the most common ways of collecting quantitative data is through questionnaires, interviews, observations and by using existing materials (Thomas, 1997).
These structured, standardized techniques of quantitative research are typically compelled into highly useful set of statistics (hard data) (Chisnall, 1991). Qualitative research on the other hand could be explained as more exploratory and focused on getting a deeper understanding of customer’s motivations, behaviors and attitudes and is trying to answer the questions ‘how’ and ‘why’. The findings of qualitative research are portrayed as ‘soft’ data in comparison to hard data from quantitative research and they are usually complementary to each other rather than supplementary (Chisnall, 1991).
The real meaning of qualitative research is that it is diagnostic. It seeks explanations of why certain kind of behavior take place and it typically probes rather than counts. Further, qualitative data is more often presented verbally as opposed to numerically as in the case of quantitative research (Have, 2004). The most typical techniques of qualitative research are in-depth interviews, group discussions and focus groups, which are derived from small non-random samples. 3. 1. 1 Choice of method
This thesis is based on qualitative research, because we believe that qualitative methods will answer the research questions in the most suitable way. The primary data is collected through interviews with both the company and its customers. We wish to find answers that are explaining certain kind of behavior and attitudes of the customers as well as the company’s motivations for certain decisions. The only way to uncover this is to use qualitative methods. The concept of loyalty that is covering the whole thesis is very complex and perceived differently depending on the individuals.
To discover how the company and its customers perceive loyalty, it is necessary to conduct in-depth interviews in order to fully understand diversity of the concept. Further, we consider that quantitative methods would be insufficient to reveal the innermost attitudes and behaviors of the targets of the research. 16 Method Depending upon the situation, it might strengthen the quality of the research if other research methods are used in combination with qualitative methods. Case study is one method that can be used as a complement to qualitative study (Yin, 2003) and will be explained in the following section. 3. 2 Case study
Creswell (1994, p. 61) defines a case study as “a single, bounded entity, studied in detail, with a variety of methods, over an extended period. ” Case study can be considered as ‘non-pure’ method compared to other research methods, because the data is normally collected from multiple sources and several methods are being used. It is quite typical to combine such methods as surveying, interviewing, participant observation and archival research in one case study (Maylor and Blackmon, 2005). Previously, it has been popular among business and management researches to use a case study method for both practical and theoretical reasons.
Maylor and Blackmon (2005) suggest that if you want to carry out a limited or exploratory study, it is particularly useful to apply a case study. Exploratory study means that data collection and analysis occurs prior to theory development and is tested against the theory. However, Yin (2003) argues that a view of case study just being an exploratory tool is incorrect. Case studies can be both descriptive and exploratory. Descriptive studies attempt to reveal patterns and connections of the described phenomena that may otherwise go unobserved.
In addition to exploratory and descriptive studies, case study method can be used to answer analytic research questions i. e. ‘how’ and ‘why’ (Yin, 2003). It is a suitable method for both to test and to build theory. 3. 2. 1 Choice of case study A single case study concentrates on a single unit of analysis, for example a company. It might be interesting to focus on a single internal problem of a company or a case that is unique for a certain firm (Maylor and Blackmon, 2005). We chose to apply a case study method, because we wanted to find answers to analytic research questions ‘how’ and ‘why’ and to test theory as Yin (2003) suggests.
The first step in conducting a case study is to select an appropriate target as is implied by Cassell and Symon (2004). The selection can be based on purposeful sampling method, which means that the researcher intentionally chooses the targets that can provide the most relevant information to the issues that are studied (Maxwell, 1996). Firstly, we wanted to apply the theories on a single case study to be able to get more in depth information rather than selecting several companies. Secondly, since we wanted to study customer clubs, it was apparent that a retail company would be suitable for that purpose.
We had earlier professional contacts with INTERSPORT, which we also knew had an established customer club since 1996. This customer club had been functioning successfully and had been further developed and improved during these years. We also believe that the chosen company could have been almost any retail company with an established customer club, because retail companies have faced the same challenges during the last decades of customers getting more demanding and competition getting more intense on the consumer markets.
The case study company, INTERSPORT is presented in more detail under the section of Empirical findings. 17 Method Within the case study, we have interviewed INTERSPORT’s Customer club coordinator Pernilla Nimmermark and the owner of INTERSPORT Jonkoping, Patrik Linddahl. In addition, to get the customers’ perspective we chose to conduct interviews with the selection of INTERSPORT Jonkoping’s customers, which will be further explained in the following section. 3. 3 Interviews According Cassel and Symon (2005) interviews are the most frequently used method of data collection in qualitative research.
The objective of any qualitative research interview is to comprehend the topic that is researched from the interviewee’s perspective and to understand how and why they reached this particular perspective. Interview types that fit the qualitative research label are referred to as ‘depth’, ‘exploratory’, ‘semistructured’, or ‘un-structured’. Further, qualitative research interviews should preferably be either semi-structured or unstructured because this allows the researcher to be flexible and get hold of as rich data as possible.
Cassel and Symon (2005) suggest that the researcher should prepare an interview guide that leads the conversation throughout the interview and probes, which can be used to obtain more details to the issue that is studied from participants. 3. 3. 1 Choice of interview The interviews for this thesis were conducted in a semi-structured form and by using interview guide (appendix) in accordance with Cassel and Symon (2005). Within the case study, we have interviewed INTERSPORT’s Customer club coordinator Pernilla Nimmermark on two separate occasions and the owner of the INTERSPORT Jonkoping, Patrik Linddahl.
In addition, to get the customers’ perspective we chose to conduct 20 interviews with selected members of Club INTERSPORT who are customers in INTERSPORT Jonkoping. The interviews were carried out through telephone and each taking between 10 to 15 minutes. In the next section, the authors will explain how the selection of the customers was made. 3. 4 Selection For the selection of the interviewed customers we yet again used purposeful sampling method, which means that the researcher intentionally chooses the targets that can provide the most relevant information to the issues that are studied (Maxwell, 1996).
The selection of the members for the interviews was based on the customer data that INTERSPORT provided. We received an excel file consisting of some specific information on customer club members in the Jonkoping area. The file included names, addresses, sexes, personal identification numbers, club card numbers, the amount of purchases and the number of visits during the years 2003-2005. It also contained information whether the members were active or passive and when the members began the membership, and whether they had an extra card.
For the selection we were basically interested in two different things, the monetary value of the purchase and the frequency of the visits. Most importantly, the selected customers would represent loyal customers from the company’s perspective, because we wanted to find out if the loyal customers actually were loyal from both attitudinal and behavioral aspect and if they in fact were also loyal to several companies. The first group would represent highly loyal customers from the behavioral aspect i. e. they were 18 Method eavy buyers as well as frequent buyers. The second group would characterize frequent buyers, but not heavy buyers as compared to the first group. We knew that the first group spent a lot of money each time they purchased and were probably loyal to the company from that aspect. The second group was frequent buyers, who can also be seen as loyal but they were not necessarily as heavy spenders as the first group. We are not going to distinguish between these two separate groups, but treat them as one unit loyal customers.
The excel file contained information of more than 15 000 customers, we needed to arrange the customers by certain criterions and sort out the ones we found would not fit our standards. The first group would contain both heavy and frequent buyers, so the first criterion was that the monetary value of the purchases needed to be over 10 000 SEK per year. Now we needed to make sure that the customers had been purchasing frequently, because we believed that a customer who has bought just on one occasion could not be regarded as loyal. It might have been that the large purchase was due to some other occurrence.
The next criterion was that the customer who had spent more that 10 000 SEK per year, needed to have visited the store more than 10 times a year. From this group we selected 5 male and 5 female customers for telephone interviews. The second group was selected similarly, although, this time we wanted to reach the frequent buyers. First condition was that the customer would have needed to visit the store more than 15 times a year. Moreover, the customers purchases would not exceed 10 000 SEK because we did not want the selection to overlap with the first group.
From these customers we selected 5 males and 5 females for the telephone interviews. In total, we cross-examined 20 Club INTERSPORT customers, who could be considered as loyal from the company’s perspective. The interviewees remain anonymous due to secrecy issues and furthermore, we believe that it is not of relevance for the study to disclose the names of the interviewed customers. 3. 5 Data interpretation and analysis According to Stake (1995), there are two strategic ways that can be used to reach new meanings about cases; direct interpretation and categorical aggregation.
Direct interpretation in qualitative research context means that the researcher concentrates on the instance, trying to pull it apart and put it back together again more meaningfully. Categorical aggregation, on the other hand, means that issue relevant meanings will emerge from the collection of instances. Many times studies are searching for patterns i. e. search for meaning. Depending on the search for pattern, both category aggregation and direct interpretation can be suitable. Sometimes the patterns are known in advance while other times patterns will emerge unexpectedly from the analysis.
Usually, the researcher is trying to understand a case by scrutinizing episodes or text materials in order to find correspondence. The researchers are trying to comprehend behavior, issues and context pertaining to the particular case. If there is a time-shortage, the pattern or the significance can be tried to be found through direct interpretation, by simply asking, “What did that mean? ” For more complex issues, the researchers need to be skeptical about the first impressions and simple meanings and take more time to reflect and triangulate (Stake, 1995). 19 Method
The authors try to find patterns and meanings for the phenomena of interest. This is done by analyzing the empirical material from INTERSPORT and from its customers as an attempt to find correspondence to the theories. The authors have strived to make as correct interpretation and analysis as possible by carefully weighing up the answers and their relevancy to the theories. We should further acknowledge that some of the answers from the customer interviews had to be interpreted by the authors since the customers did not always give direct yes/no answers, but rather the answers were describing in their nature.
In these circumstances, the authors used direct interpretation to solve what the particular answer meant. The analysis part is following the structure of the theoretical framework with an emphasis on the research questions. 3. 6 Quality of the qualitative research A study is valid when it analyses what it is intended to analyze (Patel and Davidson, 1994). In this thesis the authors are analyzing whether customer loyalty clubs truly creates loyalty, meaning that the authors need to make sure that the questions and observations are investigating the right thing.
Sometimes it might be difficult to assure validity if the research tries to measure something that is not tangible, such as attitudes. In qualitative studies the validity does not solemnly concern the data gathering but rather touches upon the entire research process (Patel and Davidson, 1994). Further, it is not viable to validate findings through probabilistic methods since qualitative studies cannot use the methods of random sampling (Mariampolski, 2001). Each and every qualitative study has its unique characteristics, which implies that it is difficult to set up some general rules or procedures to secure the validity.
However, there are certain means of guaranteeing that conclusions of qualitative studies can reach valid results. Triangulation is a commonly used concept in the context of ensuring validity in qualitative research. The validity of data collection can be strengthened by using different techniques such as interviews, observations and diaries among others. Also, the data can be collected from different sources (Patel and Davidsson, 2003). For this study the technique that is used is semi-structured interviews.
We believed it was also important to use different sources for the interviews in order to make correct interpretations and to increase trustworthiness. Thus, the same questions with some modifications were posed to both the Customer club coordinator, Pernilla Nimmermark and the owner of the INTERSPORT Jonkoping, Patrik Linddahl. We suspected that they might have different views on the topics since they are working on different levels of the organization. Mariampolski (2001) explains further that in order to validate the conclusion through triangulation, the questions can be asked in different ways at various points.
When it comes to interviews with the customers, our intention has been to formulate several questions from different angles to investigate the phenomenon of interests. Patel and Davidson (2003) emphasize the importance of giving the reader a chance to evaluate the validity of the study in case the study is based on interviews. The authors can write quotations from the interviews which enables the reader to make own judgments. In this thesis, we have chosen to provide summary of the interviews and some quotations, so that the reader would be able to verify the interpretation of the authors.
Reliability is the degree
