Loyalty program membership: A study of factors influencing customers' decision Introduction

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1 Loyalty program membership: A study of factors influencing customers' decision Introduction Retaining customers is more profitable for a company than acquiring new ones as the cost of retaining existing customers is far less than the cost of acquiring others (Reichheld and Sasser, 1990). Retaining customers not only helps in reducing marketing expenses (Duffy, 2003), it also helps in improving business through increased customer purchases - cross-buying and up-buying (Reichheld, 1996). Existing customers have also been found willing to buy things at a premium (Reichheld and Sasser, 1990). Customer retention is therefore, an attractive proposition; however, retaining customers may be easier said than done. In a recent study undertaken by Colloquy (2011, a publication of LoyaltyOne), it was found that only one in five customers (Indian), was loyal to his/her favourite brand. Given the benefits of retaining customers, companies may be seen using various customer retention tools, like - promotions, loyalty programs etc. for maintaining existing customers. Loyalty programs that were introduced with an intention of rewarding customers for their continued patronage and purchase over time (Kumar and Reinartz, 2008), help in reducing customer switching by forming exit barriers (Nunes and Dreze, 2006). These programs have been found to induce resistance to competitors promotions, help in the spread of positive word of mouth, and thereby encourage customers to join the program (Uncles, Dowling and Hammond, 2003). Furthermore, loyalty programs that are designed with a long term focus may also improve customer loyalty by strengthening customer-firm relational bonds (Ou, Shih, Chen and Wang, 2011). In the light of these advantages, it is not surprising that businesses across sectors - retail, hospitality, airlines, banks, travel companies etc. are seen offering membership of loyalty programs to their customers. Popular loyalty programs in India include - First Citizen program of Shoppers Stop, Inner Circle membership of Landmark Group, Jet Privilege Program of Jet Airways, etc. Literature Review Review of available literature reveals that several investigations have been made to improve the understanding of loyalty programs in general and their effectiveness on customer retention and loyalty in particular. In a study conducted in a convenience store context, Liu (2007) found that loyalty program membership led to an increase in purchase levels among light and moderate buyers and helped improve their loyalty towards the store. In an investigation involving Dutch households Leenheer, van Heerde, Bijmolt and Smidts (2007), found that loyalty program membership impacted customers share of wallet with the patronized grocery store in a small yet significant manner. A mixed effect of loyalty program on customer purchase behaviour towards participating brands was reported by Sharp and Sharp (1997) in their study of customers or members of a large scale loyalty program. Another much investigated area in the study of loyalty programs is their structure and organization. Five different types of loyalty programs, namely - reward program, rebate program,

2 appreciation program, partnership program and affinity program were identified by Johnson (1998) on the basis of their structure and organization. As per Johnson, each of these loyalty programs has a unique structure that can be used by businesses for achieving specific goals. In another research investigation by O Brien and Jones (1995), five key elements were identified that need to be considered when designing loyalty programs. These elements include - cash value of reward, choice of reward, aspirational value attached to reward, relevance of reward to the customer and convenience. Hoffman and Lowitt (2008) stated that loyalty programs designed with a short term orientation and not aligned to customers interest would cause customers to consider switching to competitor program/s that offered similar benefits. In a study undertaken by Noble and Philips (2004), the authors found that customers reject loyalty program memberships out of their concern for time, unattractive program benefits and perceived personal losses such as - loss of social status or privacy. Loss of freedom in choosing brands and presence of contractual bonds like minimum purchase levels etc. also discouraged customers from accepting loyalty program memberships (Wendlandt and Schrader, 2007). In a study of grocery store customers Demoulin and Zidda (2009) found that perception of loyalty program advantages, it s complexity, customers proximity to the store in question, and number of loyalty cards in their possession influenced the acceptance (or rejection) of loyalty program memberships. The researchers also found that customer loyalty in terms of attitudinal loyalty (customers disposition towards the store) and behavioural loyalty (actual purchases made from the store) also influenced the chances of a customer accepting the membership of a loyalty program. Demoulin and Zidda (2009) were of the view that attitudinal loyalty measures like commitment to the store influenced customers decision to accept or not accept membership of loyalty programs far more than their behavioural loyalty towards the store. While the work done by scholars has helped identify some factors that influence the acceptance of loyalty program membership, review of available literature did not reveal any study that provides a holistic exploration of the factors influencing customers decision to accept or not accept the membership of loyalty programs. Given that such an understanding could be of much use to both academicians and practitioners an attempt has been made in the present study to: 1. identify factors that influence the decision of Indian customers to accept/not accept membership of a loyalty program 2. understand the role played by and the significance of the identified factors The study finds relevance in the current situation where a multitude of loyalty programs are offered to customers, making them more selective and careful while accepting the membership of these programs. Methodology A qualitative study comprising of 25 in-depth interviews was conducted to gain a deeper understanding of the factors that influence customers decision to accept or not accept the membership of a loyalty program. A judgment sample of the respondents was selected on the basis of their familiarity with and knowledge of loyalty programs. The final sample comprised of 10 men and 15 women, aged 23 to 55 years belonging to different cities of India. While most of the respondents were members of some loyalty programs, few respondents did not have membership of any such programs. All the respondents had however, been offered membership

3 of loyalty programs sometime in the past and were knowledgeable about the same. Respondents who did not have membership of any loyalty program were included in the study primarily to understand the reasons why they declined membership offers. All the interviews were conducted face to face, except four that were performed over telephone. Respondents (with loyalty program membership) gave reasons for accepting loyalty program membership, and provided detailed description of the benefits, privileges, rewards membership fee, rules and regulations etc. In a question posed to them respondents were asked whether they would accept or reject the membership offer of yet another loyalty program. They were asked to provide detailed description of all possible reasons for acceptance and rejection of such an offer. The interviews were concluded after 25 respondents as saturation was reached in respondents discussions. All face to face interviews were recorded while detailed notes were made for the ones conducted over phone. Transcripts of all interviews were prepared immediately after the completion of each session. Once prepared all transcripts were read, re-read and examined several times to identify key words and phrases. Following the categorization process of Lincoln and Guba (1985), the phrases that reflected similar feelings and sentiments were organized into distinct categories. Five main themes namely Purchase, Attitude, Concerns, Loyalty program characteristics and Sales persons expertise and several sub-themes corresponding to each of these were identified (see Figure 1). Excerpts from customer interviews that reflect and support each of these themes and sub-themes are provided in Table 2. Conclusion The present study tried to understand the factors that affect customers decision to accept or not accept the membership of a loyalty program, through a qualitative study, comprising of 25 indepth interviews. The five main themes that emerged from the study are - Purchase, Attitude, Concerns, Loyalty program characteristics and Sales persons expertise. The findings from this research may help firms to structure loyalty programs that are readily accepted by customers. However, while the factors revealed from the present study are important, they are essentially preliminary in nature. A more extensive quantitative study would be undertaken in future to validate the findings of the present study.

4 Appendix 1 Figure 1: Acceptance/ Rejection of Loyalty Program Membership Acceptance/Rejection of Loyalty Program Membership Purchase Attitude Concerns Loyalty program characteristics Sales persons expertise *Frequency *Value *Toward store/brand *Towards loyalty programs in general *Privacy *Convenience *Loss of freedom *Membership *Policy *Rewards *Knowledge *Proactiveness Appendix 2 Table 1: Respondents Comments Purchase - I don t find much use in it (loyalty program) because to get anything redeemed, you must accumulate lots of points. The chances of me shopping in Lifestyle for that much amount will never happen. I go to Lifestyle maybe once a year or twice a year. My purchase there will in all be worth 2000 rupees. Let s say, I might get 10 points from that but to buy anything of any value you might need at least 200 to 300 points. For me because I don t shop that much, I don t earn enough points to spend it. (Female, 33yrs.) Attitude - Any place I shop in has to meet certain basic criteria in terms of cost, quality if they don t, I will not stick with them If these basic criteria are met, I will consider their loyalty program. (Male, 35yrs.) - I think it s a pain. I am not interested in loyalty programs. There is no immediate reward that you get. You have to acquire points for quite some time. Every purchase you make, you get minimal points. Maybe after your nth time you get something free I would prefer something which is instant. (Female, 27yrs.) Loyalty program characteristics - I did pick up a loyalty card from a shoe store recently. They had a 5% cash back offer in terms of reward points straightaway on whatever you purchase. I thought that was a good scheme and I felt that there was a good chance of me going back there because of the same reason. (Male, 35 yrs) - I would never take a card if I had to pay for it because every store these days wants to offer you something and you never really know if you going to use it. Most of the time what happens is, when you redeem those points, you get something very useless like a water bottle which makes you happy you got something but it s

5 really meaningless. It doesn t make sense. I wouldn t pay for that anyways. (Female, 24yrs.) Concerns - I obviously don t want to take that card because it goes into my wallet and makes it even more bulky. (Female, 24 yrs.) - One of the reasons that I don t choose a loyalty card is that I have to give my details. I know that the details are sold and your phone numbers are sold for advertising. This is one of the main reasons why I don t opt for a card as it will have all my details like my , my mobile etc. (Female, 33 yrs.) - I am not loyal to any particular store. I don t want to restrict myself because when you have the card you kind of feel that you have to go back again. (Female, 23 yrs.) Salespersons expertise - Even if I am slightly hesitant, there are instances when I remember that even if there s a form filling to do, they (sales persons) will do most of it and they will give it to me saying you just have to fill up your name, e- mail, address etc...for Westside that s what happened and I am not even a frequent shopper with Westside. (Female, 25 yrs.)

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