A conceptual model for exploring impact of loyalty programs on consumer purchase behavior: with special reference to Indian apparel retailers

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1 A conceptual model for exploring impact of loyalty programs on consumer purchase behavior: with special reference to Indian apparel retailers Author s Name: Dr. Ruchi Jain Author s Name: Sakshi Singhal Department: Amity School of Business Name of Organization: Amity University, Uttar Pradesh, India ABSTRACT A loyalty program is an important element of customer relationship management for firms related to the retailing sector, apparels, airlines, and hotel industry. As there is proliferation of loyalty programs over the wide range of categories, this is little research that also focuses on loyalty programs and measurement of its impact on consumer purchase behavior. The need of measuring the impact of loyalty programs is that loyalty programs acts as incentive schemes which benefits consumers based on the repeated purchases made by them. The loyalty program encourages the consumers to make decisions more dynamically while making repeated purchases with the firm. The loyalty programs provides rewards on cumulative purchasing which enhances customer retention and encourages them to make repeated purchases by proving incentives which is beneficial to them. In this project, impact of loyalty programs on the consumer purchase behavior is analyzed by studying the benefits of loyalty programs for the customers as well as for the company, by studying the different type of loyalty programs offered by the apparel sector players like globus, lifestyle, pantaloon, shoppers stop and Westside. The impact of loyalty programs is studied by finding out key factors which impact the consumer loyalty and their purchase behavior. Key Words: Loyalty programs, Consumer purchase behavior, Rewards, Loyalty Cards, Customer satisfaction, Customer loyalty 1. INTRODUCTION 1.1 CONCEPT OF LOYALTY PROGRAMS Loyalty Programs can be defined as a program that allows consumers to accumulate free rewards when they make repeated purchases with a firm and therefore encourages the consumers to be loyal to the firm. In marketing terms, a loyalty card is a plastic or paper card, which is quite similar to the other financial cards in visibility and that, identifies the card holder as a member in a loyalty program. Loyalty Cards typically have a barcode or magstripe that can be easily scanned when it is swapped at the particular stores. Loyalty cards can be in the form of small key ring cards which are often used for convenience in carrying and ease of access for the consumers. Loyalty programs are predominantly run by retailers and the service industry. Companies typically have several goals when launching loyalty programs, all of which are focused on generating greater profits from the 164

2 program s members. These goals include Improving knowledge of the customer Leveraging that knowledge to increase the sales of undersold and/or highly profitable products/services Increasing customer retention and purchase frequency Loyalty cards are the easiest and cheapest way of running the loyalty programs. This type of loyalty programs is more applicable in organized retail sector. It is special type of scan able card which can be swiped at the time of purchase. Loyalty cards are durable and cheap. A loyalty card is a mechanism for identifying and rewarding the loyal customers in a way to make them feel special and rewarded. The various types of cards are: Point cards, multi retailer cards, co-branded cards, store cards etc. The customers are awarded with points according to their purchase on each transaction under loyalty card scheme. The points collected can be further used as rewards which can redeemed at future purchases as discounts, gifts etc. The retailer or group of retail shop may issue a loyalty card to a consumer which can be used as identification to the retailer. By presenting the card, the consumer or purchaser is typically entitled to either a discount on the current purchase, or an allotment of points that can be used for future purchases. It is largely influenced by consumer s evaluative response of the value perceived of an offer-a loyalty program. The card issuer or the retailer requests the customers seeking the issuance of a loyalty card to provide some amount of identifying or demographic data, such as name and address which is always confidential to the firm and non-disclosure by the stores. The stores might use the consumer s data as part of its marketing research. These cards can be used to determine, for example, consumers birthday date so that they can influence them to shop from their stores by giving them discounts on their birthday. 1.2 FIVE TYPES OF LOYALTY PROGRAMS 1. Rewards: Award points for purchases. Points can be exchanged for rewards. This type of loyalty program is used when a company wants to capture new consumers and differentiate the brand from the competitors. Examples: Titan as titan users accumulates points of their purchase and can exchange it for a discount or for a gift like Rs. 25 is equal to the 1 point. American Express card users accumulate points they can then use for gifts, travel, or transfer to an airline Frequent Flyer program. 2. Rebate: Award a gift coupon redeemable for the next purchase, whenever the consumer reaches a certain spending or shopping level. When companies have a wide range of products then this reward program can be used to motivate new incremental purchases. 3. Appreciation: Offer a rebate, not the cash then the result will be incremental visits and sales. In this type, consumers are offered with the appreciation reward of the same company. Airlines, hotels, phone companies use this to accumulate points for additional services within their own brand like Seat upgrades, free tickets, hotel stays at different locations, etc. 4. Partnership: Reward the consumer s accumulated purchases with a partner s products or services. Example: Tata s Westside, as they offer a discount if consumers make payment above Rs with ICICI debit card. 165

3 5. Affinity: An affinity program offers special communications, value added benefits and bonuses and recognition as a valued consumer. This is used where rewards are no longer needed to cultivate a long term relationship, just as a reminder to learn more about companies other products and services. Examples: Bank s Debit cards, gold and silver debit cards. 1.3 CONSUMER PURCHASE BEHAVIOR The actions that a person takes while purchasing and after purchasing the particular brand or the product includes the mental and social processes that follows some particular actions like:- Why should I choose this product or brand over the other? How should I make choices? What value does this product or brand provides? Consumer purchase behavior includes the purchase decision process which consists of five stages by which a consumer passes through in making choices while buying the particular product or the service. Consumers make many buying decisions every day. Most large companies research consumer buying decisions in great detail to answer questions about what consumers buy where they buy, how and how much they buy, when they buy, and why they buy. Marketers can study actual consumer purchases to find out what they buy, where, and how much. Figure-1 Pre-Purchase Behavior the behavior that is reflected by the consumers during information search about a product or a brand or a service like from where to buy, which brand to buy is known as pre-purchase behavior. Purchase behavior- the behavior that is reflected by the consumers at the time of purchase of a product or a service like why to buy, usage is known as purchase behavior. Post Purchase behavior- the behavior that is reflected by the consumers after the purchase of a product or service from a particular brand which also includes the after sales services, reparability etc is known as postpurchase behavior. 2. REVIEW OF LITERATURE Preeta H.Vyas and Piyush K.Sinha (December 2008 ) has concluded that as acquiring new customers is getting costlier day by day, business organizations have offered continuity/loyalty programmes to retain/reward existing customers and maintain relationships. The premise of CRM is that once a customer is locked in, it will be advantageous to both the organization as well as customer to maintain relationships and would be a win-win situation 166

4 for both. Consumers find it beneficial to join such programmes to earn rewards for staying loyal. Through loyalty programmes, firms can potentially gain more repeat business, get opportunity to cross-sell and obtain rich customer data for future CRM efforts. Grahame R. Dowling and mark uncles(1997) has concluded that in a bid to strengthen relationships with their customers marketers are showing renewed interest in customer loyalty programs. Research on normal patterns of loyalty in established competitive markets suggests that in many cases it is hard to obtain exceptional advantages through the launch of a loyalty program. Also, competitive forces tend quickly to erode any differential gains. A loyalty program must enhance the overall value-proposition of the product or service. This in turn will help to motivate buyers to make the next purchase of a product, and therefore support other aspects of the firm s offensive and defensive marketing strategy. Lois O Brien and Charles Jones (May-June 1995) has concluded that many of the rewards and loyalty programs in the marketplace today reveal a limited understanding of customer needs and desires. From a customer s perspective, five elements determine a program s value. They are cash value, choice of redemption options, aspirational value, relevance and convenience. Few programs today offer all five, but companies that want to play the rewards game should be sure their value measures up to customer s alternatives. Youjae Yi and Hoseong Jeon (2003) have concluded that the results indicate that processes underlying the effects of the loyalty program on customer loyalty are different depending on involvement. In the highinvolvement condition, direct rewards are preferable to indirect rewards regardless of reward timing. In the low-involvement condition, immediate rewards are more effective in building a program s value than delayed rewards. This means that delayed rewards such as a mileage program can be justified in the high-involvement condition as long as they are linked with value-enhancing rewards. In the low-involvement condition, there may be a conflict of interest between the customer and the program sponsor, because the customer may be concerned with only the reward schedule and not the reward type. In cases of low involvement, immediate rewards such as lotteries are recommended because customers may purchase to receive incentives. Byron Sharp and Anne Sharp have mentioned about the Comparison between price promotion and loyalty programs in terms of loyalty. The differing effects of a loyalty program and a price promotion on repeat-purchase behavior in the same market. The price promotion also generated excess loyalty but less than the loyalty program. The price promotion generated a greater, but temporary, market share gain. Yuping Lu (2007) has concluded that despite the prevalent use of loyalty programs, there is limited evidence on the long-term effects of such programs, and their effectiveness is not 167

5 well established. Using longitudinal data, the study shows that consumers who were heavy buyers at the beginning of a loyalty program were most likely to claim their qualified rewards, but the program did not prompt them to change their purchase behavior. In contrast, consumers whose initial purchase levels were low or moderate gradually purchased more and became more loyal to the firm. For light buyers, the loyalty program broadened their relationship with the firm into other business areas. Figure ANALYSIS AND DISCUSSION Loyalty Programs are a unique business model, as they provide significant benefits for all three stakeholders at the same time; customers, program owner and program partner. Customers can redeem points that were accrued for everyday spending and will therefore experience a discount. The program owner will either secure existing business or will experience new and incremental business. The same benefit goes to the partner of a program. They will take advantage from a larger customer base, making incremental business as well. 3.1 MONETARY PROGRAMS 168

6 Cross marketing opportunities 3.2 BENEFITS OF LOYALTY PROGRAMS Table-1 All of the benefits discussed to this point lead to a loyalty program s key goal and most important metric of success: improved profitability. Greater profits are a result of: Profitable customer retention Higher prices paid for unique products/services Increased average purchase size Decreased marketing and systems costs Decreased unsold expired inventory Figure-3 Benefits for Benefits for companies that customers using offer Loyalty Program Loyalty Program Saving Money Identification of customers (Enabling deeper relationship marketing) Risk is Reduced Identification of customer behavior-who buys what, when, where, how much, how etc. Convenience factor Customer Tie-in Ease of payment Special Increased sales volume offers/discounts for Card holders Feeling of Belonging Damage to competitors and Membership Possibility of receiving other financial services Differentiated products and services from competitors Member Magazines Switching barriers are created Satisfaction from the company Obtain rich customer data for future CRM efforts In this above graph, it shows that with the loyalty programs companies are able to differentiate its products and services over time with other competitors products and services which is a benefit for a company to offer loyalty programs to the consumers. 3.3 LOYALTY PROGRAMS IN APPAREL SECTOR Today, the stores have started offering special discounts to the consumers who join their loyalty programs. For instance, Lifestyle has a loyalty program know as The Inner Circle while Westside has Club West as their 169

7 reward or loyalty program scheme. The pantaloon has Green Card and Shopper s stop offers First Citizen to encourage the consumers for repeat purchases. Some stores like Lifestyle, Westside, Pantaloon or Titan provide their loyalty or membership cards when the customer buys for a total of Rs 2500 or above. Few companies works in tie-ups with certain banks to increase the effectiveness of loyalty programs like First citizen Citibank Card and ICICI Bank s Tie-ups with Big Bazaar and also the Westside. In keeping with the Group s tradition of making every shopping experience rewarding and memorable, The Inner Circle Landmark Group s Loyalty program allows members, to enjoy exclusive benefits and privileges such as reward points and exciting offers. The Inner Circle is today recognized amongst the leading Loyalty Program in the country with an ever increasing base of customers. The card is accepted across all Landmark Group Stores in India including Lifestyle, Home Centre by Lifestyle, Max Fashion, Splash, Bossini, SPAR Hypermarket, Polynation Food Court, Gloria Jean s Coffees & The Yellow Chilli chain of restaurants. Figure-4 program club West Circle Redeemable Y Y Y Y reward points Updates Y N Y Y Exclusive Y N N Y cash counter Free Y N N Y parking Valet Y N N N parking Home Y N Y Y delivery of altered goods Special N N Y N occasion discounts Exclusive Y Y Y Y sale *NOTE: The benefits are offered by different retailers at different levels (i.e. Gold, Silver or platinum) 3.4 FACTORS WHICH INFLUENCE LOYALTY ARE:- Table-2 LIST OF THE BENEFITS OFFERED THROUGH LOYALTY PROGRAMS:- Particulars Shopper s Pantaloons Westside Lifestyle Stop Loyalty First citizen Green card Club Inner Satisfaction that a consumer feels from prior purchase experience with a retail outlet motivating a consumer to come to the store again. Switching barriers gets created when once a consumer becomes a part of loyalty program and if leaves it then all the accumulated points get lost. 170

8 An interpersonal relationship is developed with the employees working in the particular store when a consumer visits the retail store frequently which helps in strengthening loyalty. Attractiveness of alternatives, it happens when there is opening of a new outlet closer to the consumer then consumer get attracted to that store and he will look at the benefits of loyalty programs of both the alternatives then only he will decide he should stay loyal or switch. 3.5 FOCUSING ON CONSUMER APPRAISAL The key characteristics of successful loyalty programs and has identified five key factors of performance which are value, choice, simplicity, aspiration and relevance. Figure-5 Consumers perceive two types of utilitiesfunctional utility by looking at its price and performance or value perceived with the dealing of the firm and Symbolic utility is certain segment of consumers stay loyal to the premium brands as it helps in self concept projection, status or group identification. Consumers who are price sensitive looks for price as a determinant attribute which leads to loyalty. Once the consumers commit themselves to a store, a bond gets created which make them insensitive to the price and competitor s offers. The rewards which are psychological, economical and sociological in nature leads to greater trust and commitment and develop long term relations. 3.7 IMPACT OF LOYALTY PROGRAMS ON CONSUMER PURCHASE BEHAVIOR AND INCREASED REVENUE PER CUSTOMER Figure-6 Loyalty Programs need to offer a minimum value in terms of a discount factor, to be considered as attractive. Perception also plays a vital role in the customer appraisal. Programs need to be simple and relevant to many potential customers. 3.6 RELATIONSHIP BETWEEN LOYALTY AND CONSUMER BEHAVIOR: Consumers show committed behavior towards the loyalty as they perceive different benefits from being loyal. In the above figure, it is explained that consumer loyalty and consumer profitability results from consumer purchase behavior. The consumer profitability has to start with consumer purchase behavior; if the consumer shows the positive behavior then it will lead to consumer 171

9 satisfaction, trust and commitment. If the consumer is satisfied then he will be committed to that organization and will be loyal which will increase consumer profitability of the organization. Figure INCREASED REVENUE PER CUSTOMER Traditional marketing strategies often incorporate discounting prices on products to increase market share and revenues. However, price reductions can easily be matched by competitors, leading to a general deterioration of revenues across competing companies. Frequently, there is little to no benefit to this pricing game as market shares are often not affected in a significant manner, yet each company takes in less money for its products or services thus resulting in lowered margins. To avoid a ruinous strategy for increasing or maintaining market share, some industries have introduced loyalty programs, which attempt to increase market share by attracting repeat customers, knowing it is less expensive to retain a customer than to gain a new one. Loyalty Programs allow to directly link additional sales to individual program members. The program also allows for a variety of correlative measures like enrolment rate, call volume, activity rate, etc. These metrics serve as indications for acquisition, retention, income, price realization and marketing savings. Increasing customer retention significantly improves a company s profitability and thus means the positive impact of loyalty programs. According to Frederick Reichheld of Bain & Company, a 5 percent increase in customer retention results in a 25 percent to 100 percent increase in profitability. There are several sources of these additional profits, which Reichheld breaks down in price premium, referrals, Cost savings, revenue growth and acquisition cost. 4. CONCLUSION Loyalty programs impact the consumer purchase behavior in positive manner as it influences the consumers to make repeated purchases as consumers find the different benefits i.e. direct and indirect or immediate and delayed attached with the brand. Loyalty programs helps in increasing customer retention which significantly improves a company s profitability and thus means the positive impact of loyalty programs. Consumers show committed behavior towards loyalty programs due to different types of benefits perceived by them. In case of premium brands, certain segments stay loyal to prestige brands as it helps self concept projection, group identification and status. Rewards which are economic, psychological and sociological in nature lead to greater trust, commitment and development of long term relations. Loyalty Programs create an emotional bond leading to high & irreversible 172

10 switching costs. Loyalty Programs impact customer loyalty differently in case of high involvement and low involvement purchases. Different consumer shows different behavior towards the same loyalty program scheme due their psychological, demographical and emotional factors. The price promotion also generated excess loyalty but less than the loyalty program and the price promotion generated a greater, but temporary, market share gain. 5. REFERENCES Dr. Preeta Vyas & Prof. P.K. Sinha, December 2008, Loyalty Programmes: Practices, Avenues and Challenges Customer relationship management, Getting It Right, by Judith W.Kincaid Youjae Yi & Hoseong Jeon, 2003, Effects of Loyalty Programs on Value Perception, Program Loyalty, and Brand Loyalty Louise O Brien and Charles Jones, Harvard Business Review, May-June 1995, Do Rewards Really Create Loyalty? Grahame R. Dowling and Mark Uncles, 1997, Do Customers Loyalty Programs Really Work? Byron Sharp and Anne Sharp, Loyalty Programs and their Impact on Repeat-Purchase Loyalty Patterns: a replication and extension Yuping lu, journal of marketing, 2007, The Long-Term Impact of Loyalty Programs on Consumer Purchase Behavior and Loyalty Anoop Kumar, 2007, Impact of Loyalty programs on Consumer Purchase behavior and design for an effective loyalty card Consumer Behavior, by Wayne D. Hoyer, Deborah J. MacInnis and Pinaki Dasgupta. Customer relationship management, Emerging concepts, tools and applications, by Jagdish N. Sheth, Atul Parvatiyar and G. Shainesh. oyaltyprog.htm shgww.com/five-types-of-loyalty-programs/ s.pdf ams.aspx 173