Do loyalty Programs Build a Long-term Relationship with customers? A Banking Perspective. Zeynep Roberts and Leanne Carter Macquarie University

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1 Do loyalty Programs Build a Long-term Relationship with customers? A Banking Perspective. Zeynep Roberts and Leanne Carter Macquarie University Track 15 Services Marketing Keywords: Banking, Loyalty Programmes, Differentiation. Abstract Loyalty programs have been perceived to be one of the most successful marketing tools of the 1990's. It is believed that customers who demonstrate loyalty reduce the marketing costs of doing business. A typical company loses around ten percent of its customers annually (Whitwell et al. 2003). Organisations have adopted a number of promotional techniques to secure customer loyalty. One of the most prominent has been the development of loyalty programmes linked to rewards. Marketers are aware of the need to continually reinforce the attitudes and behaviours of customers, so that they are protected from competitors. However the extent to which loyalty programmes add value to this process has to be questioned. This research investigated two areas. Firstly, the degree of current loyalty consumers have with their financial institution, and secondly, to understand how loyalty programs impact on customer satisfaction and building long term sustainable loyalty within the banking sector. The findings indicate that banks need to understand that loyalty programs alone will not ensure customer loyalty and satisfaction in the long-term. Other features and benefits offered by banks such as interest rates, product ranges, and face to face interaction will be an important component of the customers decision making processes. Loyalty programs are easy to copy and have become an expectation, and they are no longer as valued by the customer as a point of differentiation. While consumers value the loyalty programs as a bonus, there is considerable scepticism in regards to genuineness of the rewards offered, based on the idea that they are ultimately paying for the rewards in the pricing structure offered by the bank in the form of interest rates, and the redemption rules. The implication for mangers is that it could possibly undermine the benefits gained and impact on brand equity development. Introduction Customer loyalty refers to the customer's willingness to continue buying from a company (Whitwell et al 2003). A typical company loses around ten percent of its customers annually (ibid p 97). It has been compared with a leaking bucket as described by Ehrenberg & Goodhardt (cited in Dowling & Uncles1997): the higher the defection rate, the harder marketing has to work to keep the bucket full. Loyalty is seen as one key to achieving profitable growth. Loyalty schemes have been perceived to be one of the most successful marketing tools of the 1990's. It is believed that customers who demonstrate loyalty reduce the marketing costs of 2254

2 doing business (Uncles & Laurent 1997). This is likely to occur due to several reasons. There are reduced set up-costs associated with new customers, reduced marketing and advertising costs and less sensitivity to price by loyal customers (Reichheld 1993 Aaker 1992 Jones & Sasser 1995). This allows the marketer to increase prices to the point that their brands are more profitable without losing sales from the loyal. Organisations have adopted a number of promotional techniques to secure customer loyalty. One of the most prominent has been the development of loyalty programmes linked to rewards. Marketers are aware of the need to continually reinforce the attitudes and behaviours, so that they are protected from competitors. However the extent to which loyalty programmes add value to this process has to be questioned. Sustainable loyalty as a strategic issue Too many marketers are concentrating on the tactical promotions of loyalty programmes rather than the longer-term strategic focus for brand building. Measurement of these loyalty programmes leads to a short term emphasis. What is required however, is for marketers to very clearly clarify what it is they want to achieve from the loyalty programme. It must be careful not to devalue the other marketing mix variables. As Mazur (1997) stated, "loyalty has to be earned, it cannot be given away" (p 16). Customer loyalty programmes are now an accepted way of doing business to the point of being expected in many industries (Worthington 1996). A growing body of literature indicates that loyal customers purchase more frequently and spend more (Uncles 1994 Rayer 1996) which has generated a huge interest in loyalty programmes leading to this saturation (Wright & Sparks 1999). The future of these programmes remains unknown as a result of this proliferation. Some issues that customers have with the loyalty programmes and their saturation include disillusionment with the benefits and the sheer number of loyalty programmes available from which to choose (Wright & Sparks 1999). Wright & Sparks (1999) found that customers tended to belong to more than one loyalty programme in the retail sector. They tended to join schemes out of greed rather than a sense of belonging. There was also significant evidence of a tiring of cards by the consumers. Due to this apparent saturation in the market place, Wright & Sparks (1999) recommend that retailers do not abandon loyalty programmes but rather attempt to differentiate by providing customers with an added reason or benefit for using their particular card. Loyalty in the banking industry Banks have pursued similar strategies to other service providers by using loyalty schemes to ensure commitment. Bank loyalty has been defined as "the biased (nonrandom) behavioural response (revisit), expressed over time by some decision-making unit with respect to one bank out of a set of banks, which is a function of psychological processes resulting in brand commitment" (Jacoby & Chestnut 1978 & Bloemer et al 1998). Bloemer et al. (1998) propose that bank commitment is necessary for bank loyalty to occur. Where commitment is absent, then the customer is only spuriously loyal which is directed by inertia (Dick & Basu 1994). 2255

3 Whilst a great deal of research is available in terms of consumer behaviour and loyalty programmes as they relate to consumer goods markets and retail outlets, there appears to be a gap in the research specifically in terms of consumer banking and loyalty. The following research attempts to begin to close this gap. Research Methodology This research investigated two areas. Firstly the degree of current loyalty consumers have with their financial institution, and secondly to understand how loyalty programs impact on customer satisfaction and building long term sustainable loyalty within the banking sector. A pilot qualitative study technique is used as an exploratory process to define the parameters of experience, terminology and understanding of respondents as a basis for further investigation. Qualitative research methods were used to investigate the main objectives. An exploratory process is necessary when analyzing complex experiences of customers (Hastings & Perry 2000), their perceptions, assumptions, prejudgments, presuppositions (van Menen 1977) and connecting these meanings to the social world around them (Miles & Huberman 1994). The study was based on purposive non probability sampling technique using a customer list provided by a major international bank based in Sydney (Zikmund 1997). Retail bank customers were randomly select based on a screening process that identified respondents who were currently involved in a loyalty program with a major banking institution. Sydney was chosen as a test market city as it is a good representation of a market with cross section of customers utilising the services of the five major banks (Westpac, Commonwealth Bank, ANZ, Citibank and National Bank). The reason why these customers were isolated and selected for the qualitative research was to gain feedback from active and high usage customers. The sample selection was screened to ensure that respondents had strong knowledge and experience in the subject area and was willing participate as a customer in the discussion groups (Hastings & Perry 2000). A total of six focus group discussions were conducted over a period of six weeks. In total forty eight respondents participated in the focus group discussions. All six focus groups were taped and the tapes were transcribed to capture individual responses in the group. Respondents were asked about the current relationship with their chosen bank and reasons for their existing and anticipated behaviour towards loyalty programs introduced by their bank. The analysis of the focus group information was conducted using detailed transcripts downloaded from the tapes recorded during the six sessions. The emphasis was to draw out the main themes and ideas expressed by the respondents. The transcribed data also enabled direct comments from respondents to be tabled. Transcripts were content analysed then interpreted for identifying dimensions that emerged in the process of data collection. In most, cases direct quotes from respondents were used, because they best reflect the phenomena under investigation (Coviello & Martin 1999). The nature of the qualitative research is exploratory, defining the parameters of experience, terminology and understanding. The sample base is small. The findings should be considered with this limitation in mind. 2256

4 Analysis and Results For the most part, respondents considered the bank holding their mortgage account to be their principal bank. Other accounts such as credit cards and savings accounts were an extension of the mortgage account. Overall responses indicated a relative degree of underlying loyalty (in the context of negative attitudes towards banks in general) toward their principal bank. Of all the respondents in the focus groups 77% of respondents claimed to have one or more accounts with a single institution, of these respondents 89.5% had more than one account with the same institution. 22.9% of respondents claimed to have one or more additional accounts operated with other banks or financial institutions, these accounts were primarily credit card or high interest saving accounts. Overall, it was evident that while consumers showed a degree of loyalty to their main bank they also had relationships with a number of other institutions for a variety of reasons. Respondents offered a variety of reasons for keeping accounts with other financial institutions other than their principal bank. These are described below. There is a need or desire by respondents for face to face contact. If their primary financial institution did not offer a personalized service through access to branch facilities, customers were likely to have an account with another provider. It s nice to actually see someone. Other reasons offered included established relationships based on long history such as family business accounts, competitive interest rates and products offered by other providers. Also the difficulty or inconvenience associated with closing and transferring an account was mentioned. It s too hard to change. If my main bank offers the same service or products we need, will look at them straight away. Further qualitative discussions highlighted there was a sense in which respondents viewed their current relationship with their principal bank as one they have spent considerable time developing based on the level of personalised service, competitiveness in interest rates, and the preparedness of the bank to take a risk. While they were not always satisfied with the level of service they experienced from their bank, respondents were generally skeptical that other banks were likely to offer a better service and lower transaction costs. I think other banks are starting to catch up in terms of providing the same sort of service whereas my bank is going the other way. My bank used to give very good service; I think it s worse than ever now. I don t know how much better I would be if I switched. Respondents did not articulate at any stage that a loyalty program was the main reason for maintaining or switching bank accounts. Loyalty Programs and customer behaviour There was a spontaneous association between the mention of bank credit cards and loyalty rewards particularly frequent flyer points (terminology used to refer to any points which can be redeemed for flights). Respondents were members of a variety of loyalty and reward programs, mainly linked to credit card with their principle bank or credit cards linked to Visa and MasterCard accounts held with other banks. The attitude toward loyalty programs were generally positive and best summarised in the following two verbatim quotes: It s all free so you might as well get the benefit of it something for nothing. It reassures me that they re not such a bad group after all. 2257

5 Loyalty rewards attached to credit card accounts were seen as a basic feature of the product, a must have rather than a unique proposition differentiating one account from another. Respondents claimed they could transfer points between accounts and redeem rewards from two different financial institutions into the same reward program, such as the Qantas Frequent Flier programs offered by a number of different credit card providers. People will openly admit that loyalty programs do have an impact on the way they purchase products. Respondents expressed favouritism for a particular card based on size and type of reward points and they attempted to use a credit card to redeem rewards points at all times, including seeking out big stores where a credit card would be accepted even for small items. Respondents also openly discussed complicated routines to maximise points earned one example given by a man whose wife was a black belt in shopping, preferred Coles/Myer stores where they were entitled to a discount due to share ownership. These same stores gave Fly Buys points on every purchase and further points were earned when payment was made by Citibank MasterCard in one transaction, three lots of benefits were accrued. In all groups, there was a high level of understanding of which cards gave the best conversion rates for points and how to balance card usage to earn points sooner. What drives reward selection? Links between the rewards offered and customers levels of interest and participation in the loyalty program, need to be considered. Reward redemption choices were made based on a number of factors including, familiarity and need, but most importantly to redeem points for items which were closely related to respondents own personal interests and their own life stage. One respondent said; There is no point the bank offering points to redeem for example for household goods as I have no need for these items. Negative attitudes toward loyalty / reward programs There are a number of aspects raised in association with reward programs currently on offer that may need to be taken account in the decision process. A strong theme emerges that points should not expire once they have been earned. Comments to illustrate this included, Why should they expire? and [I] did something I really didn t want to, rather than lose points. There is some level of skepticism about how genuine the programs are and whether or not the rewards are significant enough to be motivating. The following quotations give examples; You don t get anything for nothing, you pay that by paying higher interest rates. Really logically speaking you ve got to be running a million dollar business through one credit card to get anything worthwhile. However, once people have been given the opportunity to air their skepticism, they usually come to realise that in the final analysis they are probably getting something for nothing. One concession that banks may need to make, is that there may always be a group of customers that will be not very interested in these kinds of programs, no matter what shape or form they take. 2258

6 Conclusion/ Further Research Banks need to understand that loyalty programs alone will not ensure customer loyalty and satisfaction in the long-term. Other features and benefits offered by banks such as interest rates, product ranges, and face to face interaction will be an important component of the customers decision making process. Loyalty programs are easy to copy and have become an expectation; they are not valued by the customer as a differentiator between products and services in the marketplace. The high cost to customers to switch between banks generates a barrier for loyalty programs to attract new customers from competitors and therefore by implication support the retention of customers, although it is difficult to link this to the loyalty programs directly, as customers decisions is driven by a long list of product and service attributes. While consumers value the loyalty programs as a bonus, there is considerable scepticism in relation to genuineness of the rewards offered, based on the idea that they are ultimately paying for the rewards in the pricing structure adopted by the bank, in the form of interest rates. The implication for mangers is that it could possibly undermine the benefits gained and impact on brand equity development. Further research is required to understand if reward programs in fact build long-term sustainable loyalty in the banking sector and whether these programs contribute profitable retention of customers. There is also the question of costs versus benefits and the impact reward programs have on profitability of the banking sector. How much profitability is compromised in the pursuit of offering the best reward selection without ensuring the bank a real point of difference and a positive value equation? Bibliography Aaker, D. 1992, Strategic Market Management, John Wiley & Sons, New York, NY. Bloemer, J., de Ruyter, K., & Peeters, P. 1998, Investigating drivers of bank loyalty: the complex relationship between image, service quality and satisfaction, International Journal of Bank Marketing, vol. 16, no. 7, pp Coviello, N.E. & Martin, K.A. M. 1999, Internationalization of Service SMEs: An integrated perspective from engineering consulting sector, Journal of International Marketing, vol. 7, no. 4, pp Dick, A.S. & Basu, K. 1994, Customer loyalty: toward an integrated framework, Journal of Academy of Marketing Science, vol. 22, no. 2, pp Ehrenberg, A.S.C. & Goodhardt, G.J. 1977, Understanding Buyer Behaviour, in Dowling, G.R. & Uncles, M. 1997, Do customer loyalty programmes really work? Sloan Management Review, Cambridge, vol. 38, no. 4, pp Hasting, K. & Perry, C. 2000, Do Services Exporters Build Relationships? Some qualitative Perspective, Qualitative Market Research: An International Journal, vol. 3 no. 4,

7 Jacoby, J.W. & Chestnut, R.W. 1978, Brand Loyalty Measurement and Management, John Wiley & Sons, New York, NY. Jones, T.O. & Sasser, W.E. Jnr. 1995, Why satisfied customers defect, Harvard Business Review, pp Mazur, L. 1995, Brands, Marketing Business, April, p.16. Miles M.B. & Huberman A.M. 1994, Qualitative Data Analysis 2 nd Edition, Sage, California. Rayer, S. 1996, Customer Loyalty Schemes: effective implementation and management, Financial Times, Retail and Consumer Publishing, London. Reichheld, F.F. 1996, The Loyalty effect: the Hidden force behind Growth, Profits and Lasting Value, Harvard Business School Press, Boston, MA. Uncles,M. 1994, Do your customers need a loyalty scheme? Journal of Targeting, Measurement and Analysis for Marketing, vol. 3, pp Uncles, M. & Laurent, G. 1997, Editorial, International Journal of Research in Marketing, vol. 14, pp van Menan, 1977, cited in Miles M.B. & Huberman A.M. 1994, Qualitative Data Analysis 2 nd Edition, Sage, California. Whitwell, G., Lukas, B. & Doyle, P., 2003, Marketing Management: a strategic, value-based approach, John Wiley and Sons, Australia, p.97. Worthington, S. 1996, The Loyalty Report. Wright, C. & Sparks, L. 1999, Loyalty saturation in retailing: exploring the end of retail loyalty cards? International Journal of Retail and Distribution Management, vol. 27, no.10, pp Zikmund, W.G. 1997, Exploring Marketing Research, 6 th Edition, Dryden Press, Orlando. 2260

8 Attachment 1 Discussion Outline for focus groups in Sydney Discussion Flow Introduction Extent & nature of consumers relationship with the bank and other financial institutions Evaluate attitudes/motivations to loyalty& preparedness to extend brand relationship Experience with loyalty programs Discuss reward incentives and value of reward incentives Conclude the discussion 2261