Customer Loyalty A Retail Marketing Perspective *MOHD.ARIF HUSSAIN *ASSISTANT PROFESSOR, MBA DEPARTMENT, SHADAN COLLEGE OF ENGINEERING AND TECHNOLOGY, HYDERABAD,.A.P., INDIA. Introduction: Traditionally, marketing has focused on market share and customer acquisition rather than on retaining existing customers and on building long-lasting relationships with them (Kotler, 2007). However with changing dynamics of the market and recently the slowdown, market share has been gradually losing its revered status as marketing s holy grail and the wisdom of focusing solely on customer acquisition (hoping that this effort will compensate for high levels of defection) is now being seriously questioned and considered as very high risk since ever more players enter an increasingly crowded marketplace. It is very well understood that every business should be organized around the latest information and latent need of customers to survive in the modern age (Shahjahan, 2004). In response to these changes there has been a paradigm shift in the way business is being done with emphasis on Customer relationship marketing, which focuses on holding on to existing customers and getting more revenue from them, in contrast to activities which focus on winning new customers. Corporate are reinventing their businesses with focus on the pursuit of loyalty as a strategic business goal. Customer loyalty matters because selling more to existing customers is easier, and cheaper, than finding and selling to new ones. Loyal customers tend to buy more, more regularly. And they will frequently recommend your business to others. Customers are hence forms a key part of the business strategy. An Effective customer relationship management means organizing your entire business to focus on the need of the customers. The aim of the study is to assess whether loyalty marketing should form a part of a retail firm s overall business strategy. Every business seeks loyal customers, customers who return again and again because they want to see a company they trust and rely on succeed customers who are highly profitable. 1
But how do we create such customers? In the pursuit of these ideal consumers, businesses use enticements such as promising the lowest prices, the best deals, special promotions and the now common loyalty reward programs. But do these tactics work? Can businesses actually generate customer loyalty and, if so, what is the foundation of that loyalty? Critics argue that loyalty programmes are little more than a discount scheme; that do nothing to engender consumer allegiance. Loyalty aficionados, on the other hand, claim loyalty programmes form the core of their business strategy, enabling them to increase customer value, grow market share, and successfully populate new markets. The research will explore the myth and realities of loyalty marketing and the part it plays in shaping retail s overall business strategy. Past Studies: The purpose of this chapter it to clear the air of confusion with regards to the concept of loyalty and bring out its true meaning considering both attitudinal and behavioral dimensions. It goes on to give a detailed account of relevant loyalty frameworks and models put forward by purists and examines the reasons for the popularity and sudden proliferation of loyalty schemes. It then evaluates whether successful loyalty programmes are a standalone entity or form a part of the overall strategy and help in strategic decision making. The chapter concludes by highlighting the hype and hoopla surrounding loyalty schemes and the myths associated with it. According to the Oxford Dictionary, loyalty is defined as being faithful or steadfast in allegiance but as Payne (2002) points out customer loyalty has been one of the most frequently discussed and most misunderstood concepts of recent years. This is further evidenced by the fact that some authors use customer loyalty interchangeably with other constructs, including customer repeat purchasing behavior and customer retention. However, it has been suggested that the construct of customer loyalty differs from the one of repeat purchasing behavior in the way that it implies an intentional component i.e. there is always a reason for the customer s repeat purchase and it does not happen by chance. The construct of customer loyalty also differs from the one of customer retention in that customer retention has a purely behavioral character, whereas today s interpretations of the loyalty construct 2
usually include both behavioral and attitudinal dimensions; moreover, while the construct of customer retention considers the marketer as the active party, loyalty focuses more on intrapersonal aspects of customer behavior. Loyalty is seen as something that consumers and customers exhibit towards brands, products, services, stores, as well as salespersons. The level of attachment a customer feels toward a product or service is a prerequisite to loyalty and that a second factor that marks a customer's loyalty is repeat patronage. Attachment is shaped by two dimensions: the degree of preference (the extent of the customer's conviction about the product or service) and the degree of perceived product differentiation (how significantly the customer distinguishes the product or service from alternatives). The highest attachment occurs when a buyer feels a strong buying preference coupled with a high degree of perceived product differentiation. CATEGORIZATION OF LOYALTY (FROM THE RETAILER S PERSPECTIVE) Cross Selling Up Selling Repeat Purchase Transactional Persistency Satisfaction Loyalty Lifetime-Value Awareness Brand Value Perceptual Complex Figure 1: Categorization of the loyalty concept 1 1 Adapted from Bergeron, 2000, pg 135-147 3
According to Bergeron (2000), the definitions of loyalty fall into three broad categories: Transactional loyalty, in which the customer s buying behavior, is seen to change or be changed, although what motivates that change may be unclear. These are often the most popular choices, as they relate most closely to commercial results. Transactional loyalty is the ultimate objective of any supermarket; Today s firm encourages transactional loyalty by concentrating on more emotional aspects of things. Perceptual loyalty, in which the attitudes and opinions of the customer are the key, but there is not necessarily evidence of an impact on purchasing. Sometimes these are regarded as more significant, because they are seen to reflect possible behavior patterns that could be created in the future, not patterns of what has happened in the past. Complex loyalty, where there is a combination of these two effects. Within each of these categories there are a number of terms, all of which have been, or are being, used as definitions of loyalty. 4
CONCEPTUALIZATIONS OF LOYALTY (FROM THE CUSTOMER S PERSPECTIVE) Model 1 Model 2 Model 3 Figure 2: Conceptualizations of Loyalty Models 2 2 Adapted from Uncles et al., 2002 5
There are three popular loyalty conceptualizations put forward by Uncles et al.(2002): loyalty as primarily an attitude that sometimes leads to a relationship with the brand (Model 1); loyalty mainly expressed in terms of revealed behavior (i.e., the pattern of past purchases) (Model 2); and buying moderated by the individual s characteristics, circumstances, and/or the purchase situation (Model 3). Loyalty has been largely defined and measured in either behavioral terms (stochastic approach), or attitudinal terms (deterministic approach) and although it has been suggested that the concept should be understood in both terms, there is still little agreement when it comes to measuring it. This disagreement has led to a debate that originally started almost 30 years ago between Jacoby and Kyner and is still going on in present times. Defenders of the stochastic approach consider loyalty as behavior and argue that the customer who buys the same brand systematically is loyal. Loyalty, like love or loathing, is impossible to quantify exactly. What can be quantified is customer behavior and where customer loyalty is concerned, the closest factor that can be measured is customer behavior. Loyalty here is defined mainly with reference to the pattern of past purchases with only secondary regard to underlying consumer motivations or commitment to the brand. Stochastic modeling techniques describe the observed patterns of customer buying. Loyalty to the brand (measured by repeat purchase) is the result of repeated satisfaction that in turn leads to weak commitment. The consumer buys the same brand again, not because of any strongly-held prior attitude or deeply-held commitment, but because it is not worth the time and trouble to search for an alternative. If the usual brand is out of stock or unavailable for some reason, then another functionally similar (or substitutable) brand (from the portfolio) will be purchased. Problem with this approach lies in the fact that it considers loyalty behavior as too complex to be comprehended due to the number of explanatory variables and their frequency of appearance and therefore makes the processing of loyalty in a dichotomous way loyalty Vs. disloyalty, which is singularly short of nuance, and requires a very arbitrary categorization of customers into one of the two categories. 6
Moreover, it has been suggested that only a few customers are 100 per cent loyal to a single brand, but rather, are likely to have a repertoire of two or three brands within any product category from which they regularly buy i.e. polygamous or divided loyalty. Another shortcoming of the stochastic approach is that it does not tell whether repeat purchasing has been done out of habit, due to situational reasons, or due to other more complex psychological reasons and it has been argued that the narrow technical definitions of the stochastic approach do not capture the full richness and depth of the loyalty construct. Many researchers and consultants argue that there must be strong attitudinal commitment to a brand for true loyalty to exist. Oliver (1999) has this in mind when he defines customer loyalty as: A deeply held commitment to re buy or re patronize a preferred product/service consistently in the future, thereby causing repetitive same-brand or same brand-set purchasing despite situational influences and marketing efforts having the potential to cause switching behavior This determinist approach considers loyalty more as an attitude and argues that there are a limited number of explanatory factors responsible for it, which can be isolated and manipulated, including: Customer satisfaction: Oliver (1999) suggested that loyalty and satisfaction are linked inextricably, but also that this relation is asymmetric, arguing that although loyal customers are usually satisfied, satisfaction is an unreliable precursor to loyalty. Commitment and Trust: According to Morgan and Hunt (1994), commitment and trust not just one or the other are the key to success in relationship marketing, since trust implies that the consumer has confidence in the brand/firm and is willing to rely on it though there is an evidence of risk involved, while commitment reflects a psychological attachment to the brand/firm and an enduring desire to maintain the relationship. The determinist approach is not based on loyalty/disloyalty opposition, but seeks to measure the degree of intensity of loyalty. 7
Nevertheless, the determinist approach has been criticized for only relying on customer declarations without taking into account their observed behavior and also for using either antecedents or consequences of loyalty to measure the former and not loyalty in itself. Despite the psychological and sociological richness of the attitudes drive behavior and relationship approaches to understanding customer loyalty, these conceptualizations of loyalty are not without their critics. They are thought to be less applicable for understanding the buying of low-risk, frequently-purchased brands, or when impulse buying or variety seeking is undertaken, than for important or risky decisions. Also, as Oliver (1999) has noted, there is little systematic empirical research to corroborate or refute this perspective of customer loyalty. Those who subscribe to the attitudes drive behavior and relationship approaches expressly rule-out revealed behavior as a dominant measure of loyalty. That, they argue, may merely reflect happenstance. Even combined measures of revealed behavior and satisfaction may not probe deeply enough for us to be sure there is true. Loyalty has become one of the most sought after concepts in the business world and it is often the most elusive phenomena. Loyalty cannot be blueprinted. It cannot be produced on an assembly line. In fact, it cannot be manufactured at all, for its origin is the human heart - the centre of self-respect and human dignity. It is a force which leaps into being only when conditions are exactly right for it, and it is a force very sensitive to betrayal. (Maurice R. Franks, 2004). Conclusion: Businesses can succeed with a great product or service, but will fail without loyal customers. As a result, it has been suggested that neither attitudinal nor behavioral measures on their own are sufficient to explain or define the complex construct of loyalty and therefore, a number of hybrid frameworks have been developed which try to combine both dimensions of loyalty in an attempt to overcome such problems in marketing products or services. 8
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