Customer Loyalty Programs

by Amy Sutton

Introduction

 At the heart of every business concern is increasing profitability for a firm.  There are many ways in which a firm can accomplish this goal, one of which is to attract committed customers and reduce the turnover in a firm’s customer base.  “A committed or a loyal customer consistently purchases a brand over time due to an emotional attachment to the brand” (Hawkins, Best and Coney, 647).  The idea of customer loyalty is geared towards the behavior of customers.  When a customer is loyal he or she exhibits purchasing behavior that is nonrandom over time (Griffin, 4). 

“The rewards of loyalty are long-term and cumulative” (Griffin, 11). “Committed customers are much more profitable to the firm than mere repeat purchasers, who are more profitable than the occasional buyer” (Hawkins, Best and Coney, 647).   The more time a customer remains loyal, the more profit the firm can generate from that customer.  Increased loyalty can also bring about: (1) reduced marketing costs; (2) lower transaction costs; (3) reduced customer turnover expenses; (4) positive word of mouth advertising (Griffin, 11). 

Gaining customer loyalty cannot be viewed as only a marketing strategy.  To gain long-term customer loyalty a firm must make it a priority at all levels of its organizational structure.  “Customer, employee, and investor loyalty are so thoroughly intertwined that to understand and manage one, you must understand and manage all three” (Reichheld, 302).

According to Jill Griffin, in her book Customer Loyalty: How to Earn It; How to Keep It, there are five reasons for enticing a first-time customer into a lifetime buyer (13).  These five reasons include:

1.      Sales increase.  The customer is buying more from the firm.

2.      Position in the marketplace strengthens.  Customers are buying from you instead of your competition.

3.      Marketing costs decrease.  Attracting new customers is more expensive than retaining existing customers.  In addition, loyal customers will spread positive word-of-mouth advertising.

4.      Competing on price is not a high issue. Loyal customers tend to not notice a competitor’s discount of a few dollars.

5.      Satisfied customers are likely to sample new products that a firm introduces.

As one can see gaining customer loyalty is vital for the survival of a firm.  Customer loyalty is so attractive because it costs more to obtain a new customer than to retain an existing one and this makes customer loyalty “the dominant key to business success” (Bhote, 31). 

Explanation of the Topic

            Generating customer loyalty requires a customer-focused attitude in the firm (Hawkins, Best and Coney, 647).  Customer loyalty depends on committed teams of employees and suppliers. To generate lifelong loyalty a firm must continually meet or exceed customer expectations.  The customer must believe that the firm is treating them fairly and is concerned with their well-being.  “[Loyalty] can be earned only when leaders put the welfare of their customers and their partners ahead of their own self-serving interests” (Reichheld, 3).

            The Loyalty Cycle. When a customer makes a purchase, he or she progresses through a buying cycle.  This cycle is described in the book The Loyalty Effect, written in 1996 by Frederick Reichheld.  First-time buyers go through five steps.  First, they become aware of the product.  Second, they make the initial purchase.  After this, the customer moves though two attitude-forming stages.  One is called “postpurchase evaluation” and the other is “decision to repurchase.”  Reichheld discusses that if the decision is to repurchase, the fifth step, repurchase, ultimately follows.  “The sequence of repurchase, postpurchase evaluation, and decision to repurchase form a repurchase loop (see Figure 1) that is repeated many times during a customer’s relationship with a company” (Reichheld, 18).

Figure 1

                                    Repurchase                  Decision to Repurchase

Awareness-->Initial Purchase-->    Post-Purchase Evaluation 

Step 1: Awareness.  This first step can come about in a variety of ways:  advertising, direct mail, word-of-mouth communication, in-store displays and others.  In this stage, the potential customer knows that the firm exists, but there is no bond.  At this point of the loop the potential customer is vulnerable to competitor advertising and can be lured away.

Step 2:  Initial Purchase.  This purchase is the trial purchase and is crucial for the ability to build loyalty.  Reichheld implies that during this purchase a company can impress the customer positively or negatively toward the product, employees, or service.

Step 3:  Post Purchase Evaluation.  After the purchase is made, the customer consciously or subconsciously evaluates the purchase.  If the customer is satisfied then step four can occur.  However, if the customer is not satisfied then switching to a competitor is almost inevitable.

Step 4:  Decision to Repurchase.  This step is the most important with regards to loyalty.  Without a decision to repurchase, loyalty does not exist.  “The motivation to repurchase comes from a favorable attitude toward the product or service” (Reichheld, 20).  This step is often a natural occurrence when the customer is satisfied.

Step 5:  Repurchase.  The final step is where a customer is classified as truly loyal.  Reichheld describes a truly loyal customer as one who “ buys again and again from the same business, repeating steps three through five (the repurchase loop) many times.”  

            Elements of Loyalty. In order for a firm to gain superior loyalty there are eight elements that should be common to their loyalty strategy (Reichheld, 303).  According to Reichheld, these elements include:

1.      Building a superior customer value plan.  The plan must offer key customers greater value in as compared to competitor offerings.

2.      Finding the right customers.  This includes understanding exactly who the target market is.

3.      Earning customer loyalty.  Customers must be treated like assets and retaining these assets must be a top priority to increase their lifetime value.

4.     Finding the right employees.  When hiring, the firm must be as selective of their employees as they are of their target market.  Look for people who share the values of the company and posses the skills required to fulfill the position requirements for a life-long career.

5.      Earning employee loyalty.  Be ready to invest in training for employees and work with them to construct career paths that include your company and enable them to get the most out of their education. 

6.      Gaining a cost advantage through superior productivity.  The longer an employee stays with a firm, the better they get at their job and become more productive.  This in turn creates a cost advantage.  “Employees may earn better salaries, but as a percentage of revenues, the cost of the higher salaries is actually lower.” 

7.      Finding the right investors. 

8.      Earning investor loyalty. 

            Types of Loyalty.  The book Customer Loyalty: How to Earn It; How to Keep It (Griffin 1995) describes four distinct types of loyalty that emerge when low/high attachments are cross-classified with low/high repeat purchase patterns (see Figure 2).

            No Loyalty.  Some customers do not extend loyalty to certain products or services.  An example described by Griffin to illustrate this is a man getting his hair cut.  This particular man will go anywhere to get his hair cut.  The only stipulations are that the cost be less than ten dollars and that he not have to wait in line.  He rarely goes to the same place twice.  To him, a haircut is a haircut no matter where he receives it.  This low attachment for the service and his low patronage generate no loyalty.  A strategy to avoid no loyalty customers should be used because they will never be loyal customers, and any other efforts would be a waste.

            Inertia Loyalty.  This type of loyalty comes from a low attachment to the product and high repeat purchases.  “This customer buys out of habit” (Griffin, 23).  This type of loyalty is common for frequently purchased items.  An exampled described by Griffin was a family taking their dry cleaning to the store down the street.  There is not too much difference in dry cleaning services and therefore the family has a low attachment to the service.  However, it has become habit for the family to use the cleaner down the street and has a high rate of repurchase.  This type of loyalty can be turned into a higher form of loyalty by the firm differentiating themselves from the other cleaners is some way.  In the dry cleaning example, a dry cleaner could offer a free delivery service.

Figure 2

The Four Types of Loyalty (Griffin 1995)

            Latent Loyalty.  A high attachment towards the product or service combined with low repeat purchases described latent loyalty.  An example of this as described by Griffin includes Chinese food.  A woman could love Chinese food and have a favorite place to order from (high attachment), however, he husband does not enjoy Oriental food at all.  Regardless of the woman’s loyalty, she only orders from this Chinese restaurant on occasion (low repeat purchase).  A company can overcome this setback by understanding the issues that prohibit a customer from purchasing the product and taking steps to contest them.  The Chinese restaurant could offer American food along with traditional Chinese food so both members of the couple would be satisfied.

            Premium Loyalty.  This type of loyalty forms with a high attachment to the product and high repeat purchases.  This is the most desired level of customer loyalty by a company.  These customers become word-of-mouth advertisers and promoters of the product.  They take pride in informing others of the great product they have found.  An example of this could be a woman who is the bookkeeper of a small, family owned business.  Many people told her about a product called QuickBooks.  They had discovered it and informed her of all the benefits it offers.  She tried it and is now a premium loyal customer also.  Every year she buys the upgraded version of the software and tells all of her friends about the software.

Examples of Customer Loyalty Programs

Enterprise Rent-A-Car.  Jack Taylor, CEO, explains that when he took over the company from his father, he was taught: “Put customers first and employees second, and the profit will take care of itself” (Reichheld, 19).  The loyalty-based strategy that Enterprise operates under is successful because it is unique.  Taylor explains, “A major difference between Enterprise and our competitors is that their business is cars and ours is people.  They focus on building their fleet of cars; we focus on building our employee’ careers” (21).

In the 1960’s Hertz, Avis and National dominated the airport rental car business.  Their combined market share was 90 percent (Reichheld, 21).  However, the home-market rental business, which consisted primarily of replacement cars when personal cars were being repaired, was occupied by dozens of local firms.  This is the area of the market that the Taylors chose to pursue.  They offered competitive rates and convenient service to insurance adjusters who needed the cars for their clients.  Enterprise grew and accumulated loyal partners (21).

Enterprise operates primarily with a simple network of local branches that serve the home market.  The company operated through company owned branches, but each branch is a separate profit center that operates as an independent, entrepreneurial business (Reichheld, 21).  Taylor explains that, “he learned long ago, the value of organizing his business into small, stable teams with maximum responsibility, flexibility, and accountability” (21).  Taylor has built a company that allows employees at each branch to have the authority to make decisions that affect their own customers and the profitability of their branch.  This strategy allows Enterprise to deliver superior service at a profit (21).  This organizational structure provides better career development opportunities for employees because they get to run their own business earlier than they would in another organization.  Every employee is motivated to find ways to increase customer retention and referrals in order to build enduring relationships with the right kind of customers (22).

            Harley-Davidson has “the world’s most loyal customers” (Reichheld, 29).  Who could argue with this statement when it is really thought about?  Not too many firms inspire customers to tattoo their bodies with the company logo.  The success that Harley-Davidson enjoys presently was not always the case.  In December of 1985 the company was on the verge of bankruptcy.  They were about to be left in the dust by Japanese companies that were dominating the market.  The company struggled on this edge until Teerlink became CEO in 1989.

            “Teerlink prized loyal customers and wanted to be certain his organization would never take them for granted” (Riechheld, 31).  When trying to keep everyone focused on customer concerns, he formed a leadership team.  This team developed and implemented a program called Harley Owners Groups, or HOGs.  Harley headquarters helped local dealers organize associations of riders, rallies, tours and parties that continually fueled the participants shared passion for riding (31).  The leadership team regularly attended these meetings.  They listened to customer praises and complaints.  They also watched as customized bikes were brought in and these bikes inspired the development of new models.  “Teerlink firmly believes that HOG stands out as one of Harley’s most successful loyalty-building efforts” (31).

            The strategy that Teerlink used to build superior, loyal relationships is still used today.  The firm’s competitive advantage is based on these special relationships:

Building and maintaining the relationships that make the Harley-Davidson experience unique and our business success is a big part of when we are all about.  Pure and simple, these relationships are a competitive advantage for Harley-Davidson...No matter where you look, we have developed long-lasting relationships that produce positive results for everyone touched by Harley-Davidson (Reichheld, 32).

Reichheld describes the employees and most of the executives of Harley-Davidson as “people who could double as extras in Brando’s classic The Wild One.  It is ironic that a bunch of “hard-core bikers who produce the infamous icon of go-to-hell individualism” are so concerned with building lasting relationships (32).

            Dell Computers.  Currently, Dell commercials focus on the low cost, low hassle of owning a Dell computer.  However, Michael Dell knew that a business built solely on low cost does not create a substantial competitive advantage (33).  As he explains in his book Direct from Dell, “What was really important was sustaining the loyalty among our customers and employees.”  By focusing on partnership and loyalty, Dell is able to deliver both superior service and significantly low costs (33).  “Dell has a clear, simple, and unwavering commitment to work in the customer’s best interest, even at the expense of short-term revenue opportunities”.  For example, Dell never sells its customer information because they view it as a breach of the customer’s privacy. 

            Dell not only spends time focusing on customer loyalty, they also focus on employee loyalty as a necessity.  In Direct from Dell, Michael Dell devotes an entire chapter to creating employee loyalty.  He says:

You need to engender a sense of personal investment in all your employees – which comes down to three things: responsibility, accountability, and shared success...Mobilize your people around a common goal.  Help them to feel part of something genuine, special and important, and you’ll inspire real passion and loyalty.

Dell is organized in a similar fashion as Enterprise.  The company is divided into small teams, each with profit and loss responsibility for a particular market segment.  “Every team is accountable for its financial and customer service results, and every employee is rewarded with stock options in the firm” (Reichheld, 35).  Michael Dell says, “It’s about people who are thoroughly invested in each other’s growth.  It is, the truest sense of the word, a loyal partnership” (36).

Closing Remarks

            There are many reasons to build customer loyalty.  However, as one can see, building customer loyalty is not solely about the customer.  The three cases discussed each demonstrated that building customer loyalty must be a company wide strategy focused on by every employee in the organization.  Decreased costs and increased profits margins are an enticing part of customer loyalty.  Nevertheless, these are the outcomes of a strategy that recognizes the loyal customer as the asset that they are.  By focusing on the long-term benefits loyal customer bring and company creates a sustainable competitive advantage, low costs and high profit margins, which are all elements that every company desires.

Relevant Web Sites

Enterprise Rent-A-Car.  www.enterprise.com

Harley-Davidson.  www.harleydavidson.com

Dell computers.  www.dell.com

Another description of customer loyalty with links for more explanation.  www.jimnovo.com/Customer-Loyalty-more.htm

Comparison between customer retention and customer loyalty.  www.customerloyalty.org/

How to build customer loyalty in an internet world.  www.cio.com/archive/010102/loyalty.html

Strategies to plan customer loyalty.  www.businesstown.com/marketing/customer.asp

The importance of customer loyalty. http://techupdate.zdnet.com/techupdate/stories/main/0,14179,2819927,00.html

Test for Understanding

1.      A person that has low attachment for a product, but high repeat purchase behavior can be classified as what type of loyalty? 

a.       Premium

b.      Latent

c.       Inertia

d.      No

2.       A person that has high attachment for a product, but low repeat purchase behavior can be classified as what type of loyalty? 

a.       Premium

b.      Latent

c.       Inertia

d.      No

3.  Which of the following is NOT a reason to focus on customer loyalty? 

a.       Increased profits

b.      Increased transaction costs

c.       Positive word-of-mouth advertising

d.      Reduced Marketing costs

      4.  Which of the following purchase steps is most important with regards to loyalty? 

                 a.  Awareness

     b.  Initial Purchase

     c.  Post Purchase Evaluation

     d.  Decision to Repurchase

     e.  Repurchase

5.  A committed or a loyal customer: 

a.       Consistently purchases a brand over time.

b.      Always buys products from the same store.

c.       Has an emotional attachment to the brand.

d.      All of the above.

e.       A and B

f.        A and C

g.       B and C

Answers to Quiz

1.      c

2.      b

 3.      b

 4.      d

 5.      f

References

Bhote, Keki R. (1996). Beyond Customer Satisfaction to Customer Loyalty: The Key to Greater Profitability. New York: AMA Membership Publication Division.

Dell, Michael (1999).  Direct from Dell: Strategies That Revolutionized and Industry. New York:  Harper Business.

Griffin, Jill (1995).  Customer Loyalty:  How to Earn It, How to Keep It.  San Francisco:  Jossey-Bass Publishers.

Hawkins, Del I., Roger J. Best, and Kenneth A. Coney (2001).  Consumer Behavior:  Building Marketing Strategy.  8^th ed.  New York: McGraw Hill.

Reichheld, Frederick F.  (1996). The Loyalty Effect.  Boston:  Harvard Business School Press.