Customer loyalty and customer loyalty programmes. Goals and methods

Table of contents

1. Preliminary remark

2. Importance of customer loyalty

3. Definitions of terms
3.1. Customer loyalty
3.2. Customer loyalty management
3.3. Customer satisfaction

4. Goals of customer loyalty

5. Types of customer loyalty
5.1. Situational binding
5.2. Contractual commitment
5.3. Economic ties
5.4. Technical-Functional Bonding
5.5. Psychological-Emotional Attachment

6. Instruments of customer loyalty
6.1. Product policy measures
6.1.1. Services
6.1.1.1. Secondary services
6.1.1.2. Service-related-products
6.1.1.3. Guarantees
6.1.2. Customer-specific service design
6.2. Price policy measures
6.2.1. Discounts
6.2.2. Bonus programs
6.2.3. Customer card
6.2.4. Complementary products
6.2.5. Contracts and guarantees
6.3. Communication policy measures
6.3.1. Complaint management
6.3.2. Customer Club
6.4. Distribution policy measures

7. Requirements for the introduction of a customer loyalty management system
7.1. Systems
7.2. Structures

8. Strategic aspects of customer loyalty management

9. The relationship between customer satisfaction and customer loyalty

10. Control of customer loyalty management
10.1. Effectiveness of customer loyalty management
10.1.1. Objective measurement methods
10.1.2. Subjective measurement methods
10.2. Efficiency of customer loyalty management
10.2.1. Customer gross margin calculation
10.2.2. Customer-oriented process cost accounting
10.3. Portfolio Management

11. Conclusion

Bibliography

1. Preliminary remark

This study paper focuses on aspects of customer loyalty in the business-to-consumer sector, which looks at the relationship between companies and end users. As a result, the loyalty of customers in the business-to-business sector, e.g. from companies to their suppliers, is neglected. Behavioral and social science approaches to explain customer loyalty are not part of this study paper.

The aim of the work is to present an overview of customer loyalty, customer loyalty instruments, the most important terms relevant in connection with customer loyalty and practicable methods for controlling customer loyalty management.

For this purpose, the need for customer loyalty is first explained and a definition of central terms is carried out. Subsequently, various goals and variants of customer loyalty are presented. In the further explanations, an overview of the most important customer loyalty instruments within the framework of the marketing dimensions is given, followed by a presentation of prerequisites and aspects to be considered when introducing a customer loyalty system. The work is rounded off by the presentation of the correlation between customer loyalty and satisfaction as well as the possibilities for controlling customer loyalty management, so that this study paper can be regarded as a compact "guide" through the phenomenon of customer loyalty.

2. Importance of customer loyalty

In the course of the change in market and environmental conditions – the development of the seller's market into a buyer's market – a rethinking of the companies took place. While in the seventies and eighties companies concentrated on products, processes and structures, now the relationship of the company with its customers comes to the fore.¹

The reasons for this are saturated markets and a resulting, increasingly stronger cut-throat competition. Furthermore, the growing substitutability of products and services, which is expressed in the increasing willingness of consumers to change providers, can also be seen as a necessity for customer loyalty.²

New customer acquisition is usually only possible through customer poaching from the competition, which leads to the intensification of the marketing activities of the own company and at the same time also of the competitors. Thus, no company is able to generate an advantage or achieve a significant increase in its market share through such activities.³ The mere acquisition of new customers is therefore no longer sufficiently economically efficient. This is also illustrated by the fact that the average cost of acquiring new customers is about five times higher than the cost of maintaining customers already gained.

The earning value of a customer is relatively low in the case of a one-time purchase, so the entire earnings potential of a customer can only be used through a lasting business relationship.⁴ For a variety of industries, loyal customers increase the company's earnings through follow-up business with each additional year of the business relationship. So-called cross-buying effects also contribute to this by the customer also using other offers from the provider's range of services. For example, a study by Reichheld and Sasser determined that the expected profit per customer for a car customer service rose from 45 dollars in the first year to 144 dollars in the fourth year (see Fig. 1).⁵ Due to the ongoing business relationship, a tripling of the profit per customer could therefore be achieved. The projected amount of 532 dollars would be an opportunity cost to the company in the event of a customer loss after the first year, if a five-year business relationship was expected.

Abbildung in dieser Leseprobe nicht enthalten

Fig.1: Development of the expected profit (per customer) of a car customer service depending on the duration of a business relationship

Source: Based on Reichheld / Sasser 1999, p. 139

In addition, companies with loyal customers tend to charge higher prices. Their customers have an increased price tolerance, because many opt for the familiar service or the well-known product rather than that they dare to buy risk from a cheaper competitor and may see their expectations disappointed. The decisive factor here is the trust that the company has acquired from the customer through proven services and for which a price surcharge can be demanded.

Furthermore, it speaks for customer loyalty that with increasing purchase frequency, or duration of the business relationship, the operating costs decrease. In the case of a small financial consulting firm, this was attributed to the fact that the customers knew in the course of the business relationship which services could be expected and therefore had fewer inquiries and problems, so that the processing effort by the employees decreased. In addition, the financial advisors worked more effectively, as they now had a better knowledge of the situation of the clients and their investment preferences. For example, for.B, long-term customers were no more than complex credit checks.

Another positive economic effect of customer loyalty is the positive word-of-mouth advertising of satisfied customers. Through recommendations from existing customers, new customers are acquired free of charge from their environment, so to speak, who then in turn make use of the company's services.

Overall, these positive effects contribute to a steadily growing profit of the company during the course of a customer relationship (see Fig. 2). Relations may vary from industry to industry.⁶

All these arguments illustrate the growing importance of the topic of customer loyalty – it will therefore not lose any of its relevance in modern marketing in the future.

Abbildung in dieser Leseprobe nicht enthalten

Fig. 2: Causes of increasing customer profitability with increasing duration of the business relationship

Source: Based on Reichheld / Sasser 1999, p. 141

3. Definitions of terms

3.1. Customer loyalty

In the literature, terms such as relationship marketing, business relationship management, relationship management, brand and product loyalty, etc. Used interchangeably with the term of customer loyalty. Customer loyalty can basically be seen from the point of view of the customer, i.e. the customer and the point of view of the company, i.e. the provider.⁷

In the demand-driven view "... customer loyalty can be defined as a customer's attitude to a business relationship with a particular provider, which is reflected in the willingness to make follow-up transactions with that supplier."⁸ Therefore, due to a positive relationship with a provider, the customer is less inclined to change this supplier and is willing to realize follow-up purchases on his own. The word "readiness" signals that it is a static perspective – a state is described.

From a provider's perspective, customer loyalty includes "... all measures of a company that aim to positively shape both the previous behaviors and the future behavioral intentions of a customer towards a provider or its services in order to stabilize or expand the relationship with this customer for the future."⁹ Accordingly, marketing policy activities are intended to create a stable bond between the customer and the company or its products. The provider-oriented approach thus describes customer loyalty as a management-side process. This definitional approach includes actual and future behavior of the customer in equal measure.

The actual behavior is understood to mean the repurchase and the reference behavior of the customer. Future behavior, on the other hand, includes the repurchase, cross-buying and reference intentions of the customer.¹⁰ Figure 3 shows this concept of customer loyalty.

Abbildung in dieser Leseprobe nicht enthalten

Fig. 3: Conceptualization of the construct of customer loyalty

Source: Homburg / Bruhn 1999, p.9

3.2. Customer loyalty management

Based on the provider-oriented view of customer loyalty, the narrower definition of customer loyalty management results. It includes "... the systematic analysis, planning, implementation and control of all measures aimed at the current customer base with the aim that these customers will continue to maintain or maintain the business relationship more intensively in the future."¹¹ This definition reflects the strategic approach of customer loyalty management.

The focus is on the already won customer with the aim of influencing the customer in such a way that his tendency to a change of provider or brand – for example through customer satisfaction or exchange barriers – is reduced. In addition, by maintaining the business relationship, the repurchase rate of the customer is increased.¹²

3.3. Customer satisfaction

The confirmation/disconfirmation paradigm (C/D paradigm) can be regarded as a generally valid explanatory approach to the customer satisfaction concept (cf. Fig. 4).

Abbildung in dieser Leseprobe nicht enthalten

Fig. 4: The confirmation/discount confirmation paradigm and possible reactions of individual customers to satisfaction or dissatisfaction

Source: Based on Homburg / Giering / Hentschel 1999, p. 84 f.

The starting point of this model is the comparison of the actually perceived performance in product use (actual performance) with the existing expectations of the customer (target performance). These expectations act as a benchmark and are characterized, for example, by advertising information, word-of-mouth communication or personal experiences of the customer. If the actually perceived performance meets the expectations of the customer, then confirmation is spoken of, which then results in customer satisfaction. If even the actual performance exceeds the target performance, which is called positive discount confirmation, satisfaction also arises. The customer is positively surprised, possibly even enthusiastic. If, on the other hand, the actual performance remains below the expectations of the customer – i.e. the target performance – then one speaks of negative discount confirmation, which results in dissatisfaction.

Consequently, customer satisfaction according to the model of the C/D paradigm is a judgment that always refers to a certain experience, the purchase or application of a product or the individual use of a service.

Possible consequences of customer satisfaction are the repurchase and positive word-of-mouth advertising. In case of dissatisfaction, there is a risk of negative word-of-mouth communication, complaint and, in the worst case, customer churn.¹³

4. Goals of customer loyalty

Through customer loyalty, economic and psychographic goals are pursued in the target system of a company.

In terms of corporate success, there are generally three types of economic goals. This includes increasing the security of the company, e.g. by contractual agreements or buying habits of customers. This is also closely linked to the minimization of risk by reducing the creditworthiness, transport and product innovation risks for the company. Likewise, the risk of the company by the competition can be reduced, since customer loyalty acts as a barrier to market entry.

Another economic goal is the growth of the company. This refers both to the increase in sales due to the increased purchase frequency of the individual customers, as well as to the expansion of the customer base through increased reference readiness of the regular customers.

Furthermore, customer loyalty also has a positive effect on the economic target of profitability, both on the cost and on the revenue side. Customer loyalty thus aims to reduce customer service and transaction costs in the form of administrative, sales and control costs. The increase in profit per customer and turnover, which is derived from the reasons already described in point two, also contributes to the increase in profitability.¹⁴

One of the psychographic goals of customer loyalty is to increase the level of awareness of the company – especially in the case of voluntary retention of the customer. In addition, customer loyalty will increase customer confidence in the company and improve the company's image.¹⁵

5. Types of customer loyalty

One way to characterize types of customer loyalty is to divide them into habitual – habitual – voluntary and involuntary bonding. Furthermore, these three superordinate types of bonding can be divided into five further aspects – situational, contractual, economic, technical-functional and psychological ties.¹⁶

However, the different types of customer loyalty can only be considered in isolation, as in practice there is often a combination of several.¹⁷

5.1. Situational binding

A situational bond between a customer and a provider arises, for example, from the influence of external factors that lead to a customer preferring a particular provider to another. This can be the case, for example, with the favorable location of a provider from the customer's point of view or with a special nature of the market – if at one time only one provider has opened or with monopolistic market structures. So it could be that the customer buys mainly from a special provider for convenience – e.g. to save time.

5.2. Contractual commitment

The customer is bound to the company by concluding a contract, whereby the customer has no legal possibility to change the provider for a certain period of time.¹⁸

However, the contractual obligation does not have a unilateral effect, because both contracting parties acquire rights and obligations that can also be legally demanded. Furthermore, contractual agreements usually supplement a bond at another level in order to minimize risks in the behavior of a customer and to ensure a certain security for both parties. The customer loyalty by contract is the easiest to recognize by the mostly written documentation of all types of customer loyalty.¹⁹

As an example of the contractual obligation, the Bertelsmann Club can be cited here, in which a minimum membership of two years and regular appointments of the members are already guaranteed by contractual regulation.²⁰

5.3. Economic ties

Economic loyalty is the best known and oldest form of customer loyalty. The customer is offered economic advantages, for example in the form of discounts. This would incur opportunity costs for the customer upon termination of the business relationship, as an extended discount framework may have been lost for him as a regular customer. Newspaper subscriptions, airline frequent flyer programs and discount brand systems work according to this principle – they offer financial benefits for the customer and bind him in this way.

In addition, a bond can also be achieved by building up economic barriers to change, such as in the form of termination costs of a business relationship. This is the case, for example, with prepaid mobile phones. If the customer also wants to use cards other than those purchased with the mobile phone before the expiry of a certain period, he must pay a one-time amount – of e.g. 100 euros – to the card provider.

In particular, the measures of the pricing policy, as described in point 6.2., are aimed at an economic commitment of customers.

5.4. Technical-Functional Bonding

The technical-functional binding of customers is mainly observed in system goods, such as furniture, EDP systems, software, in the hi-fi sector or even in industrial goods that enter the production process. The customer is technically dependent on the provider, as a change of business partner would be associated with compatibility problems. If a customer already owns a module from a system, he is initially bound to it, since the costs of acquiring this unit would be unnecessarily incurred in the event of a change of provider. In the capital goods sector, a technical link based on electronic networks, such as online connections or just-in-time contracts, is common. Online connections between banks and their customers are exemplary for a technical bond in the service sector, since, for example, a customer.B prefers a credit institution due to the offered possibility of online banking.

5.5. Psychological-Emotional Attachment

The involvement of the customer in the organization and processes of the company aims at building a personal relationship of the customer to the company. This can be done formally, e.g. through customer clubs or informally through joint ventures, tennis tournaments or personal contact by management. In doing so, a targeted psychological-emotional bond is²¹ to the company created on the basis of personal contacts.

Furthermore, a psychological-emotional bond can be achieved through a corresponding corporate image or through services particularly appreciated by the customer. This can lead to the customer identifying with the company and making it appear more attractive to him. Thus, the Swiss watch manufacturer SMH, by building an extraordinary image, achieved the loyalty of customers on a psychological-emotional level to the Swatch brand.

The habits or traditions of consumers, always frequenting a special provider when shopping, also have an influence on the psychological-emotional bond. This behavior has been observed, among other things, by numerous customers of the delicatessen Dallmayr in Munich, who have preferred this provider for decades.²²

Another cause of psychological-emotional customer loyalty is the customer's satisfaction with performance.

The main goal of professional customer loyalty management is to build or strengthen this type of voluntary customer loyalty, in which the customer rejects the option of changing providers on the basis of personal preferences, through targeted measures.²³

6. Instruments of customer loyalty

Since the instruments are presented in isolation below, it should be pointed out at this point that only through the combination and interaction of several measures will a sufficient degree of customer loyalty be achievable. In this context, one can also speak of a mix of customer loyalty instruments.

The effectiveness of the instruments of customer loyalty can focus on establishing a dialogue between customers and companies, on customer satisfaction or on the establishment of barriers to change.²⁴

In the following, the most essential measures for the retention of customers are presented – due to the diversity and diversity of customer loyalty instruments and the dynamics in this area, it is not possible to respond sufficiently to all instruments in the context of this study paper.

6.1. Product policy measures

6.1.1. Services

Services are of particular importance, especially in the context of decreasing differentiability and the increasing interchangeability of products and services. Thus, products can often only be clearly positioned in the market with the help of the services offered. Accordingly, they increasingly have a decisive effect on sales and can even, if properly designed, represent a strategic competitive advantage.

Services are additional services of all kinds that are marketed together with a core service. They include services, material benefits in kind – e.g. goods and rights, whereby the character of an additive element is always expressed. The function of services lies in the acquisition and, in particular, the retention of customers.²⁵

Taking into account customer expectations, a general distinction can be made between penalty, frill and reward services, into which the service categories and thus also the individual concrete services are integrated accordingly.

The penalty services are must-have services that are required by the customer. A lack of these offers thus carries a high potential for dissatisfaction and thus the risk of customer migration.

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¹ cf. Peter (1997), p. 1

² cf. Meffert (1999), p. 117 f.

³ cf. Peter (1997), p. 2

⁴ cf. Meffert (1999), p. 118

⁵ cf. Reichheld / Sasser (1999), p. 139

⁶ cf. Reichheld / Sasser (1999), p. 140 f.

⁷ cf. Homburg / Bruhn (1999), p. 8

⁸ Peter (1997), p. 8

⁹ Homburg / Bruhn (1999), p. 8

¹⁰ cf. Homburg / Bruhn (1999), p. 8

¹¹ Homburg / Bruhn (1999), p. 8

¹² cf. Meffert (1999), p. 119

¹³ cf. Homburg / Giering / Hentschel (1999), p. 84 f.

¹⁴ cf. Peter (1997), p. 42 ff.

¹⁵ cf. Homburg / Bruhn (1999), p. 17

¹⁶ cf. Homburg / Bruhn (1999), p. 10

¹⁷ cf. Peter (1997), p. 26

¹⁸ cf. Homburg / Bruhn (1999), p. 11

¹⁹ cf. Peter (1997), p. 25

²⁰ cf. Alber / Weber (1999), p. 483

²¹ While Peter distinguishes not only the psychological-emotional bond but also a kind of social bond, Homburg / Bruhn combine these two aspects into a psychological bond due to the great overlap.

²² cf. Peter (1997), p. 24 ff.

²³ cf. Homburg / Bruhn (1999), p. 11

²⁴ cf. Homburg / Bruhn (1999), p. 21 f.

²⁵ cf. Meyer / Blümelhuber (1999), p. 196 f.