Type and timing of rewards as influencing factors on the value perception of a customer loyalty program

Table of contents

Chapter 1 – Introduction
1.1 The context of the study
1.2 Research Motivation: What is missing in the previous research
1.3 Overall Problem Statement
1.3.1 Sub-questions
1.3.1.1 Theoretical part
1.3.1.2 Practical part
1.4 Managerial Motivation
1.5 Academic Motivation
1.6 Conceptual Model
1.7 Structure of the thesis

Chapter 2 - The customer loyalty concept
2.1 Introduction
2.2 The concept of customer loyalty
2.3 A different view on customer loyalty
2.4 Other definitions of customer loyalty, attitude vs. behaviour
2.5 Situational and normative factors influencing customer loyalty
2.5.1 Social and situational factors according to Dick and Basu and Oliver
2.5.2 Additional normative (social) drivers influencing loyalty
2.5.3 Additional situational factors influencing loyalty
2.5.4 Other influencing factors on loyalty
2.6 Conclusion

Chapter 3 – Customer loyalty programs
3.1 Introduction
3.2 Definition of customer loyalty programs
3.3 The difference between customer loyalty programs and promotion activities
3.3.1 Sales Promotion in form of coupons, stamps or vouchers
3.3.2 Affinity campaign
3.3.3 Customer card programs
3.3.4 Club programs
3.3.5 Integrated loyalty program
3.3.6 Proactive loyalty reward program
3.4 The effects of customer loyalty programs
3.5 Critical remark on customer loyalty programs
3.6 Conclusion

Chapter 4 – Consumer buying decision process
4.1 Introduction
4.2 The different problem solving processes
4.2.1 Routinized choice behaviour
4.2.2 Limited decision making
4.2.3 Extensive decision making
4.3 High involvement purchase decision making process
4.3.1 Problem recognition
4.3.2 Information search
4.3.3 Evaluation of alternatives
4.3.4 Purchase
4.3.5 Post-purchase evaluation
4.4 Critical assessment of customer decision making and the role of loyalty
4.4.1 Pre-decisional constraints
4.4.2 Mood
4.4.3 Differences in gender
4.4.4 High involvement vs. low involvement problem solving
4.4.5 Control of information flow
4.4.6 The influence of e-commerce
4.4.7 Prior decision making
4.4.8 The role of regret
4.5 Conclusion

Chapter 5 - Hypotheses Development
5.1 Introduction
5.2 Problem statement and sub-questions
5.3 Hypotheses development
5.3.1 Type and timing of reward
5.3.2 The role of moderating factors
5.3.3 Influence between type and timing of reward
5.4 Conclusion

Chapter 6 – Research and questionnaire design
6.1 Introduction
6.2 Research environment and sample choice
6.3 Research design
6.4 Questionnaire design
6.5 Conclusion

Chapter 7 - Data analysis
7.1 Introduction
7.2 Descriptives
7.3 Factor analysis
7.4 Hypotheses testing
7.4.1 The type of reward
7.4.2 The timing of reward
7.4.3 The dedication based relationship
7.4.4 The constraint based relationship
7.4.5 The relational benefit relationship
7.4.6 The interrelation between the type of reward and timing of reward
7.5 Discussion of hypotheses results
7.5.1 Discussion of the type and timing results
7.5.2 Discussion of dedication and constraint based relationship influence
7.5.3 The influence of timing on type of rewards
7.6 Additional findings
7.6.1 Benefits knowledge influence on value perception
7.6.2 Car dealer / garage usage influence on value perception
7.6.3 Age influence on value perception
7.6.4 Gender influence on value perception of loyalty programs
7.6.5 Household differences on value perception
7.6.6 The relationship between value perception and loyalty
7.7 Discussion of additional findings
7.8 Conclusion

Chapter 8 – Conclusion
8.1 Introduction
8.2 The theoretical findings
8.2.1 The concept of loyalty
8.2.2 Sorts and effects of loyalty programs
8.2.3 The decision making process
8.3 The practical implications
8.3.1 Influence of type and timing on value perception
8.3.2 The role of moderating factors
8.3.3 The interaction of type and timing of rewards
8.4 Theoretical implications
8.5 Managerial implications
8.6 Limitations and suggestions for further research

References:

Appendix 1 - Questionnaire (English)
I. Type of reward
II. Timing of reward
III. Relationship maintenance motivation (neutral)
IV. Relational benefits (neutral)
V. Demographics

Appendix 2 - Questionnaire (German)
I. Art der Prämien
II. Timing von Prämien
III. Beibehaltung der Beziehung zum Autohändler / Werkstatt (neutral)
IV. Vorteile - Beziehung zum Autohändler / Werkstatt (neutral)
V. Demographische Fragen

Appendix 3 – Frequencies

Appendix 4 – Factor analysis

Appendix 5 – Reliability analysis

Appendix 6 – Hypotheses testing

Appendix 7 – Additional outcomes

Chapter 1 – Introduction

1.1 The context of the study

As past research has shown, many authors already devoted extensive research to customer loyalty and customer loyalty programs. On the one hand there are studies that deal with the definition of customer loyalty and different sorts of loyalty (Dick and Basu, 1994). Several other studies examine influencing factors or antecedents of customer loyalty such as Blackwell et al. (1999) or Olsen (2002).

However, not only the loyalty concept itself has received a high level of attention, but also the concept and the effects of customer loyalty programs on customer loyalty are empirically investigated. Wansink and Seed (2000) for example examined the influence of reward programs on different sorts of product users. Dowling and Uncles (1997) emphasise that the effect of a loyalty program will be higher for high involvement than for low involvement products. Thus, there are many different factors that already have been examined to find out the relationship between the concept of customer loyalty and customer reward programs. Nevertheless, there are still many gaps that are to be examined and thus, this study will also be based in the context of customer loyalty and the effect of customer reward programs.

The two main articles for this study are delivered by Yi and Jeon (2003) and Kumar and Shah (2004). Whereas the former authors examine the influence of the type of reward and the timing of reward on value perception of a loyalty program (Yi and Jeon, 2003), the latter authors describe a model that distinguishes between reactive (delayed) rewards which are named Tier 1 and proactive (anticipatory) rewards called Tier 2. The outcome of Yi and Jeon’s study reveals that the type and the timing of reward have an influence on customer loyalty whereas the distinction between low and high involvement products serves as a moderating factor (Yi and Jeon, 2003). The type of reward is differentiated by direct versus indirect rewards and the timing of reward is separated into delayed versus immediate rewards (Yi and Jeon, 2003). In relation to that Kumar and Shah (2004) distinguish between reactive (delayed) rewards which are named Tier 1 and proactive (anticipatory) rewards called Tier 2. They assume that the distinction between Tier 1 and Tier 2 rewards have different influences on customer loyalty as reactive premiums are standardised and proactive rewards are customised (Kumar and Shah, 2004). The description of the research motivation will deliver the reasons why a further analysis in this field of study is necessary and what this study is able to contribute to academic literature.

1.2 Research Motivation: What is missing in the previous research

As mentioned above, there are different approaches to investigate the antecedents and consequences of customer loyalty. Furthermore, the effects of customer loyalty programs have been investigated from different viewpoints. Nevertheless, academic literature is still in need of further investigations in this field of relationship marketing.

In relation to the descriptions above, the model of Yi and Jeon (2003) disregards the proactive variable with respect to the timing of reward factor. This study will include the proactive variable into the model and empirically examine its influence on the value perception of the customer reward program. In other words, Kumar and Shah (2004) are the first ones to introduce the concept of proactive rewards instead of only focusing on reactive or immediate rewards. Certainly, the effect of proactive rewards can only be tested measuring customers intention rather than behaviour. Taking the model by Yi and Jeon (2003) as a basis, the concept given by Kumar and Shah (2004) has to be included into that model given a high involvement context.

In addition, as Dowling and Uncles (1997) explained it already in their analysis, the effect of a loyalty program is in general higher for high involvement than for low involvement products. This finding has been neglected in most of the studies and will thus be taken as a precondition for the whole research at hand. Hence, a study in a high involvement setting adds value to several studies conducted in a low involvement setting.

Furthermore, the effect of moderating factors on value perception of a loyalty program has also been ignored so far. This gap will be closed by taking relational benefits as moderating factors into the discussion. An extensive study by Gwinner, Gremler and Bitner (1998) investigated different sorts of relational benefits. It can be assumed that different relational benefits have also a distinct influence on the value perception of a loyalty program. It is therefore advisable to take these variables into the model to be examined.

With respect to the moderating factors, also the dependence of at least one partner in a relationship might have a moderating influence on the value perception of a loyalty program. In their analysis, Bendapudi and Berry (1997) observe differences between constraint and dedication based relationships. However, these differences have not been examined in the customer loyalty reward context so far. Consequently, this study adds the ideas of Bendapudi and Berry (1997) also as moderating variables to the value perception model mentioned above.

Finally, Yi and Jeon (2003) found no significant interaction effect between timing of reward and type of reward. That might be different taking high involvement products and the new Tier 2 variable into account. Hence, the connection between those two variables is worthwhile to examine again.

With respect to the different findings and the accompanying gaps in the literature explained above, an overall problem statement with its accompanying sub-questions is offered in the following paragraph.

1.3 Overall Problem Statement

The above mentioned shortcomings of previous academic research show that an elaborate study about the influencing factors type and timing of reward on the value perception of a loyalty reward program is inevitable. In addition, science still lacks an analysis of the moderating factors such as relational benefits on the value perception of a loyalty program. Therefore, this research will try to close the above mentioned gaps and find an answer to the overall problem statement:

To what extent do the type and the timing of reward have an influence on the value perception of a loyalty reward program, which role do relational benefits and relationship maintenance moderating factors play and is there a relationship between the type and timing of reward with respect to a high involvement product?

In order to tackle the problem statement above, it has been divided into two main parts which consist of various sub-questions.

1.3.1 Sub-questions

There are some sub-questions that are to be answered theoretically because they can be deduced from the discussion of prior literature. However, the gaps in the literature have to be researched empirically and thus, the second part of the sub-questions deals with the practical part of this thesis.

1.3.1.1 Theoretical part

First of all, the basic topic which is discussed in this whole study deals with the term customer loyalty. However, there are various approaches to loyalty and several models about the loyalty concept have been introduced in the academic literature. In order to find out, which definitions exist and which approach is the most useful for the thesis the question has to be answered:

What loyalty definitions and concepts are there and which factors play an influencing role in loyalty formation?

Having found an answer to the first sub-question the discussion about customer loyalty programs comes into play. As literature has shown in the past, there are many different possibilities to grasp the attention of the customer via a loyalty program. However, frequently, customer loyalty programs turn out to be ineffective or to costly for the firm. Hence, the second sub-question should try to give an answer about:

Which customer loyalty programs are there and to what extent do they affect customer loyalty?

Of course, the value perception of a loyalty program is not only influenced by the different sorts of loyalty programs. There are basic models that explain consumers’ decision making processes and choice behavior, which are determining forces on customer loyalty of course. Hence, one part of the study is devoted to finding an answer to the question:

What are the different factors that influence the decision making process of a customer and in what way do they affect customer loyalty?

1.3.1.2 Practical part

This thesis is also going to develop a new model which will be tested empirically. Hence, there are some practical sub-questions that shall be answered via conducting a survey and seriously, new insights into the value perception of loyalty programs will be discovered. According to the model of Yi and Jeon (2003), the type of reward and the timing of reward have an influence on the value perception of a loyalty program. However, the model has been revised and will be tested given a high involvement product. Hence, the question to be answered according to the modified model reads:

Given a high involvement product, in how far do the type of reward and the timing of the reward have an influence on the value perception of a loyalty program?

In the research setting at hand, not only the direct influence of the type and timing of reward is tested empirically on the value perception of a loyalty program but also some moderating factors are taken into account, which are assumed to have an impact on the customers’ value perception. Therefore, the second practical sub-question that has to be answered is:

To what extent do consumer behaviour variables such as relational benefits or the distinction between dedication and constraint based relationships act as moderating factors to influence value perception?

Opposing to the findings of Yi and Jeon (2003), namely that there is no interaction effect between type of reward and timing of reward, this thesis suspects that with a tested proactive and delayed reward system, it could be possible that the there is a relationship between type and timing of reward. However, the findings of the study will prove if the assumptions will hold and give an answer to the question:

In what way do the type and the timing of rewards interact with each other?

1.4 Managerial Motivation

The proposal at hand delivers future indications for companies dealing with high involvement products. High involvement products are products that are of high relevance on the one hand and demand extensive decision making from the customer on the other hand (Peter, Olson, 2005). The buying of a new car or a stereo entertainment system are examples of high involvement products. However, also in this field of industry, competition is fierce and products are not easily differentiated by the customer and the technique develops very fast. Therefore, companies need a tool which they can use to differentiate from competition. The concept of Tier 2 rewards makes it possible for producers of high involvement products to discriminate themselves from other producers of the same industry. If people have been already loyal to the firm for a certain amount of time, firms can actively make use of customer data to reward customers personally with direct or indirect rewards. They also might be able to distinguish between those customers who are seeking solely for confidence, social benefits or special treatment benefits. Unfortunately, customer data has been collected mostly via delayed reward programs. For example, the research by Noordhoff et al. (2004) on Tier 1 rewards has shown that people do not devote their loyalty to one single company or brand. Among other reasons, this has to do with the penetration of loyalty cards on well established markets, so that people are not bound to a particular company due to the possession of a loyalty card. However, with a proactive reward system which means that the firm anticipates the customer to stay loyal in the future if he is rewarded with a special gift, competitors are no longer able to copy a firm’s loyalty program. Nevertheless, this can only be anticipated as the effect of Tier 2 results has not been researched thoroughly in the past. Therefore, the findings of the study might have important implications for managers and broaden their opportunities to enhance customer loyalty. This research will find out customers’ value perception of the loyalty program according to the timing and the type of reward. Depending on the outcomes, a company might decide to implement proactive reward systems because it promises to strengthen the loyalty relationship with the customer, leading in the end to higher profits for the firm, because the attraction of new clients is more costly than investing in the old customer base. Additionally, the distinction between direct and indirect rewards might also help firms to make rewards more effective. This could also save money for the firm if funds are invested in the “correct” reward system. Finally firms can profit from the distinction of different customer groups. The moderating effect of relational benefits shall show how the value perception of a reward program is influenced by confidence benefits, social benefits and special treatment benefits according to the type and timing of reward. Consequently, firms can profit from positioning customers according to their “benefit type” and are able to respond accordingly. The level of dedication and constraint based relationships are also analysed and could give an indication how those different groups should be handled. Finally, this research shall empirically help managers to find alternative ways to reward customers for their loyalty with the intention to strengthen customers’ loyalty. This is a competitive advantage in contrast to major competitors and improves the company’s position in the market.

1.5 Academic Motivation

In line with the business economic motivation, also the academic motivation includes several aspects that have not been discussed in the previous research. As already mentioned above, Yi and Jeon (2003) discuss delayed versus immediate rewards in their model. In addition, Kumar and Shah (2004) discuss the distinction between delayed rewards and proactive rewards. Hence, the gap between reactive and proactive rewards will be closed with this research. The model includes a link between proactive rewards and the value perception of customers. Secondly, there are several authors that discuss different relational benefits that are experienced by customers in long run relationships (Gwinner et al., 1998). In addition, Bendapudi and Berry (1997) highlight the distinction between constraint based and dedication based long term relationships. In their model of customer loyalty, Blackwell et al. (1999) discuss several factors that influence the perceived value by customers. They find out that the variables sacrifice, benefit and personal have a direct influence on value (Blackwell et al. 1999). However, the literature still lacks the inclusion of relational benefit factors as moderating factors between the type and timing of reward and the accompanying value perception of the loyalty program. In the study at hand, relational benefits are included as moderating factors and not as antecedent variables. Consequently, a combination of relational benefits as moderators with the effectiveness of different loyalty program factors sheds more light on the value perception of loyalty reward programs for long term customers. Furthermore, most loyalty literature discussed the effects of loyalty cards or other bonus programs which are on the one hand reactive but on the other hand also based on low involvement products or on both, high and low involvement products. This research shall be based solely on high involvement products as proactive rewards also make more sense for high priced products than for low priced goods.

1.6 Conceptual Model

From the propositions mentioned above, a research model can be formed. This model shows the effects of timing and type of reward on the value perception of a loyalty program and includes also the moderating factors of relational benefits and trust in or dependence on the partner. The whole model is visualized in figure 1.1, page seven:

illustration not visible in this excerpt

Figure 1.1: Conceptual model

Source: Based upon Yi, Y., Jeon, H. (2003).

The conceptual model on page seven will recur in chapter five, which contains the hypotheses development of this research. This will then discuss the corresponding link between the type and timing of reward on the value perception of a loyalty program, which is indicated by the two arrows of type and timing which points at value perception. The role of moderating factors is indicated by the arrows that point at the type and timing linkage arrows that point at the value perception box. Finally, the direct impact between the type and the timing of reward is specified by the double arrow between type and timing of reward. The dotted arrow between value perception and loyalty implies the additional test which measures if value perception has an influence on loyalty.

1.7 Structure of the thesis

In order to find an answer to the problem statement and the research questions, this study gives an elaborate literature review and discusses the different findings on customer loyalty, reward programs and relational benefits. With the help of previous literature, arguments will be found for the research questions at hand and these arguments will be used to make propositions for the hypotheses to be tested in the subsequent chapter. The hypotheses will base on the relation between the type and timing of reward and their effects on the value perception of the reward program by customers. The factors influencing value perception are moderated by the relational benefit variables that are also tested in detail. A precise model will visualize the tested relationships among the different variables. After the development of hypotheses, the sampling choice and method are discussed and the research set up will be explained in depth. Consequently, after the hypotheses testing, the objective results are presented and explained accordingly. However, a subjective discussion of the results follows as well to show the author’s explanation of the research outcome. Finally, the theoretical as well as the managerial implications will be emphasized. The thesis concludes with its limitations and propositions for further research.

Chapter 2 - The customer loyalty concept

2.1 Introduction

After the introduction of the basic motivations and background ideas for the thesis at hand, this chapter is devoted to discuss the relevant literature about the customer loyalty concept. First of all, a frequently cited loyalty model by Dick and Basu (1994) is examined and explained. Subsequently, another article that elaborates on the difference between customer retention and loyalty is introduced. Thereafter follows a detailed discussion about various definitions of loyalty from the behavioural as well as from the attitudinal perspective. In relation to the loyalty analysis, a clear definition of loyalty that will be used further in this study is given. As the loyalty concept does not exist in a vacuum, also various influencing factors on customer loyalty are presented. Finally an answer to the theoretical sub-question mentioned above will be given.

2.2 The concept of customer loyalty

The definitions of customer loyalty are manifold and several researchers used different definitions in the past. However, the term customer loyalty is split into two main categories which are attitudinal loyalty and behavioural loyalty. There are two authors, Dick and Basu (1994) that dealt with the interplay of attitudinal and behavioural loyalty and presented a sophisticated model in 1994. It is worthwhile to take a close look at that model as it serves as a basis for the later discussion about the loyalty definition by various other authors. In addition, Dick and Basu have been cited in various articles in the past (e.g. Olsen (2002), Kumar and Shah (2004). However, the model does not only reflect the relation of attitudinal and behavioural loyalty, it also discusses the psychological factors that lead to a particular attitude as will be now shown.

Dick and Basu (1994) define loyalty as “the relationship between the relative attitude toward an entity (brand/service/store/vendor) and patronage behaviour” (Dick and Basu, 1994, p.100). Hence there is a clear distinction between a customer’s attitude and the accompanying behaviour. Furthermore, the attitude that is formed by a customer results from different antecedents that precede the attitude development. Dick and Basu (1994) mention three main attitudinal antecedents, which are cognitive, affective and conative antecedents. However, in contrast to Oliver (1999), all three types of antecedents have a simultaneous influence on the relative attitude formation. Oliver (1999) however argues that a consumer’s attitude is built on the sequence of cognition – affect – conation pattern which leads finally action loyalty. This controversy will be picked up and discussed in a later discussion section about the critical comparison of both articles. For now, it is worth noticing, that Dick and Basu (1994) differentiate between the cognitive part, which involves informational characteristics of the brand, the affective antecedent including the feelings involved in the attitude development and finally the conative antecedent which strongly refers to behavioural proneness. These factors together have an influence on the relative attitude of a consumer, whereas the attitude might be either high or low and the degree of differentiation also plays a role (Dick and Basu, 1994). Nevertheless, the most important part is the composition of the relative attitude and repeat patronage which also could be named behavioural loyalty. There are four possibilities of loyalty according to Dick and Basu (1994) which are now presented in turn.

No loyalty: If a customer has a low relative attitude in combination with a low repurchase behaviour, then no loyalty exists. Of course, this is a very unpleasant state as the low attitude will not lead to any positive word of mouth which could positively influence other customers as well. Furthermore, low repeat patronage means low repurchase behaviour of people which leads to unfavourable revenues for the firm. Hence, consumers might have a strong aversion against the brand Mercedes-Benz for example and would therefore also never buy one.

Spurious loyalty: This is the connection of a low relative attitude with a high repeat patronage. Obviously, people are loyal because they are socially influenced on the one hand or people are subject to inertia on the other hand. This loyalty position means secured revenues for the firm for a period of time but the consumer’s attitude towards switching is very high, so that the stronger the negative attitude, the more the customer might be willing to change his behaviour. Constraint based relationships also belong to that kind of loyalty as people are captured in the relationship (Bendapudi and Berry, 1997). Hence, this form of loyalty might be valid for people who have to drive a Mercedes Benz as a company car and do not have an alternative to choose from.

Latent loyalty: According to Dick and Basu (1994), this is the status of a high relative attitude in combination with a low repeat patronage. They formulate, that this is “a serious concern for marketers” (Dick and Basu, 1994, p.102). Their reasoning bases on the high influence of social norms and situational factors that rank higher than the underlying positive attitude. It is doubtful however, if this always holds true. Considering that people with a high relative attitude purchase the same high involvement brand (such as a Mercedes Benz e.g.) repeatedly in particular intervals is very favourable for the company providing the good. Hence, for high involvement goods, latent loyalty might be seen as (true) loyalty within a high involvement surrounding. Consequently, the definition of latent loyalty holds true for this research at hand.

Loyalty: The linkage of high relative attitude and high repeat patronage leads to the most favourable status. However, this status is also the most attacked one by competitors according to the authors, which try to influence customers via focusing on an attitudinal change or on modifications on situational influences (Dick and Basu, 1994). The status of true loyalty might only be reached, if consumers are able to differentiate brands clearly and if they perceive the preferred brand to be of higher value for them than other offers. It is questionable, for which group of brands or products this holds true as situational as well as normative factors play a strong role here. However, people who do like a high involvement good such as a Mercedes Benz for example and can afford to buy one, will do so in regular time intervals. Nevertheless, it can be assumed that most of the owners of a high involvement good do not repurchase the good in short time intervals. Figure 2.1 summarises the model of Dick and Basu (1994).

Repeat patronage

High Low

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High

Relative attitude

Low

Figure 2.1: Relative attitude-behaviour framework

Source: Dick and Basu (1994)

2.3 A different view on customer loyalty

A different view on the customer loyalty topic is given by Oliver (1999), whose analysis also served as a basis for several research studies in the past (see e.g. Chaudhuri and Holbrook (2001), Mc Mullan (2005)). According to him, the establishment of loyalty needs several stages including attitudinal as well as behavioural aspects. In relation to Dick and Basu (1994), also Oliver (1999) takes the cognitive, affective and conative loyalty stages as attitudinal phases of loyalty into consideration, whereas the behavioural part is defined by Oliver’s action loyalty. However, the big difference between the authors lies in the definition of loyalty development. Whereas Dick and Basu (1994) integrate cognition, affection and conation into one step to define high or low relative attitude, Oliver (1999) regards them as subsequent phases. Both views on loyalty establishment is visualised in figure 2.2.

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Figure 2.2: Comparison of loyalty development Dick and Basu vs. Oliver

Source: Ulrich Pohl (2006)

Although the loyalty development process seems to be different between both authors, also Oliver (1999) defines loyalty according to the consumer’s attitude and behaviour. His definition of loyalty is as follows: “a deeply held commitment to rebuy or repatronise 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 behaviour” (Oliver, 1999, p. 34). Each loyalty phase will be discussed in turn in order to see if there are differences or communalities to the framework by Dick and Basu (1994).

Cognitive loyalty: This is the very first loyalty phase and contains the information availability of different products and the ability of consumers to differentiate between alternatives. This stage of loyalty contains only rational aspects; hence the customer is only interested in the performance of the brand/product.

Affective loyalty: After the completion of the cognitive phase, the second, affective loyalty phase starts. This is the phase in which the likeness to the product or service is established. This liking is built up because of recurrent satisfying consumption opportunities (Oliver, 1999). The level of affect measures the degree of loyalty at this stage and translates then to the next stage of loyalty.

Conative loyalty: The third phase within the loyalty development framework is the step in which conative loyalty is built up. The customer reaches this stage of loyalty if he was positively affected by the brand before and has developed a certain brand commitment to that special product or brand already (Oliver, 1999). However, conation still refers to the attitude of product rebuy and not on the action of repurchasing which is manifested in the fourth and last stage of loyalty formation.

Action loyalty: In the last loyalty stage, the previous formulated intention to repurchase a product or brand is now put into action. Hence, the customer repeatedly purchases the product and if this stage is reached the so called action inertia (Oliver, 1999) supports further repurchase actions of the consumer. However, before the consumer is actively loyal he has to overcome several obstacles that could have emerged during the attitudinal loyalty phases.

A comparison of the loyalty framework by Dick and Basu (1994) and Oliver (1999) shows that although both loyalty definitions are quite similar, there are some striking differences that need to be discussed. The first difference has already been mentioned above which is the simultaneous against the subsequent building of the different loyalty stages which are summarised by attitudinal loyalty. It is questionable, if the proposed framework by Oliver (1999) really follows the way of cognition, affection, conation and then action. There has been much controversy about affect and cognition in the past academic literature. There are some authors who insist that affect always results from prior recognition. Other authors state that affect and cognition are completely independent and neither precedes the other. Two authors that discussed affect and cognition controversially are Zajonc (1984) and Lazarus (1984). According to Lazarus’ view, before a decision is made, the cognitive activity always precedes the affective activity (Lazarus 1984). Thereby it plays no role of whether the activity is a very simple or a very comprehensive one. Thus, also in a high involvement setting, Lazarus determines that cognition always comes first. Consequently, Lazarus excludes the possibility that decisions could be made out of a gut feeling. He does not accept that people make decisions whereas they do not really know why they have decided the way they did. Thus, all decisions are made on a rational rather than on an emotional basis. The other view is taken by Zajonc (1984), who argues that affect and cognition are two independent systems. In line with his argumentation, he also says that although the systems are independent they usually function together. However, this does not determine that cognition precedes affect. In his paper, Zajonc (1984) makes use of several empirical findings in order to prove that Lazarus’ view is too limited and that there is indeed proof for affective primacy (Zajonc 1984). Thus, although high involvement goods are mostly bought on the basis of rational deliberations, it is also possible that a car for example is bought out of a gut feeling, simply because the consumer is affected by the car’s design before he considered the positive features of the car (cognition). As a consequence of the past debates about affect and cognition, Oliver’s clear structured framework of cognition – affect – conation – action might not always hold true. Hence, the framework delivered by Dick and Basu (1994) shows a broader definition of the different steps in attitude formation. They state that “for loyalty, each may play a role in defining the nature of the attitude and consequently its relationship with patronage behaviour” (Dick and Basu, 1994, p.105). However, they do not commit themselves to a certain order. As this view is the more convincing one, Dick and Basu’s (1994) sight will be adopted also in this paper.

Furthermore, the propositions by Dick and Basu (1994) also include a graduation of relative attitude and repeat patronage. Hence, the framework given by Oliver (1999) does not make a distinction of high or low attitudinal loyalty status combined with high or low repeat buying behaviour. However, they confess that there are different forces that could negatively influence the loyalty process at every single stage of loyalty formation. Thus, a status of full loyalty might be reached but due to the vulnerability of loyalty, ultimate loyalty is difficult to attain. Therefore, Dick and Basu (1994) separate between high and low stages of attitudinal and behavioural loyalty with respect to other influencing factors such as social norms or situational influences (Dick and Basu, 1994). Based on the explanations above, this thesis will build on the loyalty framework developed by Dick and Basu (1994), as it separates between high and low attitudinal / behavioural loyalty in contrast to Oliver’s model. This distinction is necessary to evaluate the different customer groups that are taken into consideration for the statistical sample later on. Especially, when the moderating factors on the value perception of a loyalty program are examined, the distinction between high/low attitude and behaviour are assumed to make a difference in the outcome of the study.

2.4 Other definitions of customer loyalty, attitude vs. behaviour

As the analysis of the Dick and Basu (1994) model and also the framework of Oliver (1999) has shown, there is a strong linkage between attitudinal loyalty and the behavioural loyalty. Both groups of authors include both parts of customer loyalty, which also other authors did in the past (e.g. Baldinger and Rubinson (1996), Mc Mullin (2005)). However, it is worth examining if all authors build on a two sided form of loyalty or if some rely either on the behavioural part or on the attitudinal side solely. Hence, this paragraph should discover, whether behavioural loyalty is possible without an attitude and vice versa and also give an indication how the term loyalty is used in this further research.

In a research about different attitudinal loyalty measurement approaches Bennett and Rundle – Thiele (2001) base their definition of loyalty on Jacoby and Chestnut’s (1978) definition, saying that attitudinal loyalty is “the consumer’s predisposition towards a brand as a function of psychological processes. This includes attitudinal preference and commitment towards the brand” (Jacoby and Chestnut, 1978 in Bennett and Rundle-Thiele, 2001, p.194). However, Bennett and Rundle – Thiele admit that there is “no ideal, cure – all notion of loyalty but a number of appropriate measures which are context – specific and appropriate in given situations” (Bennett and Rundle-Thiele, 2001, p.194). In addition, they determine that there is no single measurement of brand loyalty, with which they mean behavioural and attitudinal loyalty (Bennett and Rundle – Thiele, 2001). However, both authors found out that the influence of a nice purchase event might have an influence on repeat purchase but is not related to a positive impact on the consumer’s attitude towards the brand.

In relation to both authors mentioned above, Fitzgibbon and White (2004) also make clear that there are two forms of loyalty which are separated into behaviour and attitude. They also rely on the attitudinal definition given by Jacoby and Chestnut (1978) mentioned above and define: “behavioural loyalty exists when a consumer repeatedly purchases a product or service but does not necessarily have a favourable attitude towards the brand” (Fitzgibbon and White, 2004, p. 215). Their research on financial service firms discovered that both elements of loyalty are important. Some CRM strategies of firms focused merely on the attitudinal affection of people and the other was solely based on changing the customer’s behaviour. Hence, although the focus of the study laid on attitudinal loyalty, these authors found a strong relationship between attitudinal and behavioural loyalty in contrast to Bennett and Rundle – Thiele (2001).

Besides the comprehensive studies that include the behavioural as well as the attitudinal part of loyalty, there are also authors that focus on behavioural loyalty only such as Neal (2000). He stated that “customer loyalty is an individual behaviour based on the act of purchasing or choosing to purchase applying equally to persons and institutions” (Neal, 2000, p.7). In addition, Mc Mullan (2005) states that “most analyses of loyalty have been from a behavioural perspective, excluding attitudinal type data and concentrating on a deterministic perspective using stochastic models” (Mc Mullan, 2005, p.471). This fact is also proven by a research conducted by Yim and Kannan (1999) who did a segmentation study on behavioural loyalty and also Tranberg and Hansen (2001) focus on the behavioural measure of loyalty. Nevertheless, all authors acknowledge that a two sided definition of customer loyalty exists although most of them focus only on one part of loyalty in their study.

A further study that investigated the connection of attitude and behaviour was performed by Baldinger and Rubinson (1996). They also emphasise that most research is based on behavioural loyalty measures but their “BrandBuilder model” includes again a behavioural as well as an attitudinal part (Baldinger and Rubinson, 1996). However, their model suggests that behaviour determines attitude which is in contrast to Dick and Basu (1994) and Oliver (1999). Actually, their model defines that “once consumers are accurately classified behaviourally, it is possible to link to their attitudes toward those brands, on a respondent by respondent basis” (Baldinger and Rubinson, 1996, p. 23). However, after the analysis of time series data the authors were able to classify customers into different loyalty groups as Dick and Basu (1994) also proposed. Baldinger and Rubinson (1996) deliver the proof that the connection of attitude and behaviour are a thorough basis for a predictive model. They divide people differently compared to Dick and Basu (1994) but the predicted and actual outcome is the same. Hence, prospective customers are those which have a stronger attitude towards the brand than behaviour and vulnerables have a stronger behaviour than attitude (Baldinger and Rubinson, 1996). The results of the time series study show that highly behavioural loyal customers with a low to moderate attitudinal loyalty tend to switch to a different brand. On the other hand, low loyal buyers with a strong attitude towards a brand tend to switch to that particular brand. Hence, it depends on the mixture of attitude and behaviour to determine whether the consumer is truly loyal, prospective to become a customer or a vulnerable customer that tends to switch away.

For the thesis at hand, it makes sense to include both measures of loyalty as the practical part of this paper will take the attitudinal as well as the behavioural loyalty of consumers into account. As already mentioned above, the framework delivered by Dick and Basu (1994) serves as the most comprehensive basis for this research and therefore also their definition is the most applicable for the research at hand. Figure 2.3 on page 17 visualises the findings.

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Figure 2.3: Different definitions and approaches of the loyalty concept

Source: Ulrich Pohl (2006)

2.5 Situational and normative factors influencing customer loyalty

As the introduction to this chapter already indicated, a customer’s loyalty does not exist in a vacuum. Hence, there are several factors that influence the consumer’s loyalty decision in a positive as well as in a negative way. This paragraph introduces some of these factors to reveal their variety and strength.

2.5.1 Social and situational factors according to Dick and Basu and Oliver

In their framework, Dick and Basu (1994) also mention social and situational factors that have an impact on customer loyalty behaviour. According to their model, repeat patronage is strongly dependent on these factors regardless of the attitude that has been formed before. Social norms are defined as “People’s beliefs that significant others think they should or should not perform a behaviour and their motivation to comply with these referents” (Dick and Basu, 1994, p.105). Hence, the repurchase behaviour of people depends strongly on how strong the purchase hinges on a reference group. Furthermore, Dick and Basu (1994) describe that the link between attitude and behaviour could also be biased by situational factors such as price variations or the customer’s propensity to be attracted by a certain promotion action. Unfortunately, Dick and Basu’s elaborations are not exhaustive as there are many more influencing factors that already have an impact on customer loyalty at the attitude formation stages as Oliver (1999) has shown. The influencing factors which he calls “obstacles” are separated into consumer idiosyncrasies and switching incentives. Especially during the above mentioned cognitive and conative stage, people recognise product variations, differences in price, performance, design etc. Hence, competitors might have been able to lure the consumer away before he was actually able to reach the behavioural stage of loyalty (action loyalty). Furthermore, Oliver (1999) mentions that people register also changes in need which Dick and Basu (1994) totally neglected.

2.5.2 Additional normative (social) drivers influencing loyalty

In their analysis on loyalty antecedents, Gounaris and Stathakopoulos (2003) include social drivers in their conceptual model as social group influences and peer’s recommendation might have a significant influence on the type of brand loyalty. Indeed, social group influences have a strong impact on the type of customer loyalty as found out in their analysis. In addition, Rimal and Real tested “how behaviours are influenced by perceived norms” Rimal and Real, 2005, p. 389). The study included several normative factors, which are all anticipated to have an impact on people’s behaviour as also Dick and Basu (1994) suggested. The outcome of the study emphasises that normative mechanisms truly have an influence on behavioural intention (Rimal and Real, 2005). Several researches dealt with this topic and it was found out that “consumers attitudinal and behavioural responses to a brand’s action are influenced by the relationship norm salient at the time of their brand interactions” (Aggarwal and Law, 2005, p.453). Also their study reveals the findings of other researchers and state that “…type of relationship norm influences the processing strategy adopted by consumers” (Aggarwal and Law, 2005, p. 460). They differentiated between communal (between friends and family) and exchange related (between business partners) norms. However, both types of norms have an influence on attitude and behaviour as they show in their research. A deep analysis about sociological (= normative) influences on consumer behaviour is also provided by Sheth and Parvatiyar (1995). They state that there is a great influence of society, family and other reference groups on consumer behaviour (Sheth and Parvatyiar, 1995). Thus, the influence of family members on attitudes and finally also on behaviour are intense. According to the authors, there are four reasons as to why individuals follow norms. These influences that a family member has to consider are driven by power, conflict, social exchange and cooperation (Sheth and Parvatiyar, 1995). People are more apt to change their attitude towards a certain brand or product or refrain from certain behaviour than engaging in a conflict with reference groups or group members. The influence of others might even increase the more risk there is involved in a certain situation. In the case at hand, the purchase of a high involvement good is associated with high risk as there are much higher investments required than in a low involvement good purchase situation. Consequently, the normative variables in the attitude formation and retention given a high involvement product are assumed to be considerable influencers. A summary of the above findings is provided in figure 2.4 below.

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Figure 2.4: Normative drivers that influence loyalty

Source: Ulrich Pohl (2006)

2.5.3 Additional situational factors influencing loyalty

In addition to the normative influences there are also situational factors that could manipulate the link between attitude and behaviour. In line with Dick and Basu, Ha (1998) also mentions that different situational factors might have an influence on the purchase behaviour of people. He states that “these situational factors are potentially extraneous events that may introduce inconsistency in an attitude – behaviour relationship (Ha, 1998, p.56). Some of those situational factors include availability of alternative behaviours, norms for acceptable attitudes and/or behaviour, expected and/or actual consequences of the behaviour etc. (Smith and Swinyard, 1983). Furthermore, Blackwell et al. (1999) perceive that situational factors are one of the influencing antecedents on repeat patronage. Referring to Dick and Basu (1994), they are of the opinion that a situation variable is able to heavily influence repeat patronage (Blackwell et al., 1999). The discussion and also the empirical analyses of situational components and their impact on value/attitude formation and behaviour turn out to be valid in different research settings. However, mostly, situational factors have only been tested in the low involvement goods setting as also the study by Dubois and Laurent (1999) was conducted in a FMCG environment. They confirm that the situational component indeed has a great impact on customer loyalty (Dubois and Laurent, 1999). Nevertheless, the outcomes of the study are also transferable to the research setting at hand as price for example plays a great role in high involvement goods sectors. Furthermore, the consequences that evolve from purchasing a high involvement good are much more profound as more effort, information search, money etc. is involved. Again, the findings of this paragraph are illustrated in figure 2.5:

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Figure 2.5: Situational drivers that influence loyalty

Source: Ulrich Pohl (2006)

Although this study will not empirically assess the normative and situational influencing factors that play a role in the consumer’s attitude formation and repurchase behaviour, it is important to notice that these influences exist. Certainly, customers are driven by situational influences as well as normative variables. Family members and other groups have an impact on people’s attitude and finally also on behaviour. In addition, situational influences such as massive price reductions also lead to a reconsideration of the consumer’s attitude especially in a high involvement setting.

2.5.4 Other influencing factors on loyalty

Another study that investigated different antecedents on customer loyalty has been delivered by Gounaris and Stathakopoulos (2003) as mentioned above already. They empirically assessed which variables have an influence on the different forms of loyalty that are identical to repeat patronage / relative attitude framework by Dick and Basu (1994). With respect to their study, they define the term brand loyalty as being attitudinal as well as behavioural. Hence, brand loyalty might be used interchangeably with customer loyalty in this case. Gounaris and Stathakopoulos (2003) pick up the influencing drivers delivered by Oliver (1999) and Dick and Basu (1994) but they also expand the list by additional aspects. Thus, besides the variety seeking driver which was also described by Oliver (1999), they call risk aversion also as an important measure. According to their anticipation, goods with high value involve a higher level of risk as low value goods. As a consequence, customers stay with the brand that they already know to reduce the risk of switching to a different brand or product. In fact, it was found out that risk aversion has an influence on the type of loyalty. In the case of premium loyalty which is interpreted as high purchase loyalty and high attitudinal loyalty, risk aversion plays a central role, which is also relevant for the study at hand.

2.6 Conclusion

The preceding chapter has shown different definitions about customer loyalty and introduced two underlying customer loyalty concepts by Dick and Basu (1994) and Oliver (1999). Both concepts discuss the attitudinal part as well as the behavioural part that customer loyalty consists of. The discussion has shown that the approach proposed by Oliver (1999) is too short sighted as cognition does not always precede affect. Hence, the broader concept delivered by Dick and Basu (1994) allows a deferral of the attitude formation antecedents and is reasonably the more useful concept in this thesis setting. Furthermore, the analysis of different loyalty research papers proves that loyalty cannot only be seen from a behavioural perspective but also from an attitudinal view. Nevertheless, behaviour does not always logically follow from consumer’s attitudinal loyalty as normative and situational influences manipulate both factors of the loyalty concept. The next chapter deals with the discussion of loyalty programs and elaborates on a valid definition for the research at hand.

Chapter 3 – Customer loyalty programs

3.1 Introduction

In the previous chapter, the concept of customer loyalty has been introduced and discussed in depth. An answer was found to the first sub-question and also a convincing framework of customer loyalty delivered by Dick and Basu (1994) has been adopted for the underlying study. This chapter will now discuss the concept of customer loyalty programs. The economy has introduced many different customer loyalty programs with different levels of success. Also the academic assessment of the effect of customer loyalty programs has been discussed controversially in the past. Thus, an overview about different loyalty program definitions will be given at first. Then, an introduction about the various forms of loyalty programs and customer promotion activities follows. Finally, a critical reassessment sheds light on the negative sides of customer loyalty programs.

3.2 Definition of customer loyalty programs

Already before they were defined as loyalty programs, a kind of loyalty programs already existed in the economic upswing in the 1950s. During these times, small companies or shops introduced bonus cards or trading stamps. Thus, people received stamps for their regular shopping at a distinct grocery shop or at the butchers for example. The real introduction of loyalty programs started in the early 1980s when airline companies introduced bonus programs for loyal customers by collecting airmiles that they could trade for free flights or things alike (Wansink et al., 2001). Later on, banks, restaurants and grocery stores developed loyalty programs where people could receive bonus points for using a certain service or purchasing at a specific company.

The various forms of loyalty programs have also lead to different definitions. There are some definitions that focus on the general definition of loyalty programs and others are more specific. There are also definitions that focus on profitable consumer segments whereas others introduce market specific definitions. Palmer et al. (2000) for example define loyalty programs as “an identifiable package of benefits offered to customers which reward repeat purchases” (Palmer et al., 2000, p. 49). A different definition is given by Yi and Jeon (2003) who define “a loyalty program is a marketing program that is designed to build customer loyalty by providing incentives to profitable customers” (Yi and Jeon, 2003, p. 230). A comparison of both definitions shows that Yi and Jeon’s (2003) definition is more specific (profitable customers) than the definition given by Palmer et al. (2000).

However, other authors do not really give a definition but rather a description of product segments, for which a customer loyalty program works best. For example, Wansink and Seed (2000) describe that “loyalty programs works best for products and services with high margins and for products and services that a customer will invest heavily in over a long period of time” (Wansink and Seed, 2000, p. 213).

Dowling and Uncles (1997) defined loyalty programs from different perspectives. From the individual viewpoint, loyalty programs shall increase customer brand loyalty, reduce people’s price sensitivity, making people more unwilling to accept offers from competitive firms, promote word of mouth activities among customers, increase revenue and achieving a larger customer base (Dowling and Uncles, 1997). Another perspective is taken when analysing loyalty programs from a market view. Hence, customer loyalty programs can have three different aims. First of all, the general size of the brand shall be enlarged and the programme is defined as to attract more potential customers. Secondly, niche brands are supported by programs to keep the customer base quite small but to increase their aggregate demand level. Thirdly, brands that evoke absolute commitment via their customer loyalty program are called super loyalty brands. Hence, customers that are already loyal shall become absolute brand loyal via the introduction of a reward program. In general, a loyalty program should “improve the accessibility, availability and conspicuousness of a brand” (Dowling and Uncles, 1997, p. 21). Furthermore, they say that loyalty programs “are schemes offering delayed, accumulating economic benefits to consumers who buy the brand” (Dowling and Uncles, 1997, p. 28).

Less exhaustive but also precise is the definition of Bolton et al. (2000) who emphasise that “the goal of these programs is to establish a higher level of customer retention in profitable segments by providing increased satisfaction and value to certain customers” (Bolton et al., 2000, p. 95).

Whereas Bolton et al. (2000) focus on loyalty programs in profitable segments, the definition delivered by Rosenbaum et al. (2005) distinguishes between communal and non-communal loyalty programs. The non-communal loyalty program focuses on discounts transferred from the firm to the customer. Hence, their definition does not only focus on profitable segments but on the general market (Rosenbaum et al., 2005).

An even broader definition of loyalty programs is presented by Sharp and Sharp (1997) who defined loyalty programs as “loyalty programs are structured marketing efforts, which reward and therefore encourage loyal behaviour” (Sharp and Sharp, 1997, p. 474). This definition is comparable to the definition by Palmer et al. (2000). A summary of the important statements is crafted in figure 3.1 on page 24.

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Figure 3.1: Summary of customer loyalty definitions

Source: Ulrich Pohl (2006)

Figure 3.1 shows that there are general definitions that do not focus on a particular aspect of loyalty programs, such as rewarding loyal behaviour (Sharp and Sharp, 1997) or attracting more potential customers (Dowling and Uncles, 1997). Conversely, specific definitions mention an exact detail of where and how loyalty programs should be implemented such as rewarding people in profitable segments (Bolton et al., 2000) or for products and services with high margins (Wansink and Seed, 2000).

The enumeration of the different loyalty program definitions shows that there is no general agreement on one single definition on a customer loyalty program. Some authors stress that programs should be created only for profitable customers such as Yi and Jeon (2003) or Bolton et al. (2000) who emphasise profitable segments. However, it is questionable whether customer loyalty programs are always implemented in profitable segments or if only profitable customers are rewarded. With respect to the countless programs that exist on the FMCG market, there is no doubt that also non profitable customers are rewarded for their repeat purchase behaviour.

In addition, Dowling and Uncles (1997) stress that loyalty programs focus on the delayed benefits customer receive according to their loyal behaviour (Dowling and Uncles, 1997). However, this research tries to give evidence that not only one form of loyalty programs exist to enhance customer loyalty but that there is also the opportunity to reward customers proactively. Hence, the definition given by the two authors is not exhaustive enough for this paper. Consequently, a broader loyalty program as such from Sharp and Sharp (1997) is a more acceptable definition as it does not only focus on profitable segments or delayed reward systems for example. Furthermore, they state that those campaigns should encourage loyal behaviour which means that it does not have to lead automatically to ultimate loyalty. Nevertheless, another description of loyalty will be adopted for the thesis which can be incorporated in the particular research setting. The description is taken from Wansink and Seed (2000) which was already named above: “loyalty programs works best for products and services with high margins and for products and services that a customer will invest heavily in over a long period of time” (Wansink and Seed, 2000, p. 213). However, in order to adopt the description as a definition, the sentence is modified and complemented by: “and provides delayed or proactive incentives to strengthen customer loyalty” Hence, the whole definition for this paper is named:

“Loyalty programs are structured marketing efforts for products and services with high margins and for products and services that a customer will invest heavily in over a long period of time and provides delayed or proactive incentives to strengthen customer loyalty”

This comprehensive definition fits into the concept at hand as customer loyalty is examined for high involvement goods. For example, the purchase of a Mercedes Benz involves high margins for the manufacturer DaimlerChrysler and also heavy investments by the consumer into that product. Those investments encompass service, repair, additional features such as sportive exhausts etc. In addition, the investments also take place over a long period of time as high involvement goods are kept for a considerable time. Lastly, the definition leaves the sort of loyalty program open. In the following part of the chapter the discussion about delayed and proactive loyalty programs is to come. Hence, a specific definition of loyalty programs as the one given above is the most suitable in the setting at hand.

3.3 The difference between customer loyalty programs and promotion activities

The spectrum of loyalty programs is manifold and there are various ideas of marketers how to increase customer loyalty by means of a customer loyalty program. However, although many marketers or authors define it as loyalty program, it is mostly only a short term promotion activity to stimulate purchase. Some programs are short term oriented whereas others focus on long term customer loyalty. On the other hand there are programs that demand a membership but alternative firms do not even collect any customer data. This section will shed light on the different sorts of loyalty programs and promotion activities according to the loyalty program definition given above. Each form will now be discussed in turn.

3.3.1 Sales Promotion in form of coupons, stamps or vouchers

The simplest form to grasp customers’ attention and to stimulate purchase is the short term oriented collection of coupons, stamps or vouchers over a limited period of time. That is, a company invites the customer to save some coupons, stamps or vouchers that are delivered with the product which is promoted. When the customer has collected a certain sum of coupons etc. he is able to exchange the coupons etc. for the promised premium. The aim of such a loyalty campaign is to increase short term sales by the company. Furthermore, it can help to promote a brand extension or line extension of a certain product which shall enhance the level of awareness. Hence, the aim is not increase customer loyalty, as a short term promotion action is not able to bind customers to the firm on a long term basis. Such a short term loyalty program is easy for the firm to implement as the product sticker has to be changed slightly to draw the customer’s attention to the program. In addition, there is a direct effect of the promotion on the sales figures of the product. Furthermore, it does not involve too much technology to be implemented so that the campaign is not too costly for the firm. Thus, if the campaign does not show the desired effect, it is relatively easy to stop this form of promotion. Many authors have already demonstrated that the implementation of coupons is an effective promotion tool to make people switch from a certain brand to the coupon promoted one (e.g. Lichtenstein et al., 1990). It is very easy for the client to collect the offered coupons etc. and retrieves the promised premium also easily when exchanged for the collected coupons. The client is not bound to any loyalty program by a membership, is not bothered by ongoing advertising campaigns and is able to stop participation whenever wanted. In relation to the definition above, the customer does not invest in the product heavily over time. This form of loyalty campaign is mainly used in the low involvement retail setting. Thus, the products involved are of relatively low value, daily products which are quickly consumed and where the need for replenishment is relatively high. Therefore, this activity cannot be defined as a loyalty program as major conditions are not fulfilled. It is rather a short term promotion than a loyalty program

Fast food chains such as McDonalds or soft drink manufacturers such as Coca-Cola offer short term promotion actions to increase the turnover of their products. Coca-Cola for example offers points or stamps that are delivered with the Coke, Sprite or Fanta bottles. After the collection of a certain amount of coupons the consumer can exchange these points (coupons) for an extra crate of Coca-Cola or something alike, which is a rather direct reward for loyal behaviour. McDonalds for example offered the so called Monopoly game with which the consumer should be animated to consume more McDonald’s food to receive more Monopoly game cards. A particular amount of cards qualified the player to win a journey or a car or something else depending on the quality level of cards he collected. Thus, the rewards offered were rather indirect and not related to McDonalds products specifically.

3.3.2 Affinity campaign

In relation to Blijenberg (1996), an affinity campaign contains the dissemination of product information, product related magazines or invitations to fares or exhibits. If a certain customer group shall be targeted, the firm needs information about the customer segment in advance. The other form of information dissemination could be done by random information spread across a whole area or in rural areas or something similar. This form of loyalty campaign is rather medium to long term and involves higher costs and engagement than a simple sales promotion action. The aim of such a campaign is to inform the customer about new product features, line extensions, serious product test outcomes or simply general product information. The consumer shall be attracted by written information or events as opposed to coupon sales promotions for example. However, as the firm does not provide any incentives or premiums in the framework of an affinity campaign, it cannot be called a loyalty program. But, this sort of campaign brings a lot of benefits for the firm. The dissemination of information about the firm’s products is rather simple and can be easily spread among target groups. Furthermore, this form of loyalty program is also applicable for branches with strict advertising constraints such as the pharmaceutical industry. As clients are not allowed to be lured by promotion actions, this form of promotion makes it possible to reach interested clients without legal consequences. In addition, the firm can enhance its level of awareness and improve its brand image (Blijenberg, 1996). Moreover, firms can directly stop this sort of campaign and they are also not committed to deliver magazines, brochures etc. to the customer. Besides the benefits for the firm, there are also benefits for the customer. The consumer is provided with “internal” information from the firm, receives additional information about product features or product tests etc. and is not forced to react on the information given. Furthermore, the customer is free of choice either to read the information that he is provided with or not.

The level of application for an affinity campaign is manifold. The dissemination of information can take place on a very broad level for FMCG goods for example but also for high involvement goods such as a Mercedes Benz the provision with extra magazines or additional information about product launches. Hence, the application may include low involvement as well as high involvement products and furthermore also a limited amount of clients may be touched as well as a broad customer mass might be targeted.

After the boycott of Shell petrol stations due to the purpose to run down the oil-platform Brent Spar in 1995, Shell had to cope with a tremendous brand image loss. With the help of extra information brochures, customer letters etc. Shell was able to recover from the brand image crisis. Another example is Mercedes-Benz who makes use of affinity campaigns to attract people to test new cars, take part in driving events or simply to inform people about new cars via magazines and newsletters. In the pharmaceutical industry, newsletters or the support of magazines shall attract customer’s attention and make the customer attentive to new or improved forms of illness treatments.

3.3.3 Customer card programs

There are different forms of customer card programs on the market at the moment. The distinction starts with simple customer identification cards that have no function but are used for certain product order mechanisms or simply as a reminder for the customer. Then there are customer cards with which the client is able to collect bonus points or receive price reductions whenever he makes a purchase at a particular shop or store. That means that the customer card has a limited memory function (Noordhoff, 2001). Furthermore, customer cards with an extensive memory function fulfil even more functions than the limited memory customer card. Thus, in contrast to the limited card, the extensive card is able to save relevant customer data, update information, retrieve customer buying behaviour patterns etc. Whereas the identification card is no means in a customer loyalty program, the second card could be integrated in a loyalty program, as cards that are used to collect bonus points activate the customer’s readiness to buy more of the product and probably also over a longer period of time. In addition, the customer is rewarded for his loyalty in order to increase customer loyalty. The third form of a loyalty card integrates even more aspects mentioned in the definition above. Hence, the extensive memory function and the additional features of the card lets the customer use this card more intensively; investments (purchases) will be more frequent or of higher value and also the firm has a long term orientation because the extensive form is very costly and is not easily recovered.

The aim of the simple customer loyalty card is just to serve as a reminder means for the customer. The limited card function is more extensive and fulfils a more comprehensive aim. On the one hand, the aim is to bind customers to the product or company via the card because customers can earn bonus points for their purchase for example. On the other hand, the company tries to retrieve simple customer data such as frequency of purchase etc. as the card is scanned when used. Finally, the extensive memory card owns some additional features compared to the limited card. The information that can be saved on the card is dynamic, thus the aim is to retrieve relevant customer data and to provide the customer with additional features such as collecting bonus points or the possibility to pay with the card. The benefits for the firm are depending on the card function. The very simple identification card without any further function does not deliver recognisable benefits whereas the sophisticated customer card includes many different benefits for the firm. First of all, relevant customer data is saved, which can be used for data evaluation and adaptation of the marketing campaigns according to the customer shopping behaviour (Noordhoff, 2001). In addition, the company is able to analyse shopping patterns, seasonal differences, demographic facts etc. The firm can reward the customer with premiums with which the customer shall be bound to the firm. Therefore, a clear distinction must be made between identification cards which do not belong to loyalty programs and the limited / extensive form, which are integrated into a customer loyalty program. The benefits for the customer are also varying according to the level of the card he owns. With an identification card, the customer is easily found in a company database according to a client number or something alike. However, the advantages of a customer card with more functions are the possibility to collect bonus points with the prospect to gain a premium for the collected points. Furthermore, the card may serve as a payment means or as a tool to receive price reductions etc. (extensive card). Indirectly, the customer also benefits from the firm’s collection of customer data if the data is analysed extensively. The result of the analysis should be an improved product assortment and the further development of existing products. The application level is very individual but mostly limited to common shopping products. There are many supermarkets that offer a bonus card or a customer card with a special possibility to collect points. However, there are also high involvement goods producer that offer a customer card with a credit card option or payment function in combination with the collection of bonus points (Noordhoff, 2001). Consequently, it depends on the sort of the card, whether it can be categorised in a promotion activity or into a customer loyalty program.

One example of an identification card is the VW card which exists solely to retrieve the client in the customer database more easily. A more sophisticated card is offered by the payback system which already saves customer data and makes it possible for clients to collect bonus points. Various firms take part in the payback system at least in Germany. A very complex form of customer card is offered by Mercedes Benz or Lufthansa. They offer a customer card with credit card function with the additional feature to collect bonus credits so called air miles (Lufthansa) or road miles (Mercedes-Benz). Both firms have the possibility to make use of extensive customer data, such as service demand, product purchase or flight bookings. Hence, the dissemination of customer cards to a certain customer segment makes it possible to collect the needed data to improve the service level, product range etc.

3.3.4 Club programs

Several loyalty programs are built on so called club programs. They are meant to offer a membership in a club program for a certain amount of membership fee. Many firms used this sort of loyalty program to bind customers for a long time to a certain program or to the firm. With this club card, people are able to make use of special treatments, services or product offerings which are reserved only for members of the club. The range of usage is diverse and exists in low involvement sections such as the books sector as well as in the finance branch that belongs to the high involvement area. The aim is to bind a certain customer group to a certain firm for a long time and intensify the relationship with the customer via the offering of special service, special offerings, extra price reductions etc. (Noordhoff, 2001). The customer shall have the feeling of being unique, to receive the feeling of belonging to a special group of customers. The payment of a membership fee and the contractual boundary serves as a higher exit barrier for members to leave the company so that the loyalty level is higher due to the membership in the club. Although a club membership program is difficult to implement and also to terminate, it offers several benefits for the firm. First of all, due to the membership fee, the firm can count on a continuous income which may be invested into the loyalty program again. Furthermore, as the program is limited to club card holders, the loyalty program might be more effective than a loyalty program, which is randomly spread among several customer groups. In addition, the firm sets a higher exit barrier due to the club contract and the membership fee that is paid by the customer. Thus, once a member signs a club contract, he is assumed to stay for a longer time period. Within this form of loyalty program the customer receives a kind of special treatment which makes a clear differentiation between members and non-members. Members receive extra information about products, get price reductions on certain goods or have the possibility for exclusive service that non-members do not get such as longer guarantee times or the possibility to visit certain events (Noordhoff, 2001). In addition, depending on the level of club membership, long term customers are rewarded for their loyalty with price reduction and also incentives. As not only supermarkets but also automobile companies offer club memberships for their customers, the club program is applicable in the low involvement as well as in the high involvement goods sector. However, it makes more sense to implement it in the higher than in the lower involvement segments as the exclusivity of a club membership can be better represented in the high price than low price sector. Thus, club programs can be defined as loyalty programs as they are long term oriented, customers invest in the relationship via their membership fee, customers receive incentives or premiums to reward their loyalty and a club program needs a thorough planning and implementation. The only difference has to be made between low involvement and high involvement club programs because low involvement products and services do not include high margins as high involvement products do.

Of course, there are again many different forms of club programs. However, there are three programs that differ strongly from each other but all pursue the same target: customer loyalty. The club membership in the German ADAC includes several features such as the full scale around car breakdown, price reductions for certain travels, events etc. and the receipt of a monthly club journal. The ownership of a Bertelsmann club card empowers the customer to buy books, CD’s etc. in the Bertelsmann shop. Without the membership, it is not possible to receive any goods. It also depends on the sort of card, how much price reduction a customer might receive. The third card is the club card offered by IKEA. With this membership, customers get a certain IKEA magazine four times a year, get price reductions and invitations to certain workshops or events.

3.3.5 Integrated loyalty program

This form of customer loyalty program is the most complex one. However, they exist on different levels and the benefits from this program get bigger the higher the customer level (Blijenberg, 1996). It is used to build customer loyalty with different forms of loyalty rewards and is only worthwhile for high class products where the effort is worth the costs. Participants shall be bound to the firm for a very long time because loyalty building efforts are combined with extensive investments in the customer base (Blijenberg, 1996). The aim of the loyalty program is to build long term relationships with customers, to build up true loyalty as opposed to lower levels of loyalty and to bind the customer to the firm via different loyalty program tools. The complexity of the program shall connect the customer emotionally with the firm so that the exit barrier gets higher from an emotional viewpoint. Long term loyal customers can be very profitable for the firm. In addition, due to the graduation of the loyalty program into different levels, customers can be easily segmented into different benefit levels. Hence, the firm does not reward every client equally but differentiates between high class clients and lower loyalty customers. The emotional attachment of those integrated loyalty programs should deliver a high customer retention rate for the firm which serves as a solid basis for continuous sales. The customer is confronted with a complex system that offers several different opportunities for him. Some of those positive features are the collection of bonus points for later exchange into premiums, price reductions on products, additional information on certain products, prolonged guarantees, or special treatment (Noordhoff, 2001). The application level is quite various, but more likely to be implemented for high involvement products than for low involvement products. First of all, it is difficult for a firm to bind a customer for a long time on one firm or product in the low price sector. Furthermore, the effort is very high so that if customers leave the program the costs would be higher than the benefit that the firm receives. To summarise, the integrated customer loyalty program includes all relevant aspects which are also stipulated in the definition about customer loyalty programs above.

One example for an integrated loyalty program is the one offered by Mercedes Benz as already mentioned above. Customers do not only receive a credit card with which they get also bonus points for their purchases. They can also book travels for lower prices, receive a Mercedes Journal, travel journals or can get a car journal at a bargain price. Furthermore, a foreign health insurance in combination with a car writ of protection is also offered exclusively for loyalty card owners.

3.3.6 Proactive loyalty reward program

This form of loyalty program is a new form and used especially in the high involvement setting. It is used to strengthen the loyalty of certain customer groups who have shown a convincing loyal behaviour in the past. The aim is to keep the customer brand loyal and strengthen the relationship between the firm and the customer. As Kumar and Shah (2003) described it, “Tier 2 rewards would be special rewards given to select customers to cultivate attitudinal loyalty or enhance behavioural loyalty or both” (Kumar and Shah, 2003, p.323). Thus, if people are rewarded proactively without a prior collection of bonus points or things alike, the aim of the company to keep a higher level of customers might be possible. A further aim is also to reward the customer with a differentiated and customised premium and not with a mass premium that most loyalty programs offer as rewards. The greatest advantage of this loyalty program is that the firm does not carry any liabilities over a long period of time. Thus, the firm is not forced to reward the customer with a premium because of a bonus point account for example. Therefore, the firm can decide when and how to reward the customer for his loyalty which takes away the burden of high obligations for the firm. As selected customers already show a high amount of loyalty before they are rewarded, it can be assumed that those and only those customers stay with the firm if they are rewarded for their faithfulness (Kumar and Shah, 2003). Furthermore, this form of loyalty program is invisible for other firms and cannot be copied easily, as it rewards customers proactively and is therefore a clear competitive edge for the firm. Not only the firm has advantages with the proactive system, but also the customer profits from the proactive reward system. He does not have to collect bonus points for a longer period of time and the client can be sure to receive a customised premium, which meets his taste by 100%. When the company decides to reward the customer for his loyalty, the surprise effect of the free gift is higher because the client did not expect to receive something from the firm and appreciates the present all the more. This form of loyalty program is meant for a selected group of customers who shall be rewarded for their long term loyalty. Hence, as it is difficult to measure customer loyalty in the low price sector, this form of program is more applicable in the high involvement, long term sector. In a low involvement setting, the customisation of premiums, the control of loyal clients without a bonus point account might be difficult and is thus not applicable in the low involvement sector.

A client of Mercedes-Benz who has driven this brand for 20 years and used the service of the Mercedes Benz dealer / garage regularly could be rewarded with the proactive system. Mercedes-Benz might have experienced that the client always ordered his car with an air condition and also the air condition service was always conducted at the car dealer / garage. Thus, the firm could reward the client with a free air condition in the next car he orders without informing the customer beforehand.

On the next page, figure 3.2 provides an overview on the different marketing campaigns and loyalty programs discussed in section 3.3.6.

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3.4 The effects of customer loyalty programs

With the introduction of the different customer loyalty programs, the various effects of customer loyalty programs are now presented in this paragraph. In the past, several researchers assessed the effects of customer loyalty programs and also came to different conclusions.

One article that extensively examined the effects of loyalty programs on brand loyalty, value perception of loyalty programs and program loyalty was written by Yi and Jeon (2003). The first part of their analysis examines the effect of the type of reward (direct vs. indirect) and the timing of reward (immediate vs. delayed) on the value perception of loyalty programs moderated by the type of involvement (Yi and Jeon, 2003). The framework of the different reward schemes is reproduced in figure 3.3.

Type of reward Timing of reward

Repeated & immediate Delayed

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Figure 3.4: Stage one: Effects of reward schemes on value perception

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Figure 3.4: Stage two: Effects of value perception on loyalty

Source: Yi and Jeon (2003)

For the first part of their analysis, the researchers found out that the perceived value of a loyalty program is higher for direct than indirect rewards. Furthermore, Yi and Jeon’s results reveal that there is no difference between immediate rewards and delayed rewards in relation to the perceived value of the loyalty program. Thus, in the high involvement setting, the timing of reward does not matter at all, in contrast to the type of reward where direct rewards are more appreciated than indirect rewards (Yi and Jeon, 2003).

Another important point is the relationship between the value perception of a loyalty program and brand loyalty. Yi and Jeon (2003) have shown that there is a direct connection between value perception of a loyalty program and brand loyalty. In addition, also the indirect route from value perception over program loyalty to brand loyalty was significant. This means that people’s brand loyalty is affected by program loyalty on the one hand but also directly through the value perception of the loyalty program (Yi and Jeon, 2003). However, this study will test later on, if the findings by Yi and Jeon (2003) also hold true in a different research setting when delayed and proactive rewards are the basis for testing.

Another paper that deals with the effectiveness of loyalty programs has been published by O’Brien and Jones (1995). They describe that a reward program is able to create loyalty but only if the company understands to effectively implement the loyalty program. Thus, if the loyalty program is not defined as a short term means to increase sales but rather a part of an extensive loyalty management strategy, then the program can manage customers to act as very profitable customers over a long period of time (O’Brian and Jones, 1995). Furthermore, they insist on rewarding the most profitable customer with the highest possible premium whereas average clients should also be rewarded on a medium level. This expression is also comparable to the ideas of Kumar and Shah (2003) who also want to reward the most profitable customers proactively with very valuable and customised premiums. O’Brian and Jones (1995) formulate it as such: “customers who generate superior profits for a company should enjoy the benefits of that value creation. As a result, they will then become even more loyal and profitable” (O’Brian and Jones, 1995, p.76).

Most effectiveness researches have been conducted in the FMCG that is in the low involvement segments. The study by Noordhoff et al (2004) has shown that there are different effects of loyalty card possession and behavioural / attitudinal loyalty with respect to different cultures. Hence, in countries such as the Netherlands, the ownership of a customer loyalty card need not have a positive effect on customer loyalty automatically (Noordhoff et al., 2004). Furthermore, Palmer et al. (2000) found different effects of loyalty programs according to loyalty program framework and industry. Consequently, the Airline industry seemed to be an effective basis for the implementation of loyalty programs not least because of the management’s effort. These findings are comparable to the utterances of O’Brian and Jones (1995) mentioned above. In addition, it has been mentioned that the effectiveness of loyalty programs is higher when markets can be segmented. The more customised the product offer and the accompanying customer loyalty program the more people are prepared to stay loyal with the company (Palmer et al., 2000). However, they also state that it is extremely difficult to measure the effectiveness of a loyalty program on conceptual as well as practical basis (Palmer et al., 2000).

Hence, as it is difficult to measure the effectiveness of customer loyalty programs they are not without criticism in the academic literature. Therefore, the next paragraph deals with the critical assessment of loyalty programs and discusses different views on that topic.

3.5 Critical remark on customer loyalty programs

In the academic literature, there is much less information on the downsides of loyalty and reward programs. However, negative effects of customer loyalty are found by Grayson and Ambler (1999) who examined the antecedents of loyalty in the long run perspective. They find out that investments in building up trust and commitment do not always have a positive result on customers’ usage of a service (Grayson and Ambler, 1999). Hence, conversely to what has been argued before, it does not always pay off for a firm to create trust in the consumers’ minds. In addition, interaction and involvement are influential only in long term relationships (Grayson and Ambler, 1999). But as the impact of trust fades during the relationship, there is evidence that “long term relationships have a negative impact on service use” (Grayson and Ambler, 1999, p. 132).

In addition to the negative sides of loyalty, there is also a critical assessment of brand loyalty programs published by Shugan (2005). First of all, he criticises that firms operate loyalty programs that result in large liabilities for the firm rather than producing assets (Shugan, 2005). Thus, it can be assumed that customers will refrain from staying loyal with the company if the future rewards are not as promised by the firm or anticipated by the customer. Furthermore, if a company’s product is superior to competitive products, then the firm does not need to invest in customer loyalty programs due to the fact that customers will buy the product because they simply like it. Furthermore, with the implementation of a loyalty program, the firm has to trust the customer that the outcomes of a program are in fact beneficial for both, the company and the customer. However, it is not certain, if the costs of the benefits are worth the costs. Thus, the short term revenues due to loyalty programs could be exceeded by the long term liabilities and obligations towards the customer (Shugan, 2005). Hence, rather than employing a costly program, it is more recommendable to increase switching costs, product customisation and service to make products more attractive to customers and to ensure their loyalty also in the future (Shugan, 2005).

Not only Shugan (2005) occupied with the negative sides of customer loyalty programs. The research paper provided by Strauss et al. (2005) examined “customer frustration in loyalty programs” (Strauss et al., 2005, p. 229) and gained insights into the negative effects of reward schemes. Hence, there are several factors that empirically show that a customer loyalty reward program can in effect lead to customer frustration which negatively influences loyalty. The factors mentioned in the study that affect customer frustration are the access difficulty to participate in the program. Furthermore, people often have no chance to claim their right to get the reward and often the low quality of rewards is criticised. If people have to sacrifice additional money to receive the reward, they also perceive this as unfair and become frustrated (Strauss et al., 2005).

Another striking factor for customer frustration is enviousness. They recognize other customers as receiving better rewards and get angry about the program and the firm itself. Furthermore, if the program is better than the product or service delivered by the firm, the customer also perceives this as negative and might change his loyalty due to frustration (Strauss et al., 2005).

A rather strong claim is expressed by Hallberg (2004) who states that “repeat purchasing per se has little or no impact on emotional loyalty” (Hallberg, 2004, p. 238). He also mentions that it is not enough to solely provide customers with financial rewards to increase the bonding rate of customers towards the company. It is important to attach individuality to a program so that the customer feels emotionally attached and perceives to be treated personally (Hallberg, 2004). However, there is of course the possibility of frustration mentioned above if people have the impression that others are treated better than they are (Strauss et al., 2005). For loyalty programs to enhance customer loyalty it is not only important to increase repeat buying but loyal customers have a much higher rate of emotional attachment than just repeat buyers. Therefore, it should be the task for managers to enhance the emotional bondage with the brand or service (Hallberg, 2004).

However, it should be also interesting for managers to find out whether customers are interested in the product or brand that is offered or if they are generally loyal towards the program that is offered to them. If the loyalty program offers more attraction to the customer as the brand itself then the customer will change his loyalty if a loyalty program is stopped. For example, Mauri (2003) found out that people are more loyal to their loyalty card if the value of promotional goods is increased. Hence, people use their card only if they recognise a perceptible difference between using the card for the achievement of an incentive and not using the card. However, people also decide not to use the card if the promotional incentive is perceived to be too high. From a different perspective, it can also be argued that if people are not very loyal to card usage, the company is not able to collect the necessary customer data to improve brands, product lines etc. Thus, the customer loyalty program should not only lead to a higher shopping frequency of people but also to a better assessment of shopping behaviour in general. If people increase loyalty but refuse to use their loyalty cards then it is difficult to measure people’s loyal behaviour. Therefore, according to the findings of Mauri (2003), it is important that people are not only owners of loyalty cards but show also their loyalty towards that cards.

There are of course more critical aspects on customer loyalty programs and loyalty programs might have lost also their impact on customer loyalty as Noordhoff et al. (2004) have shown in their research. However, besides the critical aspects, reward programs can enhance customer loyalty if implemented thoughtfully and sustainable. Hence, individuality of loyalty programs with an adequate reward scheme might refute the findings by Strauss et al. (2005). In addition, a firm must consider whether the benefits of a loyalty program are worth the costs as Shugan (2005) explains. Consequently, loyalty programs lead to an increase in customer loyalty as long as they are sophisticated and are able to add value for the customer.

3.6 Conclusion

The preceding chapter has discussed the various definitions of customer loyalty programs which dealt as the basis for the development of an own loyalty program definition tailored to the thesis at hand.

The evaluation of the different types of customer loyalty programs and promotion activities demonstrated on the one hand the variety of existing loyalty programs across different industries and sectors. On the other hand it showed that many activities that are defined as a loyalty program do not match with the definition of loyalty programs proposed above. However, the analysis of the effects of the various loyalty programs has shown that a loyalty program works best in highly segmented markets, with the opportunity to customise the reward system and that the timing of rewards does not play a role in contrast to the type of reward. Nevertheless, no loyalty program can guarantee absolute loyalty as people might switch to other suppliers or service providers. Hence, in contrast to customer promotion activities, loyalty programs as defined in the chapter above have a higher chance of binding the customer to the firm and enhance customer loyalty. Especially the introduction of proactive reward systems in connection with the discussion of the program effects has shown that it is worthwhile to examine the impact of a proactive reward system on the value perception of a loyalty program and consequently on customer loyalty.

Chapter 4 – Consumer buying decision process

4.1 Introduction

After the discussion about the customer loyalty and customer loyalty programs, this chapter is devoted to the consumer buying decision process. This is necessary to understand the different stages of decision making, learning how people make their decision in a high vs. low involvement setting and finally to understand the influences on purchase decisions. Hence, the analysis of the customer decision making process stages is also helpful to find out in which phase loyalty might play a role on the attitudinal as well as behavioural side.

The chapter will start with a description of the different problem solving processes. Then, the differences between high involvement vs. low involvement goods and the purchase decision process on high involvement goods are elaborated on. Furthermore, some important influences on the purchase decision process are mentioned and a short conclusion is given at the end of the chapter.

4.2 The different problem solving processes

In the academic literature there are three different types of problem solving processes mentioned. They are categorised according to the extensiveness of decision making considerations. The first and simplest one is the routinized choice behaviour, followed by the limited decision making and finally the extensive decision making. Each form is now discussed in turn.

4.2.1 Routinized choice behaviour

The easiest form of problem solving is the routinized choice behaviour. This form of choice behaviour happens in daily life and is also the most common way of problem solving. As Peter and Olson (2005) formulate, consumers’ “choice behaviour is based on learned decision plan stored in memory” (Peter and Olson, 2005, p. 186). Thus, it is difficult for marketers to promote a product in this category as people behave according to a fixed decision process with little motivation to engage in research for alternative products. This routinized choice behaviour takes place mostly in low involvement settings where buying decisions are more or less automated. For marketers, the most challenging but also success promising tactic is to grasp the attention of customers and to anchor the product or brand in the evoked set of the consumer (Peter and Olson, 2005).

4.2.2 Limited decision making

When people have almost all information about a product or brand to make their decision to buy, then this is called limited decision making. The information that customers have, bases mostly on own experiences and only little additional external information is necessary to the decision making. Consequently, when people make decisions in a limited form, then they do not consider many alternatives to the brands that already exist in their evoked set (Peter and Olson, 2005). In this category of decision making, it is easier for marketers to transfer information about products or brands to the consumer than in the routinized decision making process as people “give some conscious thought to the decision” (Peter and Olson, 2005, p.187).

4.2.3 Extensive decision making

In contrast to the first two sorts of decision making, the extensive decision making includes deliberate considerations of the consumer on which product or brand to decide on favourably. That means, people are not only interested in the feature of the product, they also regard price, durability, guarantees and design for example as very important. In order to receive the information, consumers seek for information from different, sometimes very independent sources. This means that people involve a lot of effort and time to search for the best alternative to satisfy their need. The needs that have to be satisfied are mostly individual and do not apply for the big mass. As people are open for new information because they cannot profit from a huge internal information base, they are very susceptible to marketers’ campaigns (Peter and Olson, 2005). If these campaigns are successful, consumers might save this information and recover it in their evoked set. This could also lead to loyal behaviour, when people make positive experiences with the chosen brand or product.

This thesis exclusively deals with the extensive decision making process as the purchase of a high involvement good comprises an extensive search of information, a lot of time and effort before a decision is made. However, in order to demonstrate the difference between high involvement and low involvement goods, the following paragraph discusses both forms comparatively.

4.3 High involvement purchase decision making process

In marketing literature, the difference is made between the purchase of high involvement and low involvement goods. The difference between both is grounded on the psychological importance and the risk involved in the decision making process. Thus, high involvement purchases are defined as:

High involvement purchases involve goods or services that are psychologically important to the buyer because they address social or ego needs and therefore carry social and psychological risks. They may also involve a lot of money and therefore financial risk. (Boyd et al., 2002, p.113).

Low involvement products are described differently, as these are not very important to customers and are more or less impulsively bought. Furthermore, the customer does not engage in extensive search before the purchase of the product. In addition, not much risk, time and effort are devoted for low involvement products (Boyd et al., 2002).

The different types of decision making on the basis of high vs. low involvement goods is reproduced in figure 4.1 below.

Extent of involvement

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Figure 4.1: Types of consumer decision making

Source: Boyd et al (2002)

As this research focuses on high involvement products, the decision making process that has been described by various authors will now be elaborated on in depth accordingly. The model of consumer decision making process (Boyd et al., 2002) or the model of consumer problem solving (Peter and Olson, 2005) exists of five different subsequent steps. The process starts with the problem recognition or identification and proceeds with the search for alternative solutions. Afterwards, the consumer engages in the evaluation of alternatives and finally purchases the good. Afterwards, the post-purchase evaluation takes place in which the consumer reconsiders his purchase choice. The model of the decision making process is depicted in figure 4.2.

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Figure 4.2: Steps in high involvement, complex decision making process

Source: Based on Boyd et al. (2002)

4.3.1 Problem recognition

The first stage in the high involvement decision making process is called problem recognition or alternatively need recognition (Zeithaml and Bitner, 2003) or problem identification (Boyd et al., 2002). The consumer recognises that he has a problem or need when new needs or wants occur or if actual needs and wants are unsatisfied. Therefore, they search for a means with which they can satisfy their need and solve the problem at hand. There are different needs that can be sorted by different categories. The first one is the very natural need for physiological satisfaction. This includes for example food, water and sleep. Another form of need is the desire for safety and security and are also very basic natural problems that human beings like to be solved (Zeithaml and Bitner, 2003). The accompanying problem to safety and security is the request for social affiliation.

On a higher level, ego needs as well as self actualisation needs are to be satisfied. However, these do not belong to the very basic needs that everyone wants to satisfy. If someone owns ego needs, then this person wants to find products which show his success and prestige and support his accomplishment and prestige (Zeithaml and Bitner, 2003). This kind of needs can be solved via high involvement goods, as low involvement goods are not “useful” to underline a person’s ego. In addition, consumers want to fulfil their self-actualisation needs in order to be up to date, get the best possible solutions to their problems to achieve self fulfilment and to enrich experiences (Zeithaml and Bitner, 2003). Hence, people that have a strong disposition to self actualisation for example might be willing to satisfy needs or solve this special problem more often than others. Due to limited time and financial resources, it is only possible to serve all needs one by one. The most basic needs come first and then the higher level needs which encompass more time and money.

4.3.2 Information search

The second step within the decision making process is the search for information that is necessary to solve the problem that arose in the first step. The amount of information that the customer searches depends on several factors which are product related on the one hand and personal related on the other hand. If the purchase is very meaningful for the client, then the purchase and not necessarily the product itself is of high value to the customer. For high involvement goods, Boyd et al. (2002) mention three aspects of importance:

1. The strength of a person’s need for the product
2. The person’s ego-involvement with the product
3. The severity of the social and financial consequences of making a poor choice

There are also different sources from which the customer can choose to receive information about the product or brand he is in need for. On the one hand, there are personal sources that a customer can retrieve information from. This information which is delivered by friends, family or colleagues is naturally very subjective and relies mostly on own experiences with the product in question. On the other hand, the customer may take advantage from public sources which cover professional consumer protection agencies, independent information centres, lawyers or consumer-interest groups. The information given at those sources is objective and very reliable because they mostly base on objective tests or statistical analyses etc. The third available source of information is the commercial source which is a mixture of subjective and objective information. Commercial sources publish mostly advertisements, price and product information, invitations to personally test the product etc.

Especially for high involvement goods, the customer will make use of as much information as he can get. The search for alternatives will stop until the customer has the feeling that the costs for obtaining more information is equal to the value obtained from that information (Boyd et al., 2002).

As the thesis at hand deals with products in a high involvement setting, the information search stage is also very important for customer loyalty. As Boyd et al. (2002) express, the importance for extensive information search bases on the three aspects mentioned above. These are the reasons why people need more information on high priced, socially accepted and visible products that mirror their self-image better than low priced products that the environment does not recognise as much as high class products. Thus, the more positive experiences a customer makes with the product the more the fear of social and financial consequences due to a poor choice is reduced. In addition, the more the product fulfils the need for prestige and self esteem, the more the customer tends to purchase the same good again. This tendency can be supported by a customer loyalty program. Whether the type and timing of reward has an influence on the value perception of the loyalty program is examined in the practical part of the thesis.

4.3.3 Evaluation of alternatives

When the customer has finished searching for information, he evaluates the different information given and considers the pros and cons of the different alternatives. However, not all information that is given beforehand is also considered during the evaluation of alternatives stage. This is due to the limited cognitive capacity of humans and thus, consumers choose only among a limited alternative mix, called the evoked set (Boyd et al., 2002) or consideration set (Peter and Olson, 2005). Furthermore, the products that are considered in the evoked set are only measured according to a limited number of attributes of the particular product. In this context, the Fishbein model which was developed by Martin Fishbein (1975) is an important tool to show the linkage between a customer’s attitude towards a brand or product and the salient beliefs about the products attributes. In particular, the model consists of the following variables:

Attitude = Consumer’s overall attitude toward Brand A

Bi = Consumer’s belief concerning the extent to which attribute I is associated with Brand A

Ii = The importance of attribute I to the consumer when choosing a brand to buy

k = The total attributes considered by the consumer when evaluating alternative brands in the product category

i = Any specific product attribute

n

Attitude Ao = ∑ biei

i=1

Figure 4.3: Fishbein model

Source: Boyd et al., (2002)

Hence, for a high involvement product the evaluation on a product according to the consumer’s belief could be as follows in figure 4.4 on page 47.

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