Dissertation on (Customer Loyalty)

7/30/2019 Dissertation on (Customer Loyalty)

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TABLE OF CONTENTS

Chapter 1 Introduction

Introduction.6

Aims andObjectives...8

Scope..10

Rationale

.10

Methodology...1

0

Conclusions &

Recommendations11

Chapter 2 Literature Review

The Concept ofLoyalty13

Customer LoyaltyProgrammes.23

Loyalty asStrategy33

Rhetoric Vs.Reality..36

Chapter 3 Methodology


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ResearchMethodology.40

Summary of

Results.46

Chapter 4 Analysis

Results48

Discussion ofResults.56

Origin andMotives64

Tescos definition ofLoyalty.63

SuccessFactors..66

Strategic implications of theClubcard72

CompetitivePressures....77

Chapter 5 Conclusions and Recommendations

Conclusions81

Limitations...89

Recommendations89


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References93

Appendices


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List of Figures

Fig 1 Categorization of The Loyalty Concept

Fig 2 Conceptualizations of Loyalty Models

Fig 3Categories of Loyalty (O Malley model)

Fig 4 Motivator, De-motivator (Diller model)

Fig 5 The 5P Loyalty Strategy

Fig 6Characteristics of Loyalty programmes (Butscher model)

Fig 7Opportunities for using customer information

Fig 8Behaviour based CLP (Morgan et al model)

Fig 9 Relationship-based CLP (Morgan et al model)

Fig 10 The Ideal Customer experience (Fournier et al Model)

Figures 11-19 depict survey results

Fig 11 Customer Loyaltyindex sorted by female and male

Clubcard members

Fig 12 Customer loyalty dimensions: Female and male Clubcard

members

Fig 13 Overall customer loyalty for Tesco-Clubcard members andnon-members


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Fig 14 CLI of Clubcard and non-Clubcard members on loyalty

parameters

Fig 15 CLI of Clubcard members by occupation

Fig 16 CLIof Clubcardmembers by size of household

Fig 17 Percentage of monthly grocery budget spent with Tesco(Clubcard-members)

Fig 18 Percentage of monthly grocery budget spent with Tesco

(non-Clubcard members)

Fig 19 Factors in selecting a supermarket

Fig 20 The Loyalty Cube

Fig 21 Six Key success factors

Fig 22 COFP diagram


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List of Acronyms

CIUCustomer Insight Unit

CLPCustomer Loyalty Program

CLICustomer Loyalty Index

CRMCustomer Relationship Management

LTVLife-time Value

LTVALife-time Value Analysis

RFVRecency, Frequency, Value

ROIReturn on Investment

SWOTStrengths, Weaknesses, Opportunities, Threats

TPFTesco Personal Finance

4Ps - Price, Place, Product, Promotion,


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1.1 Introduction (Overview and Background)

Traditionally, marketing has focused on market share and customer

acquisition rather than on retaining existing customers and on building

long-lasting relationships with them (Kotler, 2003). More recently,

however, market share has been gradually losing its revered status as

marketings holy grail and the wisdom of focusing solely on customer

acquisition (hoping that this effort will compensate for high levels of

defection) is now being seriously questioned and considered as very high

risk since ever more players enter an increasingly crowded marketplace

(Baker,2000). In response to these changes there has been a new

emphasis on defensive marketing, which focuses on holding on to

existing customers and getting more custom from them (higher share of

customer), in contrast to activities which focus on winning new

customers. Calls for a paradigm shift to the pursuit of loyalty as a

strategic business goal have become increasingly popular over the recent

years (Sharp & Sharp, 1997).

Accordingly, in Feb 1995, Tesco changed the way it did business so

fundamentally that its effect is still seen in every part of the company.

The events changed the way Tesco makes decisions, develop products,

manages its stores and, most importantly the way it serves its customers.

On that day Tesco launched Clubcard, its customer loyalty programme.

As a major food retailer, in a competitive market sector, there is always a

need for brand loyalty. Customer loyalty schemes were not a new idea

when Tesco launched it but Tesco developed a contemporary version of

the original concept which went much further in developing an active

relationship with customers. Today, Tesco Clubcard has established itself

as one of the most successful loyalty schemes over the past nine years,


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and a key driver of this is that the scheme in integral to Tescos stated

core purpose, To create value for customers. By understanding its

customers more and using this insight to deliver back what the customer

wants, Tesco is succeeding in its purpose- to deliver value to the

customer and earn their lifetime loyalty. Working with its suppliers, it

helps both parties to gain a better understanding of what the customer

wants in terms of good value quality products and in-store promotions.

Tescos marketing works because they combine insight with creativity,

value and scale.

Before Clubcard, Tesco was stuck as UKs second-ranking supermarket.

Today, not only is it the UKs largest grocer, it is the worlds most

successful Internet supermarket, one of Europes fastest growing

Financial Services company and arguably one of the worlds most

successful exponents of CRM. The Tesco Clubcard is the most successful

CLP currently running in the UK, used by one third of all UK households

(there are 25 million Clubcards in circulation, of which 10 million are

active in any one week), with 82% of Tescos turnover going through the

Clubcard (in out-of-town superstores, this figure rises to over 95%). (

Humpy et al. , 2004). No one would claim that Clubcard is exclusively

responsible for the success of Tesco, but it is clear that the benefits of the

Clubcard are now written through the Tesco business like lettering

though a stick of rock. (Mason, 2003 cited in Humpy et al.)

Tesco may well have got this enviable position without Clubcard but it

could not have done so as quickly or as cheaply as it has done without the

Clubcard data an insight the Clubcard provides. This information guides

almost all of the key business decisions the management team makes,

reducing the risk of taking bold new initiatives. As Mason points out Itchanges the behavior of the businesses. With Clubcard, Tesco gets


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personal by introducing a medium through which it can treat customers as

individuals. It can mass-customize to suit the needs of all the types of

customers, of all tastes and incomes and ages. Not on the basis of what

they think the broad mass of customers want but in knowledge of what

individual customers actively choose and what they prefer. While every

business talks about being customer centered, Tesco has made that

commitment tangible. It designed Clubcard not just to show customer

loyalty to Tesco, but more important, to recognize Tescos loyalty to

customers.

Clubcard is a reflection of the attributes of the business and its

commitment: a strong team ethic, a commitment to serving customers,

and most of all, top-to-bottom retailers pragmatism. Tesco made

customer loyalty marketing work, when every other British supermarket

loyalty programme in the late 1990s failed, faltered or never got started.

Every year since 1995, headlines have proclaimed the death of loyalty

scheme, usually enthusiastically supported by other retailers whose

loyalty schemes are distant memories. Yet Clubcard is never questioned

as a strategic priority by the management. Instead, Tesco has responded

to the critics by measurably building sales through Clubcard, using the

relevant knowledge it creates to improve the way it runs its business.

In short, Tesco hasnt found that its loyalty programme is a costly

overhead. Because Tesco made Clubcard work, it can find out what its

customers need and generate enough sales by satisfying those needs cover

the cost of finding out. Tesco runs Clubcard, and has been doing so since

1995, for no net cost.


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1.2 Aims and Objectives

Aim

To analyze and examine the concept of loyalty in retail and to assess its

effectiveness as a corporate strategy through a Tesco Plc Case Study.

The Purpose of this research is to gain fresh insights into the concept of

loyaltyand customer relationship management and the part it plays in

strategic decision making. Its the strategic implications of loyalty

schemes that the project seeks to look into. Objective 5 is in a way the

primary objective of the research, all other objectives are necessary to

be realized before a thorough understanding of the strategic ramifications

of loyalty programmes is acquired. Thus, objectives 1-4 are important

stations (intermediate goals) which help reach the final destination or

purpose (objective 5).

Objective 1

Analyze and define the concept of loyalty and identify the

relationship between customer satisfaction and customer loyalty

Customer Loyalty has been one of the most misunderstood concepts

of recent years (Payne, 2002). Unfortunately there is no universally

agreed definition of loyalty (Jacoby and Chestnut 1978; Dick and Basu

1994; Oliver 1999). Oliver (1999) suggested that loyalty and

satisfaction are linked inextricably, but also that this relation is

asymmetric, arguing that although loyal customers are usually

satisfied, satisfaction is an unreliable precursor to loyalty. This


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research seeks to define the real meaning of loyalty in retail terms

and how it differs to satisfaction.

Objective2

Examine the conditions under which customer loyalty enhances

profitability

Some loyalty Schemes are termed as a disguised from of Sales

promotion. They are just another way of bribing the customers

(Woolf, 1996), Its a zero sum game as profit margins are squeezed

to run the scheme (Oliver, 1999). Handling data is like drinking water

from a fire-hose (Humpy et al, 2004). Still, loyalty schemes are

practiced by big retailers. This study seeks to identify the variables

which help make a loyalty scheme successful, and clearly identify the

conditions under which loyalty enhances profitability.


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Objective 3

Assess the role of loyalty programs in promoting loyalty and

building favourable customer relationships

Our Customers told us that they prefer pound in their pockets. (Zaria

Pinchbeck, Asda, 2003, cited in Web 1). Trying to analyze all the data is

madness (Waitrose, cited in Web 2), Dropping the loyalty card is

inconceivable (Russell Craig, Tesco, 2004, cited in Web 3). The market

research company Mintel, says that there is mixed evidence that loyalty

cards really do promote loyalty. Gary Davies (2004), professor of

retailing at Manchester Business School (cited in Web 4), believes that

loyalty cards have run out of steam stating that most of us have cards for

at least two stores, so that defeats the point [of loyalty]. The UK's top two

supermarkets, Tesco and Sainsbury's, both say that loyalty schemes are

an integral part of their retailing strategy and insist they remain

committed to them. The study seeks to assess the contribution of loyalty

programs in creating long-term relationship with the customer.

Objective 4

Evaluate the extent to which loyalty marketing makes its

contribution to TESCOs success and identify key areas where

TESCO outwits its competitors

The study seeks to point out the parameters TESCO considers to quantify

the effect of its loyalty program and assess if those parameters are

justified. Safeways loyalty scheme (ABC card) started off well but was

finally withdrawn four and a half years after its launch. ASDA shied

away from rolling out the loyalty card nationwide after having trials at

different stores. TESCO Clubcard was three times more famous thanSainsburys Saver card and achieved two and a half time greater


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awareness than any other card. (Woolf,2002) TESCO CEO Terry Leahy

puts it Its not the skill but the will that counts. This research seeks to

examine TESCOs skill and the will which makes its loyalty program

stand out and the extent to which it contributes to the retailers success.

Objective 5

Assess whether loyalty marketing should form a part of a retail

firms overall business strategy

Is Loyalty Marketing dead or is it a vital force to reckon with? Anti-

Loyalty lobbyists argue that loyalty programmes are little more than a

discount scheme ; that do nothing to engender consumer allegiance.

Loyalty aficionados, on the other hand, claim loyalty programmes form

the core of their business strategy, enabling them to increase customer

value, grow market share, and successfully populate new markets. The

research will explore the myth and realities of loyalty marketing and thepart it plays in shaping Tescos overall business strategy.

1.3 Scope

Since the study examines the Tesco Clubcard only, the results cannot be

generalized for every loyalty schemes. Future research should seek to

replicate the study onto other retailers in order to be able to get a broader

understanding of the loyalty effects of customer-loyalty-programmes.

Also, this study only examines the loyalty effects of the Tesco Clubcard

in terms of its marketplace impact; it does not examine the loyalty effects

in terms of the financial impact of the programme. The econometrics of

the Clubcard doesnt form a part of the research.


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1.4 Rationale

The interesting perceptions with contradictory thinking with regards to

loyalty in retail and loyalty schemes is what aroused sufficient interest in

the author to go in for a research into this elusive concept. Although

conventional wisdom dictates that customer loyalty is the most vital

aspect of every business because companies live or die from repeat

business, in reality, loyalty programmes are surprisingly ineffective

and almost 50% of them miss their business objectives partly or

completely (Web 5). Yet, most of the major supermarket multiples have

already joined the bandwagon, for some, its a roaring success while for

others it turned out to be more than a liability. This tricky tale of retail

was what made the author go in for a research on loyalty as no

existing literature gave a clear-cut judgment on the subject of

customer loyalty in retail. Is loyalty an armoury which came,

conquered and died?

1.5 Methodology

In order to approach the above mentioned research objectives, this

longitudinal exploratory study took into account both qualitative and

quantitative research strategies which is often necessary for

triangulation meaning getting a fix from two or more places (Green

et al, 2002). The Research Approach is a combination ofdeductive and

inductiveapproach. Deductive, because the existing concept of loyalty

and its impact on business decisions and strategy is first tested using data

and Inductive, because the data collected is analyzed to give new


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dimensions to the loyalty concept and its strategic effect on business

decisions.

A Case Study (Tesco) Strategy is taken as it involves an empirical

investigation of the loyalty phenomenon within its real life concept to

the particular retail firm.

Quantitative and qualitative research is applied, both using primary and

secondary information that is gathered and assembled specifically for this

study. Qualitative secondary information from a variety of sources is

gathered like Tesco Case Studies, Tesco Brochures, Tesco Web page,

Reference books, Journals, Online journals, Newspaper and Magazine

(The Grocer) Articles, Taped interviews, Business news channel views,

Research Agency (e.g Mintel) databases. Quantitative data from Tesco

Company reports and other supermarkets is collected and analyzed to

compare and contrast the effect of loyalty. Primary data is collected using

mall-intercept-interviewing (Zikmund, 2000). For this purpose, aconvenience sample of Tesco shoppers is surveyed in front of local Tesco

supermarket Other primary data collection methods included a

questionnaire that divides customers into two categories, namely Tesco

Clubcard members and non-members, which was important to know in

order to have a benchmark to find out how the Tesco Clubcard affects its

members loyalty towards Tesco. The Satmetrix Market Stat was madeuse of; it is a dynamic tool for customer satisfaction and loyalty

measurement that uses the customer loyalty index as key metric in

order to measure overall customer loyalty.

1.6 Conclusions and Recommendations


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Tescos loyalty marketing project has become a pillar of its business

strategy and has helped Tesco evolve in its strategic thinking and

direction from being an outstanding food retailer to being an information-

driven business, constantly searching for ways to act as the value-adding

agent for its customers, Its customer information assets uses to allow it

to take a strategic approach to customer management. Tescos loyalty

scheme suggests that a loyalty scheme can only have a sustained impact

on the bottom line when, from its inception, it changes the dynamic

culture of the organization. When the board recognize that loyalty scheme

data is the bedrock of their business, then the considerable investment in

technology, manpower and other resources really starts to pay dividends.

Companies embarking on a loyalty scheme should make sure that data is

analyzed with an eye on desirable economic outcomes and companies

should make sure that they establish what they are trying to accomplish

with the program and continually measure its performance.

Summary

This chapter provided us with a basic guideline of the things to come. It

gave a detailed description of the aim, purpose and objectives of the study

and what the study seeks to achieve. It clearly mentioned the scope of the

research and areas where the study will not throw much light on. The

study now moves forward into the journey of exploring the true

meaning of loyalty in retail and discusses different theoretical

frameworks of customer loyalty programmes and their individual

characteristics. It delves into both soft and hard aspects of loyalty and

evaluates the success factors and conditions which encourage loyalty.


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The aim of this chapter it to clear the air of confusion with regards to

the concept of loyalty and bring out its true meaning considering

both attitudinal and behavioral dimensions. It goes on to give a

detailed account of relevant loyalty frameworks and models put

forward by purists and examines the reasons for the popularity and

sudden proliferation of loyalty schemes. It then evaluates whether

successful loyalty programmes are a stand-alone entity or form a part

of the overall strategy and help in strategic decision making. The

chapter concludes by highlighting the hype and hoopla surrounding

loyalty schemes and the myths associated with it.

2.1 LoyaltyThe elusive phenomena

According to the Oxford Dictionary of Current English (2003, pg

327), loyalty is defined as being faithful or steadfast in allegiance

but as Payne (2002) points out customer loyalty has been one of themost frequently discussed and most misunderstood concepts of recent

years . This is further evidenced by the fact that some authors use

customer loyalty interchangeably with other constructs, including

customer repeat purchasing behaviour and customer retention.

However, it has been suggested that the construct of customer loyalty

differs from the one of repeat purchasing behaviour in the way that itimplies an intentional component, i.e. there is always a reason for the

customers repeat purchase and it does not happen by chanc e

(Hansen,2000) .The construct of customer loyalty also differs from

the one of customer retention in that customer retention has a purely

behavioural character, whereas todays interpretations of the loyalty

construct usually include both behavioural and attitudinal dimensions;

moreover, while the construct of customer retention considers the


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marketer as the active party, loyalty focuses more on intrapersonal

aspects of customer behaviour (Hansen,2000) .

Loyalty is seen as something that consumers and customers exhibit

towards brands, products, services, stores, as well as salespersons

(Laurent, 1997) .The level of attachment a customer feels toward a

product or service is a prerequisite to loyalty and that a second factor that

marks a customer's loyalty is repeat patronage. Attachment is shaped by

two dimensions: the degree of preference (the extent of the customer's

conviction about the product or service) and the degree of perceived

product differentiation (how significantly the customer distinguishes the

product or service from alternatives). The highest attachment occurs

when a buyer feels a strong buying preference coupled with a high degree

of perceived product differentiation. (Griffin, 2005, cited in Web 6))

2.1.1 Categorization of The Loyalty Concept ( from the Retailers

perspective)

Adapted from Bergeron, 2000, pg 135-147Figure 1


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According to Bergeron( 2000) , the definitions of loyalty fall into three

broad categories:

Transactional loyalty, in which the customers buying behaviour is

seen to change or be changed, although what motivates that change

may be unclear. These are often the most popular choices, as they

relate most closely to commercial results.

Transactional loyalty is the ultimate objective of any supermarket;

Tesco encourages transactional loyalty by concentrating on moreemotional aspects of things. Therefore research will deal more with

Tesco form of loyalty which is more emotional and less

transactional.

Perceptual loyalty, in which the attitudes and opinions of the

customer are the key, but there is not necessarily evidence of an

impact on purchasing. Sometimes these are regarded as more

significant, because they are seen to reflect possible behaviour

Loyalty

Transactional

Perceptual Complex

Repeat Purchase

Brand Value

Satisfaction

Awareness

Cross-selling Up-selling

Persistency

Lifetime-value


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patterns that could be created in the future, not patterns of what has

happened in the past.

Perceptual loyalty will be researched upon in more detail as

customer attitudes and opinions or the softer side of loyalty is what

Tesco concentrates on.

Complex loyalty, where there is a combination of these two effects.

Within each of these categories there are a number of terms, all of

which have been, or are being, used as definitions of loyalty.

Transactional

Cross-selling - seen as loyalty when a customer buys a new,

different product or service from the same supplier, rather than

choosing an alternative.

Up-selling - a customer buys more from the same supplier, usuallyof the same product or service.

Repeat purchase - obviously, buying the product again, when the

same need arises.

Persistency - maintaining a relationship rather than concluding it.

Perceptual

Satisfaction - an easy and obvious use of loyalty is within the

context of the degree of satisfaction felt by users of a product or

service; the kind of emotion articulated in response to the question

how was it for you?. However, customer satisfaction can be a

misleading measure as there are many examples of customers

changing supplier despite high levels of satisfaction. The research


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2.1.2 Conceptualizations of loyalty (from the customers

perspective)

Adapted from Uncles et al., 2002

There are three popular loyalty conceptualizations put forward by Uncles

et al.(2002): loyalty as primarily an attitude that sometimes leads to a

relationship with the brand (Model 1); loyalty mainly expressed in terms

of revealed behavior (i.e., the pattern of past purchases) (Model 2); and

buying moderated by the individuals characteristics, circumstances,

and/or the purchase situation (Model 3).

Fi ure 2


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Analysis of models put forward by Uncles will bring us closer to one

of the objectives of the research as it may reveal the real meaning of

loyalty in attitudinal and behavioural terms and the conditions which

help a loyalty scheme prosper.

Loyalty has been largely defined and measured in either behavioural

terms (stochastic approach), or attitudinal terms (deterministic

approach) and although it has been suggested that the concept should

be understood in both terms, there is still little agreement when it

comes to measuring it (Rundle-Thiele, 2001) .This disagreement has

led to a debate that originally started almost 30 years ago between

Jacoby and Kyner and is still going on in present times (Rundle-

Thiele, 2001) . Defenders of the stochastic approach consider loyalty

as behaviour and argue that the customer who buys the same brandsystematically is loyal. Loyalty, like love or loathing, is impossible to

quantify exactly. What can be quantified is customer behaviour and

where customer loyalty is concerned, the closest factor that can be

measured is customer behaviour. (Stone, 1997) .Loyalty, here is

defined mainly with reference to the pattern of past purchases with

only secondary regard to underlying consumer motivations orcommitment to the brand (Ehrenberg 1988; Fader and Hardie 1996;

Kahn, Kalwani and Morrison 1988; Massy, Montgomery and

Morrison 1970). Stochastic modelling techniques describe the

observed patterns of customer buying. Loyalty to the brand (measured

by repeat purchase) is the result of repeated satisfaction that in turn

leads to weak commitment. The consumer buys the same brand again,

not because of any strongly-held prior attitude or deeply-held


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commitment, but because it is not worth the time and trouble to

search for an alternative. If the usual brand is out of stock or

unavailable for some reason, then another functionally similar (or

substitutable) brand (from the portfolio) will be purchased ( East

1997; Ehrenberg, Barnard and Scriven 1997). Problem with this

approach lies in the fact that it considers loyalty behaviour as too

complex to be comprehended due to the number of explanatory

variables and their frequency of appearance and therefore makes the

processing of loyalty in a dichotomous way loyalty Vs. disloyalty,

which is singularly short of nuance, and requires a very arbitrary

categorization of customers into one of the two categories

(Odin,2001) .Moreover, it has been suggested that only a few

customers are 100 per cent loyal to a single brand, but rather, are

likely to have a repertoire of two or three brands within any product

category from which they regularly buy i.e. polygamous or divided

loyalty (O Malley, 1998) .Another shortcoming of the stochasticapproach is that it does not tell whether repeat purchasing has been

done out of habit, due to situational reasons, or due to other more

complex psychological reasons and it has been argued that the narrow

technical definitions of the stochastic approach do not capture the full

richness and depth of the loyalty construct (Odin,2001). Many

researchers and consultants argue that there must be strong attitudinalcommitment to a brand for true loyalty to exist (Day 1969; Jacoby and

Chustnut 1978; Foxall and Goldsmith 1994; Mellens et. al. 1996;

Reichheld 1996). Oliver (1997) has this in mind when he defines

customer loyalty as: A deeply held commitment to re buy or re patronize

a preferred product/service consistently in the future, thereby causing

repetitive same-brand or same brand-set purchasing despite situational


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influences and marketing efforts having the potential to cause switching

behaviour

This determinist approach considers loyalty more as an attitude and

argues that there are a limited number of explanatory factors

responsible for it, which can be isolated and manipulated (Odin,2001)

, including:

Customer satisfaction: Oliver (1999) suggested that loyalty

and satisfaction are linked inextricably, but also that this

relation is asymmetric, arguing that although loyal customers

are usually satisfied, satisfaction is an unreliable precursor to

loyalty, which is further evidenced by findings from the

automobile industry, in which 85 % to 95 % of customers report

that they are satisfied, but only 30% to 40% return to the

previous make or model. This gives us a pointer thatsatisfaction may not be as intricately linked to loyalty as

assumed and brings us closer to Objective 1.

Commitment and Trust: According to Morgan and Hunt

(1994), commitment and trust not just one or the other are

the key to success in relationship marketing, since trust implies

that the consumer has confidence in the brand/firm and iswilling to rely on it though there is an evidence of risk

involved, while commitment reflects a psychological

attachment to the brand/firm and an enduring desire to maintain

the relationship.

The determinist approach is not based on loyalty/disloyalty

opposition, but seeks to measure the degree of intensity of loyalty


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(Odin, 2001) .Nevertheless, the determinist approach has been

criticised for only relying on customer declarations without taking

into account their observed behaviour and also for using either

antecedents, or consequences of loyalty to measure the former and not

loyalty in itself (Odin, 2001). Despite the psychological and

sociological richness of the attitudes drive behaviour and relationship

approaches to understanding customer loyalty, these conceptualizations

of loyalty are not without their critics (Dowling 2002). They are thought

to be less applicable for understanding the buying of low-risk, frequently-

purchased brands, or when impulse buying or variety seeking is

undertaken, than for important or risky decisions (Dabholkar 1999). Also,

as Oliver (1999) has noted, there is little systematic empirical research to

corroborate or refute this perspective of customer loyalty. Those who

subscribe to the attitudes drive behaviour and relationship approaches

expressly rule-out revealed behaviour as a dominant measure of loyalty.

That, they argue, may merely reflect happenstance. Even combinedmeasures of revealed behaviour and satisfaction may not probe deeply

enough for us to be sure there is true loyalty (Arnould, Price and Zinkhan

2002). Brian Woolf (2004) puts Loyalty as a positive attitude built up

over a series of favourable interactions expressed in a customers

behaviour.

As a result, it has been suggested that neither attitudinal nor

behavioural measures on their own are sufficient to explain or define

the complex construct of loyalty and therefore, a number of hybrid

frameworks have been developed which try to combine both

dimensions of loyalty in an attempt to overcome such problems.

2.1.3 Loyalty Frameworks


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A popular framework that tries to take into account both dimensions

of the loyalty-

Construct has been proposed by Backman and Crompton (1994) (cited

in OMalley, 1998), which results in a number of different categories

of loyalty, each of which have clear managerial implications as

demonstrated in Figure 3.

Adapted from O Malley 1998, pg 47-55

In an attempt to explain the forces affecting loyalty in more detail,

Diller(2000) has proposed a model of loyalty motivators and de-

motivators that is based on background theory from consumer

motivation research and is illustrated in Figure 4.

No Loyalty

Managers can attempt to generate spurious

loyalty through such means as in-store

promotions, loyalty clubs and special offers.Is a state whereby customers will move

from retailer to retailer as there is little

benefit and difference perceived between

any of the outlets in the marketplace.

Spurious Loyalty

In order to defend the customer base

against competitive attacks managers can

attempt to maintain spurious loyalty and/ordevelop sustainable loyalty .Little difference

is perceived between retailers, there is often

inertia which keeps a customer loyal based

on habit.

Latent Loyalty

Managerial efforts are best focused onremoving the obstacles to patronage, for

example by extending the branch network.

Occurs when the customer feel san element

of loyalty yet will not buy from that retaileron every occasion

High Loyalty

Organisations must not become complacentand managerial efforts should be continually

focused on reinforcing attitude and

behaviour, particularly as the consumer is

likely to be targeted by competitors. This

may involve maintaining a price advantage,and/or providing additional services, which

offer value to the consumer

Patronage BehaviourHigh Low

High

Low

Relativeattitude

Fi ure 3


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Opportunism versus Relief

Arguably the strongest factor constraining loyalty has been

termed opportunism, which in this context stands for the

willingness of customers to take advantage of any opportunity

to get the maximum benefit (value for money), to be completely

flexible and to be only interested in their personal benefit (also

Fi ure 4 Adapted from: Diller, 2000, pp 39 43

Autonomy

Variety

seeking

Opportunism

Relief

Contin

uity

Social

Integra

tion

-

-

-

+

+

+

- Intensity of loyalty +


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known as smart shoppers).

The model suggests that everyone is a smart shopper to a

certain degree, but also that everyone (to various degrees) is

tired of only looking for economic advantages and therefore

opportunism is weakened by the need for relief, which

originates from the need for more freedom of economic

pressures and tasks, and a consciousness of alternative human

values, including humanity, solidarity or personal loyalty.

Variety versus Continuity

The second pair of ambivalent loyalty forces suggested by the

model includes variety seeking opposing loyalty while the need

for continuity makes it more attractive.

The desire for variety has its roots in a general motivation for

stimulation and absence of boredom, while at the same time,

man is a creature of habit who loves the well-known and

familiar, thus people are curious, but still have their habits and

like the certainty of knowing what they will get for the money

paid.

Autonomy versus Social Integration

The third pair of ambivalent loyalty forces suggested by the

model includes the need for autonomy opposing loyalty while

the need for social integration makes it more attractive.


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Autonomy in this context means freedom from others and

decision-making independence, which is becoming increasingly

important in a time of customer emancipation, where self-

esteem is highly regarded and attempts made by suppliers to

restrict this freedom might achieve the opposite of the intended

affect.

However, even in times of individual isolation, social

integration remains a widespread need and therefore many

customers long for social integration, a sense of social security

and a sense of affiliation or social esteem within different

relationships or groups.

Loyalty has become one of the most sought after concepts in the

business world and it is often the most elusive phenomena. Loyalty

cannot be blueprinted. It cannot be produced on an assembly line. In fact,

it cannot be manufactured at all, for its origin is the human heart -the

centre of self-respect and human dignity. It is a force which leaps into

being only when conditions are exactly right for it, and it is a force verysensitive to betrayal. (Maurice R. Franks, 2004)

Businesses can succeed with a great product or service, but will fail

without loyal customers. (Anon, 2004)


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It is now appropriate to discuss the possible effects of the construct of

loyalty for retailers and why it has become increasingly popular over

the recent years.

2.1.4 Reasons for the rapid increase in popularity of customer

loyalty

A critical evaluation

Gronroos (19994b, p9) described the objectives of relationship

marketing as being to identify and establish, maintain and enhance

and, when necessary terminate relationships with customers and other

stakeholders, at a profit so that the objective of all parties involved

are met, and this is done by a mutual exchange and fulfilment of

promises.

Customer loyalty is a strategic approach to improving shareholder

value through the development of appropriate relationships with key

customers and customer segments.(Payne & Ballantyne,2002).

Proponents tend to focus on the psychological bonding that eventuates

from membership (a customer benefit), and the enhanced customer

insights that can be gained from analyzing the program database (a firmbenefit) (Brown 2000; Pearson 1996). Critics argue that the loyaltyboth

attitudinal and behavioral for most customers is quite passive and

resembles habit rather than serious commitment. Where the focus is on

individual customers, loyalty programs can be seen as vehicles to

increase single-brand loyalty, decrease price sensitivity, induce greater

consumer resistance to counter offers or counter arguments (fromadvertising or sales-people), dampen the desire to consider alternative


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brands, encourage word-of-mouth support and endorsement, attract a

larger pool of customers, and/or increase the amount of product bought(

Bolton et al., 2000) Two aims of customer loyalty programs stand out.

One is to increase sales revenues by raising purchase/usage levels, and/or

increasing the range of products bought from the supplier. A second aim

is more defensive, by building a closer bond between the brand and

current customers it is hoped to maintain the current customer base. The

popularity of these programs is based on the argument that profits can be

increased significantly by achieving either of these two aims. In today's

economic climate loyalty programs can help companies do more with

less. They have been able to provide a sense of personal service without

an actual person which is clearly apparent from Tescos case (Seybold,

2001) Loyalty schemes can lead to more purchases more often, give

the ability to mass customize marketing communication, minimize

waste and help promote trust. It attempts to win a slightly larger share

of the customers spend than would otherwise be the case if theadditional value of the scheme were not offered (McAlexander,2002).

Loyalty programmes seeks to identify and talk to individual

customers on a massive scale and torrential flow of live transactional

data offers the possibility to transform how retailers manage their

business. Research will analyze in greater detail the ways in which

loyalty programmes can transform the business and help makestrategic business decisions, which is the purpose of the research (to

evaluate loyalty as a strategy). One of the reasons for the great

popularity of customer loyalty is the recognition that losing a

customer means in fact more than a single sale: It means losing the

entire stream of purchases that this particular customer would make

over a lifetime of patronage also known as the customer lifetime

value(Kotler and Armstrong,2001).


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Another reason for the rapid increase in popularity of customer

loyalty can be found in the impressive array of suggested evi dence

in support of loyalty, such as the figures provided by the associates of

Bain & Company, claiming that the net present value increase in

profit that results from a 5% increase in customer retention lies

somewhere between 25 and 95% in over 14 industries (Oliver, 1999).

Loyal customers are supposed to buy more, pay higher prices and

bring in new customers through word-of-mouth support (Morgan et

al.,2000).Another profitability-argument in favour of loyalty

includes that in many cases the management of loyal customers is

supposed to be cheaper since they are usually better informed and

therefore ordering and delivering procedures can become routine

(Scott, 2000, cited in Web 7).However, some of these profitability-

arguments have been challenged recently by Reinartz and Kumar(2002), who compared the behaviour, revenue, and profitability of

more than 16,000 individual and corporate customers over a four-year

period, concluding that they discovered little or no evidence to

suggest that customers who buy on a steady basis are necessarily

cheaper to serve, less price sensitive, or particularly effective at

bringing in new business. They also found that a considerable amountof loyal customers were only marginally profitable, while a large

percentage of short-term customers were very profitable.

This has arguably to do with the fact that many non-loyal customers

can be highly profitable at the beginning, causing companies to chase

after them in the hope of future profits, but once these customers

cease their buying activity, they may become unprofitable because the


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company continues to invest in marketing to them (Reinartz and

Kumar,2002).A recent Best of Biz (2003) report also questioned

customer loyalty as the driver of profitability, arguing that

profitability might ultimately be more related to business

fundamentals such as superior products, services or processes.

Academicians have also argued that loyalty programmes are

ultimately self-defeating when competition confronts the first mover.

Woolf (1996) puts it great success comes from a marketing strategy

base firmly on understanding customer economics and only

secondarily on customer loyalty. Other pro-loyalty arguments include

that loyal customers may bring more certainty into the business, e.g.

through increased customer immunity to competitive offers, through

higher tolerance of mistakes made by the supplier, through increased

customer feedback (loyal customers are supposed to be more prepared

to complain and to participate in surveys).On the other hand,

however, loyal customers may also seduce suppliers intocomplacency and encourage inactivity and carelessness or the

supplier may become too reliant on them, which may mean that they

fail to adapt to changes in market structure or to respond to the

changing importance of certain market segments

(Diller,2000).However, despite their criticism, even critics themselves

have suggested that customer loyalty is a worthy contributor to theshareholder value of a company(Diller,2000;pg33), and that firms

are encouraged to study their position and options in the pursuit of

this goal(Oliver,1999; pg37). The research will extensively analyze

the reasons for popularity of Tescos loyalty programmes and

compare it with other loyalty schemes which are one of the objectives

of the study (to compare and contrast Tescos loyalty schemes with its

competitors).


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2.2 Customer-Loyalty-Programmes

The notion of customer-loyalty-programmes is not really a

revolutionary idea and it is probably fair to say that the cooperatives

pioneered the modern day programmes already in the mid 1800s

(Sparks,1999).What distinguishes todays customer-loyalty

programmes is their ease of use for consumers as well as the degree

of technology involved. However, the rationale behind modern CLPs

is still the same, to build lasting relationships with customers, and to

do so by rewarding loyal and heavy or frequent buyers, in the hope of

achieving benefits of loyal customers. The ultimate goal of every

CLP, according to Stauss et al. (2001), is to increase general

operational profitability by customer retention. However, Butscher

(2001) argues that profitability should be considered as a medium- or

even long-term goal which can only be achieved if other intermediategoals are reached first, such as building a strong customer database.

Most modern CLPs are using some form of membership card which is

presented at the point of sale in order to identify the customer and to

record the purchase details (e.g. time of purchase, value and type of

items etc) and/or the value of the rewards earned. There are various

different types of cards issued by and on behalf of retailers, including:Payment cards: provide a mechanism for customers to pay

retailers and are sometimes known as store cards

Reward cards: provide a mechanism for retailers to reward

their customers for repeat purchasing and are sometimes called

bonus cards or club cards which is what Tescos club card is all

about.


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Combined cards: act simultaneously as payment and reward

card

According to Cuthbertson and Williams (1999), retailers have four

different CLP-card strategies available:


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Adapted from Butsher,2001, pg 123-131

The 5 P Loyalty Strategy

Pure Strategy: Spending and accruing benefits with only the

card-issuing retailer. Means, strengthening the existing bond

between the customer and the retailer, so that the retailer can

find out what the customers wants, and give the customer more

of it. Pure loyalty schemes aim to establish a two way dialogue

so that the retailer can act to improve the basic offer. (Rayner,

1998). Tesco used to follow a Pure Strategy and even now the

Clubcard is more or less based on a pure strategy with the

primary objective being, strengthening the two way

communication and understanding the customer better.

Fi ure 5


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Although Tesco has partners like Allders, H Samuel, Powergen

etc under Tesco Freetime but it is Tesco which issues the

Clubcard points and the partners buy those at a rate negotiated

with Tesco. But they are the Tesco Clubcard points redeemable

through Tesco or Tesco Freetime only.

Push Strategy: Spending at several retailers, accruing benefits

with the card-issuing retailer. Means, creating a scheme to

encourage customers to use a way of shopping that they would

not have done before ,pushing customers through new channels,

or trying to create new types of behaviour. It is a technique

used by low-cost airlines to encourage customers to book

online, or it can be used by a retailer expanding into non-core

businesses to draw customers with it.

A pure loyalty card strategy primarily affects current customers. Ifsuccessful, new primary customers would then need to be attracted

via a Push loyalty strategy.( Rayner ,1998)

Pull Strategy: Spending at the card-issuing retailer, accruing

benefits outside the retailers everyday range. Means, attracting

customers by augmenting a retail offer, so customers will find

that buying one product means that they get an offer on another,

linked product. At a simple level buy one get one free.

Effectively it is an inducement to create more sales by

encouraging customers to buy something new.( Sharp,1997) It

is best suited when a retailer's offer is not sufficient in itself to

attract new primary customers or retaining the existing ones.


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Purchase Strategy: Spending and accruing benefits across

many retailers. A Purchase Strategy is primarily aimed at

increasing customer purchases regardless of where those

purchases take place. It is suited to financial services and

transaction processing providers and to mainstream retailers

wishing to develop financial or transaction processing services.

To encourage usage, successful Purchase loyalty card strategies

tend to rely on high use availability, high brand awareness and

low costs, especially processing costs. They tend to act as

payment cards first and reward cards subsequently.( Reichheld ,

2000)

Purge Strategy: Represents a deliberate choice by retailers to

avoid a loyalty card scheme, target customers of other schemes

with alternative benefits and increase the number of primary

customers and overall market share. Therefore the key measures

should aim at increasing the competitiveness of the retailerrather than any specific measures related to loyalty cards

Butscher (2001) has suggested that the information obtained from

CLP-members are particularly useful as they have already identified

themselves as having a special interest by signing up for the

programme and sometimes depending on the type of programme

(limited programme versus open programme), even pay a

membership-fee an effort that non-interested customers would

probably not invest. The advantage of a limited programme, where

members have to pay a joining-fee and/or annual-membership fee is

that it has a positive influence on filtering out unwelcome members


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The characteristics of limited and open customer-loyalty-programmes

Limited or Opt-it CLP Open CLP

Membership fee helps to

cover costs.

Membership prerequisitehelps channel

membership/focus on target

groups.

Limited access makes

membership more valuable.

Clearly defined membership

structure makes

communication more effective

Membership prerequisite

keeps number of members,

and thus cost , down.

Database includes only

members with an above-

average interest in the

product

Membership payments raise

expectations, so the loyalty

programme management is

constantly forced to improve

A wider number of

customers can be reached.

Database more completePotential customers and

competitors customers can

be reached more easily.

Completeness of database

could, after further analysis,

lead to segmentation and

segment-specific

communication.

Larger number of members

helps to reach critical mass,

which makes loyalty

programme become more

cost-effective sooner.

Fi ure 6 Adapted from: Butscher, 2001, p 51


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value.

Will be the better approach for

companies:

Will be the better approach for

companies:

Trying to reach/reward their

top customers.

Preferring a more focused

approach

With smaller budgets

In clearly segmented markets

In business-to-business

markets

In markets with homogeneous

customers

With very little knowledge

about current and potential

customers

Following a more general

approach

With long-term larger

budgets

In unsegmented markets

In business-to-consumer

markets

With commodity products

The Tesco Clubcard falls into the category of open CLPs, since

everybody living in the UK aged 18 years or above can register for it for

free via an application form which provides essential information for

targeted promotions (Tesco Clubcard Brochure). Since this research takes

a Tesco Case Study, it only takes into consideration Open-CLPs.

Opportunities for using customer informationFi ure 7

Direct

Sales

Report

Sales success

Generate sales

contacts

Define

Sales goals


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It should be kept in mind that a loyalty card is not a replacement for

any of the basic loyalty drivers but is a supplement to them. Just as a

hammer doesnt build a house, a loyalty card doesnt build customer

loyalty. Both the hammer and the card are tools that, when properly

and appropriately used, help bring the architects blueprint to life.

(Woolf, 2004)

2.2.1 Building a CLP

Setting up a customer-loyalty-programme requires careful planning

and should include detailed plans and methods for customer

identification and registration, segmentation, reward design, and

Customer

InformationProdu

Product

demand

Servi

Pursue customerissues

Marketi

Sales

Product

development

Product

analysis

Competitive

analysis

Assess customer

satisfaction

Monitor service

quality

Respond

customer

inquiries

Program

testing

Program

preparation

Program

PlanningProgram

analysis


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programme maintenance operations. Moreover, setting up a CLP is

very resource intensive and therefore the company developing the

programme should take it very seriously, i.e. being aware of the time,

effort, financial investment and above all, being aware of entering a

long-term commitment (Butsher,2001). In order to be a source of

sustainable competitive advantage, the company developing the CLP

must always take into account what its loyal customers value, since

loyalty is inextricably linked to the creation of value, and then design

a programme that directly supports their value proposition (Morgan et

al, 2000). The greater the perceived value of a companys goods or

services, the greater the loyalty effect. (Bryan, 2002). A value

proposition is the full positioning of a brand , the full mix of benefits

upon which it is positioned and the answer to the customers

question Why should I buy your brand?(Kotler &

Armstrong,2001).Moreover, in order to be viable, a CLP must build

and sustain noticeable differences in its offerings that are difficult tocopy, since a lack of differentiation removes any potential of

competitive advantage which is anything but easy in retailing,

where first movers are quickly imitated (Morgan,2001).Thus, the

right combination between soft (e.g. magazine, travel aids, special

products, services, events) and hard-benefits (e.g. discounts, rebates,

coupons) is essential and Tesco is a champion at this, because itknows fully well that although savings are at the top of the customers

wish list, hard benefits are usually copied by the competition and

therefore it considers soft benefits as the key to its loyalty programme

as they are less likely to be copied due to their mostly intangible

nature. Five elements which determine Tescos loyalty programmes

value are (1) cash value (how much the reward represents as a

proportion of spend); (2) choice of redemption options (the range of


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rewards offered); (3) the aspiration value of the rewards (how much

the customer wants the rewards); (4) the perceived likelihood of

receiving the rewards; and (5) the schemes ease of use .In addition to

the elements are the psychological benefits of belonging to the

programme and accumulating points.

In order to be able to deliver a unique value proposition (that is still in

line with an organisations overall strategy), CLP -managers have to

select an appropriate CLP-format which can be further categorized

into behaviour-based models, attitude-based models, hybrid models

and relationship-based models (Morgan et al.,2000).In practice, most

CLPs follow the behaviour-based model, focusing on behavioural

outcomes such as repeated patronage and targeting immediate

benefits for the organisation by providing easily observable

typically economic benefits to cause the customer to purchase,

repurchase, or purchase more frequently the firms offering ( Figure

8).However, this stands in contrast with the long-term character of the

relationship-marketing concept and as a result of that, behaviour-

based customer-loyalty-programmes have been criticised as dressed-

up sales promotions that are highly questionable as relationship

building initiatives which fail to emphasise on emotional elements

and do not necessarily lead to greater marketing efficiency andeffectiveness (Tynan,2000).According to Dowling and Uncles (1997),

behavioural based models might well stimulate sales for the duration

of the promotion but do not have any long-term behavioural after-

effects.


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Adapted from: Morgan et al., 2000, p 73

Behaviour-based CLP

Programme tactics Programme outcomes

An alternative approach followed by Tesco and proposed by Morgan

et al. (2000) is known as the relationship-based model, which is based

on relationship marketing theory, consumer behaviour theory and

strategic marketing theory (Figure 9)

It has been suggested that in any marketing relationships, all partners

engage to some extent in economic, resource and social exchanges

and therefore these three areas of relationship content build the

starting point for the relationship-based CLP:

Fi ure 8

Price advantage

Persuasive

communication

Economic

benefit

Habitual buying

Switching costs

Repeat

patronage

Promotional

expenses


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Economic Content. The economic content of relationships deals

with the economic benefits and costs of participating in the

relationship and it has been suggested that customers are only

willing to participate actively in a CLP, if their individual cost-

benefit calculation leads to a positive result, which then

provides the partners with an incentive to explore the

relationship further, cooperation may become more attractive as

enhanced economic returns will be expected thus, a strong

economic relationship content can contribute to the growth of

loyalty (Stauss et al.,2001).Loyalty marketing is, essentially, all

about economic differentiation. Its about deciding how to

optimize long-term yield from the limited resources we have.

Understanding our customers behaviour and economics

(derived from loyalty program) allows to do just that. (

Woolf,2003 )

Resource Content. It has been suggested that parties engage inrelationships to secure valuable resources that they would not

be able to acquire more efficiently elsewhere, which, in a

business/consumer exchange means that the business requires

the purchasing power and effort of the consumer, while the

consumer wants reliability, status, safety, and other facets of

reputation and tangible value in the products and services theypurchase and according to Morgan et al.(2000), the resource

content of relationships can contribute to commitment among

exchange partners through dependence, strategic interest,

reciprocity and equity.

Social content. The relationship-based model suggests that

although economics and resources may indicate a prosperous


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relationship, no relationship can be successful in the long-term

without a social environment that nurtures communication,

honesty, fair play and an awareness of mutual interests and

therefore a CLP should accommodate opportunities for

interactions so that friendships may be developed.

Customer loyalty and customer trust are the key variables of Tescos

relationship-based model which it considers to be the crucial in

building the intermediate goals of the model and providing

competitive advantage, as they lead directly to a successful outcome.

Fi ure 9 Adapted from: Morgan et al., 2000, p 79


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Relationship-based CLP

Relationship content Key variables

Outcomes

2.2.2 Tescos CLP-Mix

Tescos CLP falls into the category of so-called integrative

instruments (Stauss et al.2001) due to its capability to combine

various elements from existing tools as it relies on a differentiated set

of product, price, communication and distribution issues to organize

the customer benefits (although it has been claimed that relationship

marketing offers an alternative to the traditional 4P classification,

Economic

content

Resource

content

Social

content

Share of

customer

Customer

referral

Co-operation

Promotional

expenses

Customer

Loyalty

Customer

trust

Product

development

ex enses

Customer

retention


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most scholars do still use the classic paradigmatic framework when

identifying adequate tactical marketing tools for building and

maintaining relationships with customers (Hansen,2000).

The product-mix consists of goods and services of the specific CLP-

operating company (Tesco) or its coalition partners (partners under

Tesco Freetime). The price-mix, contains member discounts,

favourable conditions of payment as well as financial advantages via

bonus programmes. Communication issue is of great importance for

the interaction with CLP-members and with Tesco, communication

with members is exclusive, meaning that it is only accessible to

members, integrated in the sense of everything Tesco does (and

sometimes does not do) sends a message that can strengthen or

weaken relationships, as well as interactive in that Tesco not only

talks to their CLP-members but also listen to what they have to say

(Hansen, 2000). For this purpose Tesco has exclusive CLP-magazines

(Clubcard Magazine), regular newsletters or mailings, or CLPmeetings and events for members (Butsher, 2001).

2.3 Loyalty as strategy

In order to realize the purpose of the research, its important to as sess

loyalty schemes as a part of a strategy rather than a stand-alone entity.It must be considered that CLPs do not exist in a vacuum, but should be a

coherent element of a companys overall strategy and capabilities

(OMalley , 2000).Given the potential benefits of customer-loyalty-

programmes, firms like Tesco have adopted them as a core business

strategy (Morgan et al,2000). Tescos design of a loyalty program takes

into account the nature of the business, its market position and strategicgoals, and the competitive landscape. (Fournier et al, 2001). It is


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essentially a long term CRM strategy that not only evaluates the current

performance of Tescos relationship with its customers, but also drives its

strategic direction (Roberts, 2004). The success strategy is always to

closely align an organization with its customers but bringing this vision to

reality is far from easy ( Sawhney, 2001).

Tescos concept of Relationship Management begins and ends with the

customer.

Strategists have put in place a framework for understanding and meeting

the needs of the customer or which (Fournier et al, 2003) calls as The

Ideal Customer Experience.

A framework for the Ideal Customer Experience is designed by (Fournier

et al.,2003)to deliver a Customer Experience that meets the needs of the

individual customer. The strategy behind this (and behind Tescos

strategy) is that a customer whose needs are understood and met will

continue to purchase from the company with increased frequency and

value. The result is win-win between the company and the customer.

Adapted from Fournier et al, ,2003 pg 133-151Fi ure 10


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Customer Loyalty Measures

Customer Loyalty measures are designed for the people within a

company who dictate the strategic direction of the company. These

measures evaluate the performance of a companys current customer base

and drive the future direction of a companys overall customer strategy.

Tescos loyalty measures are comprised of:

Average Profit per Customer by Tenure

Size of Customer Base by Tenure

Lifetime Value of Customer Base by Tenure

Potential Value of Customer Base by Tenure

Although Loyalty measures are discussed in brief, the study doesnt deal

in depth with the econometrics of the Clubcard.


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Rank the Customer Base by Value

One of the key outputs of determining the Customer Loyalty Measures is

to rank the customer base by value. This is very crucial as it should drive

decisions on where a company should allocate resources. Initially,

Tescos loyalty scheme was one size fit allin this case but later on it

realized the importance of doing something extra for its more profitable

Premium Loyal customers. Now Tesco understands the pivotal concept

in determining a customers value, that some customers are much more

important than others.

Customer Strategies

Tesco establishes customer strategies to retain High Value customers,

grow High Growth customers, acquire either High Value or High Grow

customers, and determine if negative value customers can be turned into

profitable customers. Each individual Customer Strategy outlines the

steps that need to be put in place to retain, grow, acquire or terminate

specific customers. These strategies are executed via the Customer

Experience. The strategies designed are created with the primary

objective of meeting the needs of the customer, and its success is

dependent on whether the needs of the customers have been met.

Customer Strategy Measures

Customer Strategy measures attempt to answer the following questions:

1. Which customers should a company retain/grow/acquire/terminate?


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2. How did the company perform in

retaining/growing/acquiring/terminating the appropriate customers?

However, Tescos Customer Strategy measures delve into deeper detail

by breaking down the measures by each customer segment, which breaks

it down by Value and Customer Characteristics/Preferences. Also, each

customer strategy contains tailored Customer Strategy measures, such as

Wallet Share for growth strategies, and Retention rate for retention

strategies. The results of these measures enable Tesco to allocate specific

resources to target a specific customer segment. The resources that work

within a targeted customer segment shapes the customer experience for

the individual customers within that segment.

The Customer Experience is comprised of the following components:

1. Populating the Customer Profile To create the Ideal Customer

Experience, Tesco populates the Customer Profile with the relevant

information to properly understand and meet the customers needs.

The Customer Profile will continue to be enriched as the relationship

between the company and customer grows deeper

2. Delivering and Receiving Value at Each Customer Interaction

Tesco views each interaction as a golden opportunity to deliver value

through its products, services, and processes, as well as to receive

valuable information from the customer in the form of feedback

3. Customizing the Customer Experience By understanding an

individuals needs, it creates the Ideal Customer Experience by


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customizing the products, services, and processes to meet the needs of

the individual customer

The Customer Experience bit is where Tesco hugely outflanks itscompetitors. Detailed examination of all the factors will be done which

will make the author reach closer to Objective 4.

Tactical Measures

Tactical Measures are all measures that evaluate the performance of the

Customer Experience, Customer Ownership, and Technology. These

measures are critical to detecting the success or failure of any component

within the Customer Experience..

Depending on the models (shown in Figure1) one adopts, the strategy

adopted can be significantly different. For example, advocates of the

attitude approach (Model 1) ( more or less adopted by Tesco) aim to

increase sales by enhancing beliefs about the brand and strengthening the

emotional commitment of customers to their brand. Moving customers up

a loyalty ladder through image-based or persuasive advertising and

personal service (recovery) programs are frequently used tactics (Brown

2000; White and Schneider 1998).

Managers who adopt (Figure 2 Model 2) approach try to maintain their

share of category sales by matching competitor initiatives and avoiding

supply shortages, and achieve growth via increased market penetration.

Under these circumstances, a loyalty program might be launched for

mainly defensive purposes, in a bid to match competitors with no

expectation of dramatic changes in customer attitudes and behaviour.


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Advocates of the contingency approach (Figure 3 Model 3) emphasize

what might seem to be prosaic factors such as avoiding stock-outs,

extending opening hours, offering the appropriate assortment mix. They

also often use price promotions, deals and special offers to attract the

customers of competitor brands. Here the potential for loyalty programs

to impact demand is very limited.

2.4 Rhetoric vs. Reality

There is confusion regarding the nature, scope, role and influence of

customer relationship marketing. From a functional perspective, many

marketers believe that the route to customer loyalty is through the

operation of a number of mechanistic, tactical initiatives such as loyalty

cards, points schemes, events and promotions. It is hoped that customer

incentives and rewards are a sufficient basis to build loyalty, generate

knowledge and change customer behaviour. On the other hand, an

organizational perspective views relationship marketing as a total firm

customer orientation one that seeks to integrate and align multiple

sources, processes and activities for creating superior customer value on a

consistent basis. Although the applied marketing literature suggests

that there are very high expectations for CLPs, in reality they are

surprisingly ineffective and it has been suggested that almost 50% of

them miss their business objectives partly or completely (Reinartz,

2002). One reason therefore can be found in the fact that many CLPs

have been launched as competitive-moves in order to combat a

competing programme, with quality often being sacrificed for speed

in many cases (Butsher, 2001). Too often, loyalty programs appear to

lack clear goals or are not tied to overall business strategy which is


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what makes ineffectual and ineffective. As markets mature, there is

increasing saturation and cannibalization of loyalty effects, making it

difficult for smaller programs to compete effectively .Another reason,

according to Cigliano et al.(2000), is that many organisations

underestimate the full cost of setting up and sustaining CLPs, arguing

that even those that increase sales might actually be still draining

money which could have a variety of reasons apart from

underestimating CLP-set-up and maintenance costs, such as getting

caught up in price wars with competitors due to heavy financial

incentives, or investing in the wrong customers (in some cases, the

demand of certain customers is so small, even after a lifetime, that the

cost and effort of turning them into loyal customers are out of

proportion to the revenue they could generate (Butsher,2001)).It has

also been suggested that far too many customer-loyalty-programmes

have overemphasized on information gathering rather than

relationship building and have thereby ignored the need forcustomers voluntary participation in the programme

(Tynan,2000).One reason therefore might be found in the false

assumption by many marketers that every customer is keen to develop

an intense and devoted relationship with them, while in fact it has

been suggested that they are more likely to view companies as

enemies, not allies(Fournier et al,1998) .Furthermore, it has beenargued by Fournier et al.(1998) that the very things that marketers

are doing to build relationships with customers are often the things

that are destroying those relationships since what is called

intimacy by marketers is often viewed as intrusive by the

customer in a world where customers want, and will increasingly

demand control over their own data (Tynan,2000). Also, there is a

clear limit to the number of such schemes the customer will take the


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trouble to join. The greater the proliferation of loyalty schemes, the

less they act like loyalty schemes, appealing more to the minority of

customers who are especially susceptible to promotions. One must

question whether the proliferation of loyalty programs represents real

value creation or is simply a case of keeping up with the

neighbours. (Kadar & Kotanko, 2004).

Summary

This chapter dealt with the relevant theories and concepts that pertain to

the concept of loyalty in general and illustrated the brand of loyalty which

is relevant to Tesco. It gave us the outline of the form and structure of

Tescos Clubcard and how its embedded within the organization. The

study now moves ahead into adoption of appropriate methodologies to

figure out what loyalty approach Tesco adopts, how its strategy aligns

with the loyalty model and overall business objectives, if loyalty forms

the core of its business strategy and how much does it contribute to

enhancing customer experience and achieving business objectives.

Through appropriate methods in place, it also seeks to evaluate the

loyalty concept and its effectiveness in future.

The aim of the next chapter is to achieve the research objective by

applying the appropriate research approach, strategy and

methodology. The chapter also seeks to ensure that the data collected

is valid and reliable, is not contaminated and bias is reduced to a

minimum. For this purpose the tried and tested Satmetrix Loyalty

index is applied to measure Customer Loyalty Index to find out the


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effect of the Clubcard. Focus groups, Telephonic and face to face

interviews are also conducted as a part of primary data collection,

which help to triangulate findings.


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In order to approach the research objectives, this longitudinal exploratory

study is taking into account both qualitative and quantitative research

strategies, which is often referred to as triangulation meaning getting

a fix from two or more places(Green et al,2002).

The triangulation approach strives to capture a more complete, holistic,

and contextual portrayal of the phenomena under study, and is intended to

neutralize bias in any one approach applied (Green et al., 2002).

According to Bonoma (cited in Lewin & Johnston, 2002), researchers can

pursue high levels of data validity and generalizability by adopting

triangulation strategies which provide replication and/or corroboration of

findings across methods (i.e. experiments, surveys, case studies). It has

further been suggested that the integration of both research strategies

within a single project opens up enormous opportunities for mutual

advantage, since inherent weaknesses of one approach can be overcome

only by using other methods (Simon & Vosseberg , 2001).

The Research Approach is a combination of deductive and inductive

approach. Deductive, because the existing concept of loyalty and its

impact on business decisions and strategy is first tested using data and

inductive because the data collected is analyzed to give new dimensions

to the loyalty concept and its strategic effect on business decisions.

Both Quantitative and qualitative methods of data collection technique

is applied, although the major part of the research relies upon qualitative

data and its analysis. Qualitative secondary information from a variety of

sources are gathered like Tesco Case Studies, Tesco Brochures, Tesco

Web page , Reference books , Journals , Online journals, Newspaper and

Magazine (The Grocer) Articles , Taped interviews , Business news

channel views , Research Agency (e.g Mintel) databases . Quantitative


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data from Tesco Company Reports and other supermarkets are collected

and analyzed to compare and contrast the effect of loyalty.

Before embarking on a definitive research methodology (Philosophy,

Strategy and Approach) each research objective was taken into

consideration separately and a SWOT analysis was done for each data

collection approach against each objective. A rationale was established

behind each research method before going ahead. It was ensured that the

data collection methods were more or less interdependent so that each

method filled the hole or covered the areas which could not be covered by

the other.(e.g Focus groups helped in redesigning and reframing some of

the questions in the questionnaire, telephonic interviews and Face to Face

interviews were only conducted after the secondary data was collected

and analyzed to properly design questions in order to keep the interview

short , exact and effective)

Initial secondary data collection method included reading through the

relevant material in Books , Journals , Online Web pages, White papers,

Seminar papers, Company Reports, Tesco website, Tesco cases studies,

Research databases (Mintel) etc. Keywords were then generated to refine

the search.

Keywords generated: - Customer Relation Management, Loyalty

Marketing , Direct Marketing , One-to-one Marketing , Database

Marketing , Relationship Marketing , Customer Loyalty, Retail Strategy,

Co-creation, Integrated marketing communications, Affinity programs ,

Buyer behaviour.


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Generation of keywords made the secondary data collection a lot easier as

it gave a specific direction to data collection , more relevant material

were available in less time.

Primary data collection methods were embarked on only after sufficient

insight had been gained from secondary data and most of the secondary

data was collected and analysed and the loyalty concepts fully

understood.

For the fulfilment ofObjective 1, Objective 2 and Objective 3, Focus

groups have been conducted to reveal both behavioural and attitudinal

aspects of loyalty and to decipher if loyalty schemes encourage loyalty or

is it just another marketing tool. Focus groups are a cognitive form of

qualitative research. There is less structure to the group, with group

members being encouraged to take their own paths of discussion, make

their own connections and for the whole process to evolve. It seeks toencapsulate the experiences and feelings of respondents in their own

terms. The purpose of the project is disclosed to the respondents or is

otherwise obvious to them from the questions asked. Focus group is a

tool borrowed from psychotherapy where it has long been realised that

people can be encouraged to open up if they are asked to share their

views as part of a small group.(Edmunds,1999). It has a brainstormingeffect so that a comment from one person sparks ideas from another and

groups can yield more ideas than one to one interviews. The group may

gel and a bonding between members acts as further encouragement to

disclosure.

Focus groups reveal customers viewpoint and perception and looks at

loyalty programs through customers eyes. By historical evidence it is


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found that women and old people were more loyal in their shopping

habits while men and students are the most promiscuous and fickle. The

variables taken into consideration in the formation of focus groups were

Age, Gender, Income, Religion (in some cases), closeness to the

supermarket, weekly shoppers and weekend shoppers. The details of the

participants were tried to be matched against the profile of the customers,

to ensure that the conclusions drawn were statistically significant. Focus

groups gave customer viewpoint on loyalty, satisfaction, loyalty schemes

and what kind of loyalty programs they preferred and wh

Documents

Dissertation on (Customer Loyalty)