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Loyalty scheme retailing strategy analysis

This paper seeks to critically examine the use of relationship marketing/loyalty scheme retailing strategy by a retailer of my choice. In doing this, it will be important to understand what Relationship Marketing/ Loyalty Scheme is all about. I will endeavour to explain the concept of Relationship Marketing Strategy and how they are formulated, will speak briefly on consumer behavior and will speak on Relationship marketing and loyalty scheme. I will be looking at Garment Care, a drycleaning outfit in Nigeria, West Africa that is currently using a loyalty scheme. I will be asking how successful they have been in the use of loyalty scheme as a relationship marketing technique. While doing that, It will be important also to look out for whatever advantages or disadvantages they might have achieved and there scope of activity. I will then conclude by suggesting to their management team a relationship marketing strategy that will be beneficial to the organization.

Relationship marketing and loyalty schemes are both marketing strategies. A strategy is the master plan to achieve recognized goals of an organization which extends into the thought process and ultimately the culture of an organization. [University of Leceister, Retail Marketing MN7332/D]. The scope of strategic planning in any organization should be identifying and establishing a customer driven direction through planning and identifying and modifying the organizational process that is required for effective implementation of the chosen strategy.

For any strategy to be employed, a careful understanding of consumer behavior is necessary. Why do people shop? What does shopping entail? How do consumers choose the store to shop from? How do consumers decide who they patronize?

Maslow’s’ theory, initially developed in 1940s, suggested there is a hierarchy of needs from the most basic to the most mature. The theory suggests that people seek to advance through these hierarchies and as the needs at one level are fulfilled the need of the next level takes over. He also estimated that there is a ‘tolerated satisfaction level’ at which people move to the next level even though the lower needs may not be totally satisfied. He divided these needs into Physiological needs, safety, love and belonging, esteem and self actualization. Maslow later added self transcendence. [A.H. Maslow, A Theory of Human Motivation, Psychological Review 50(4) (1943):370-96.]

Maslow's hierarchy often forms a basis for understanding consumers' motives for action. Marketers have over the years looked at consumers' needs to define their actions in the market. If products are designed to meet consumer needs, consumers will more often choose those products over those of competitors. Whichever product better fills the void created by the need will be chosen more frequently, thus increasing sales. Maslows’ hierarchy of needs has however been criticized that it is old and does not have a clear representation of the world today. Some of the issues raised about its lack of empirical data was addressed by Clayton P. Alderfer who developed the ERG theory a need-based model that is more consistent with empirical findings [Alderfer, Clayton P., An Empirical Test of a New Theory of Human Needs; Organizational Behaviour and Human Performance, volume 4, issue 2, pp. 142–175]. A proper understanding of the consumer is necessary for any retail strategy to be employed as it has been tested overtime to have far more effects than just formulating strategy.

What is Relationship Marketing?

Relationship marketing can be described as a form of marketing that is developed from direct rejoinder from marketing campaigns that emphasizes customer retention and satisfaction, rather than a dominant focus on sales transactions. Relationship Marketing is a broadly recognized, widely-implemented tactic for managing and cultivating a company’s interactions with clients and sales prospects. It refers to a long-term and mutually beneficial arrangement where both the buyer and seller have an interest in providing a more satisfying exchange. This strategy attempts to go beyond the simple trade-barter process with a customer to make more significant and productive contact by providing a more holistic and comprehensive, bespoke purchase. Relationship management uses this experience to create stronger ties.

Martin Christopher, Adrian Payne and David Ballantyne [Relationship Marketing. Butterworth-Heinemann, Oxford. 1991], explained that relationship marketing has the potential to forge a new idea between quality management, customer service management, and marketing. Marketing and customer service to them is inseparable. This form of marketing involves all parts of the organization from the board of directors to the front desk officer. Regis McKenna (1991) says “Marketing is not a function; it is a way of doing business . . . marketing has to be all pervasive, part of everyone's job description, from the receptionist to the board of directors”. This form of marketing recognizes the long term value of customer relationships.

Relationship marketing aims at increasing customer loyalty by focusing on managing their dissatisfactions or increasing their satisfaction and increasing switching barriers. By increasing switching barriers or switching cost we mean increasing the cost of changing of suppliers.

In many markets, consumers are forced to incur costs when switching from one supplier to another. These costs are called switching costs and can come in many different shapes. The definition of switching costs is quite broad. Thompson and Cats-Baril (2002) defines switching costs as "the costs associated with switching supplier", while Farrell and Klemperer (2002) write that "a consumer faces a switching cost between sellers when an investment specific to his current seller must be duplicated for a new seller". As these definitions indicate, switching costs can arise for several different reasons. Examples of switching costs include the effort needed to inform friends and relatives about a new telephone number after an operator switch, costs related to learning how to use the interface of a new mobile phone from a different brand and costs in terms of time lost due to the paperwork necessary when switching to a new electricity provider. There are different types of switching cost and they range from exit fees to search costs, learning costs, emotional cost, installation and start up cost, financial risk cost, social risk cost to mention a few. These costs affect competition and helps in ‘keeping customers’. When a consumer faces switching costs it will not pay for the consumer to switch to the supplier offering the lowest price if the switching costs in terms of effort, time, uncertainty, etc outweigh the price differential between the two suppliers. If this happens, the consumer is said to be locked-in to the supplier. If a supplier manages to lock-in consumers, the supplier can increase its prices without fear of loosing customers since the switching costs prevents the consumer from switching.

The growth in relationship marketing was fueled by the writings of management consultants. In 1993, Don Peppers and Martha Rogers published The One-to-One Future.

Taking inspiration from mass customization manufacturing technologies and applying them to marketing communications, Peppers and Rogers promoted a one-to-one focus on “share of customer” rather than on the marketer’s ability to communicate a unique message to the customers based on the company’s knowledge of their interests. They claimed that this one-to-one interaction with customers would lead to improved lifetime value. [Peppers, Don, and Martha Rogers. The One to One Future: Building Relationships One Customer at a Time. New York: Doubleday, 1993]

Frederick Reichheld further spoke about the importance of building customer commitment in his 1996 book The Loyalty Effect. He focused on the cost of customer defection and set the stage for the problem by claiming “many major corporations now lose and have to replace half their customers in five years. He further claimed that even small improvement in customer retention can as much as double company profits because it costs less to serve long–term customers and also because loyal customers will pay a premium. Loyal customers also will generate word of mouth referrals to other prospective customers. [Reichheld, Frederick F. The Loyalty Effect. Boston: Harvard Business School Press, 1996.]

The major principle of relationship marketing is the retention of customers through different methods and practices to ensure repeated sale from preexisting customers by satisfying requirements above those of competing companies through a mutually beneficial relationship. Simply put, it is a process of attracting, maintaining, and enhancing relationships with key people. This type of marketing speaks about relationship ladder of customer loyalty. This ladder starts with prospects, to customer, to client, to supporter, advocate and eventually partner. Excellent personalized quality service is what moves each person from one stage to the other. This is what relationship marketing is about. [Phillip Kotler and Kevin Lane Keller: Marketing Management 12th edition]

What are Loyalty Schemes?

There are different types of loyalty scheme models. We have the Dirichlet model, The Hofmeyr Conversion Model, The RED Matrix Model, The Enis-Paul model, Retention Rate model and The Reichheld Loyalty Effect model.

The Dirichlet model: These measures repeat buying and makes some simple assumptions for instance that consumers tend to have split loyalties to each of several brands.

The Hofmeyr Conversion model: which was originally developed by Dr J Hofmeyr is one approach to trying to rationalize the discrepancies between customers expressed satisfaction levels and actual repeat purchase behaviour. The model is useful in that it attempts to identify the dedication of the consumer and is therefore a predictor of 'positive preference loyalty' as opposed to lethargic or limited choice loyalty.

The Enis-Paul model: The formula used to create the Enis-Paul Index is designed to calculate consumer inclination to patronize a given store during a specified period. In this approach, which defines absolute loyalty as one hundred percent and total promiscuity as zero percent, a loyal customer would have to patronize few stores, spend a high proportion of their available budget in a preferred store and not exhibit switching behaviour.

The Retention Rate Model: This approach is a simple but effective model to calculate customer retention rates. The implication of this approach is that loyalty is referenced against repeat purchase behaviour to a supplier and not the absolute level of the supplier customer base. It is based upon the number of customers at the start of the year, the number retained at the end of the year, the number lost during the year and no acquired during the year. The retention rate is then expressed as a percentage of these indices. All these models are effective depending on the indices employed. http://loyaltymatters.com/models.html

Loyalty programs are structured marketing efforts that reward, and therefore encourage, loyal buying behavior — behavior which is potentially of benefit to the firm. [Sharp, Byron and Anne Sharp (1997), "Loyalty Programs and Their Impact on Repeat-Purchase Loyalty Patterns", International Journal of Research in Marketing, 14 (5), 473-86.] A retail store may issue a loyalty card to a buyer who can then use it as a form of identification when dealing with that retailer. By presenting the card, the purchaser is usually entitled to either a discount on the current purchase, or an assignment of points that can be used for future purchases. The card issuer usually requires customers that want loyalty cards issued to them to provide a minimal amount of demographic data, such as name, address, social security number or something to show you reside in the country. The data extracted from the customers usually form a basis of marketing research. These cards can be used to determine, for example, a given customer's favorite brand of liquor, or whether he or she is a vegetarian. Where a customer has provided sufficient identifying information, the loyalty card may also be used to access such information to accelerate verification during receipt of cheques or dispensing of prescription preparations, or for other membership privileges (e.g. access to a club lounge in airports, using a frequent flyer card). In most retail shops, these cards are required in order for customers to receive advertised ‘loyalty price’ and the more the cards are used the more points the customer accumulates. Retailers often have different grades of cards ranging from regular, platinum and gold card holders. Some stores only allow card holders to shop there because they are highly discounted shops example of this is Sams’ club in the United States. Loyalty scheme is a form of marketing strategy that locks in customers to a particular retailer depending on the benefits they are getting from the retailer.

Loyalty marketing does not differ from other marketing techniques in requiring the disciplines of research, measurement and budgeting and controls. It is arguable that it requires them more to justify the considerable resource commitments to operate these programmes profitably.

How do loyalty scheme work?

Supermarkets and chain stores spend millions on loyalty cards each year. Tesco alone was reported to have handed out £200m of vouchers last year [URL: www.tesco.co.uk]; other companies offer extremely generous incentives, and that’s before the cost of the letters to 10 million cardholders. Does loyalty scheme work? Why do retailers bother with it?

The fact that the number of loyalty schemes in operation has grown certainly means that companies are convinced that they work - particularly to stem defection.  In the best cases, however, companies do not just use their loyalty scheme as a commoditized money-back method.  Intelligent firms use the information that loyalty schemes provide to gain a better understanding of each customer. 

The success of a loyalty campaign is intimately connected with the conviction that lies behind the decision to launch, maintain and build upon the programme. A successful loyalty initiative depends upon a synchronization of clear objectives from the beginning, buy-in from board level to front-line staff, and considerable investment in expert workforce. Loyalty schemes must be developed through a disciplined research process – both qualitative in order to identify the advantageous components, and quantitative in order to prioritize and group them. If adequate research is not carried out, the result will be a one-size-fits-all approach to the client base, and this will offer very little or no insight into individual customer wants and wishes. This, in turn, will make it far harder to increase customer profitability. For loyalty programme to work, the product, service, price and brand values must be gotten right. If the basic assessment is right, informed data-based marketing can lock in customers’ spend and defend against unexpected surprises. It is worthy of note that even the best ‘loyal’ customer will still try competitors!

Successful loyalty methods must be simple, must be applicable in the real world, must help deliver prolific incentive strategies and must visibly help the whole database marketing process convey better return on investment. The information given in customers’ application combined with the receipts of products bought helps the retailer in building a detailed picture of the customers’ lifestyle. Shoppers are classified according to wealth, according to family status, according to the type of food or make-up they buy, and according to their price sensitivity. If you’re a bargain-hunter, you may receive alerts to offers on products that you don’t usually buy. On the other hand, if you always buy the same brands without checking price, you may not receive these offers at all – especially if you are devoted to the retailer’s brand. Professional couples and young families would, equally, receive different marketing messages. The highest-spending customers are likely to get special offers and freebies that the rest of us go without. Ultimately, the motive of every loyalty card is getting you to spend more.

Garment care as a case study

As earlier mentioned, I will be looking at Garment Care Limited, a drycleaning outfit in Lagos the former capital of Nigeria. Garment care which was established in 1999.

From the outset, their mission statement has been “Excellence in all things” and their Vision was to be the preferred drycleaner in their target market using top of the art equipments and well trained personnel. This is reflected in their choice of state of the art computerized machines, to the investment they made to ensure that all their utilities function without interruption and are environmentally friendly. They identified the groups of customers that existed. Some just wanted their clothes washed while some wanted their fabrics pampered. They then decided that they would pitch their tent with those that want their fabrics cared for thus targeted the high income earners whom were particular on quality cleaning, finishing and packaging of clothing items. As at this time, what existed was the basic wash men who were glorified labourers, real drycleaning was still façade as at that time. There was no eminent potential competition. They started by matching the need of this particular segment of people to their companies’ competencies After defining their target market, they now went a step further to invest in their personnel who have been highly trained and are experienced in the drycleaning field. These personnel assist and advise on all aspects of care of your garment. You cannot drop your Garment Care with a loose button and pick up after drycleaning with the button not fixed. All these going the extra mile service is done at no extra cost to the customer. To appeal to these cadre of people, it was necessary to put certain structures in place, ambience was important, personnel was key, and so also was location. Every branch of Garment Care is on the High Streets of wherever they are located. Garment care became the household name in drycleaning especially for the elites. This on its own can be described as ‘Lifestyle Retailing’. Along now came competition. Other drycleaners came up trying to penetrate the market. What did they do? They introduced loyalty cards. All their customers were encouraged to be members and were given loyalty cards where you accumulate points which made you eligible for some discount. The more points you got the more discounts you are entitled to.

This loyalty cards [Prestige cards] were introduced to encourage their customers to feel like partners. These cards qualified you as a customer for as much as 20% discount. You could then further use the points on your prestige card to make payment at some point when you have accumulated enough points. The card also qualified you for discount in some other elitist stores around that vicinity However, speaking with the General Manager of the organization, he categorically said that what has worked for them and kept them in business was not the ‘prestige card’, as quite a number of customers do not even remember to claim their points, but the sense of belonging created by their staff. He said ‘the sense of belonging that is created by our members of staff as you enter any of our outlets is amazing’. I also spoke with about six card holders who confirmed also that their continuity with Garment Care over the years has been based on GC’s relationship management techniques. One of the people said that she had never used her loyalty points and has been drycleaning with them for eight years. Now that is loyalty! Garment care introduced prestige loyalty cards for continued patronage, it has been successful but that has not been the full reason for its success. The major success has come from its relationship management skills. Also GC’s target market is not bargain hunters and really would not be bothered whether they get a discount or not. They are more interested in the service being provided. GC also goes through their customer base data and suggests businesses to their customers through their newsletters. They suggest and introduce without intruding on their customers privacy using the information they have on the customer. They also encourage their customers to shop in certain stores where their prestige card earns you more discount. One of the people interviewed said ‘they’ve got a customer for life in me’ because she sees that they are interested in her total being. They seem to have excellent inter and intra personal relationship management skills. The overall goals of Garment Care are to find, attract and win new clients, nurture and retain those the company already has, entice former clients back into the fold, and reduce the costs of marketing and client service. These they have been able to achieve to a large extent. Garment care has been able to ‘be all things’ to their customers because they have made good use of the information on their data base without being intrusive or offensive.

What is the Impact of Loyalty Scheme on Garment Care?

The impact of loyalty scheme on the target market of Garment Care seems to serve the purpose from the strategic point of view. The goals of GC were to carve a niche for themselves in the industry, to care for fabrics of the elites and to be the market leader in this industry and they have been able to do all that and more using these different strategies. It is worthy of note that GC employed other strategies like CRM to get to where they are today.

The strategy employed by Garment care has helped the organization in profiling its customers to give them better services; their customers are rewarded with a certain amount of credit for every naira spent. This strategy is simple as signing up is just a swipe away removing the complexity of filing forms et al. The survey conducted showed that an average GC customer is really not interested in trying other drycleaners as they seem to have ‘locked in’ their customers with whatever strategy they have employed.

Recommendation to Garment Care

However aside from the use of relationship marketing and loyalty scheme by GC, they could also try the use of online or internet marketing. This form of marketing combines the technical and the creative aspects of the internet like advertising, design, sales, and development. It also uses search engine marketing (such as Google and Yahoo), adverts on websites and email marketing strategies. This form of marketing is inexpensive when you compare it to the cost of reaching your target market with traditional marketing techniques. It is also far reaching.. There are many companies that have found that they can reach a very large audience for a significantly lower cost than their standard advertising methods

They can also employ the use of Offline Marketing. This is the traditional type of marketing strategy. Before the era of internet, all the types of marketing that was used then fall into this category. The use of Newspaper ads, Radio jingles, Television jingles, magazine ads and Billboards were the main source of advertisements then. This will be a very expensive form of marketing because unlike the online, you pay every time you want your name out there. It may however be better for GC to concentrate more efforts to internet and relationship marketing than this other form of marketing. Relationship marketing if committed to might be the best form in the sense that once a network of people who know and trust you is built, they are all the marketing you need. These strategies will go a long way to make their customers committed to them and also guarantee returns.

Conclusion

Garment Care uses their loyalty scheme to target additional products to customers who are really likely to be interested in them. They understand who their really valuable customers are and often create additional rewards for those high revenue customers.  An effective loyalty scheme helps both to satisfy and keep customers and to increase their spending with the retailer. This they have been able to achieve through the use of loyalty schemes and relationship marketing. Loyalty schemes and relationship marketing works if properly understood applied and executed. Loyalty based marketing has almost the same principles as those of Customer Relationship Management which is basically to get more new customers, to get existing customers to spend more often or to spend more and also to minimize attrition.

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