Role Of Loyalty Programs Commerce Essay

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British retail, especially supermarket retail, is among the most competitive on the planet. Grocery retailing in the UK is a classic oligopoly, with the top three or four firms accounting for around 60% of the market. In such a fierce climate, there's a constant search for smart weapons to gain an edge.” (Shabi, 2003, The Guardian, p 18)

From the humble Green shield Stamp to more recently introduced Air miles, gift vouchers, club cards, Nectar cards, loyalty discounts, etc, there are many techniques organisations deploy to maximise customer loyalty and to keep customers coming back to the same place. There is a difference between what the schemes currently do for the providers (and consequently their customers) but an acknowledgement that in the future, if the schemes are to be successful in achieving their objectives, extra attention has to be given to key issues raised in the relationship marketing literature (Hart .et al, 1999).

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). The increasing competition between retailers has created the need of developing more sophisticated activities in order to gain market share. In response to these changes there has been a new emphasis on defensive marketing, focusing on reducing or managing the dissatisfaction of your customer and increasing switching barriers (Fornel and Wernerfet, 1987). This calls for a paradigm shift to the pursuit of loyalty as a strategic business goal which has become increasingly popular over the recent years (Sharp & Sharp, 1997). However, the approaches dealing with the customer satisfaction, consumer retention and loyalty programs have become more helpful for the management of the companies. The common vehicle of this kind of activities is the launch of a loyalty card program (Baker, 2000).

“Fifteen years ago, Tesco launched the Clubcard - a loyalty scheme that rewarded shoppers with vouchers offering discounts if they shopped regularly at the supermarket. Tesco's Clubcard loyalty programme is almost legendary in the grocery world .One third of the UK's homes use the programme” (Turner and Wilson, 2006, p1). Loyalty programmes such as Tesco Clubcard can be considered an ‘incentivised type' of loyalty, which can be exhibited by customers, but the strength of this loyalty is often questioned (Dick and Basu, 1994). Although shoppers benefit from discounts on products, the supermarkets also obtain a vast amount of knowledge about their customers' preferences. So who gets the real reward from loyalty cards?

Loyalty programs are everywhere in business. Customers interact with them multiple times almost every day—whether shopping at a grocery store, buying a cup of coffee, flying on an airline, staying at a hotel, or paying a cell phone bill. Nowadays, there are so many loyalty cards in circulation there is a concern that rather than creating or contributing towards customer loyalty to store, such programmes could stimulate “loyalty overload, causing customer confusion and apathy”(Tapp, 2001, p.253 cited in Turner and Wilson, 2006, p.260). In other words, companies have been convinced that it is possible to buy customers' loyalty but, do loyalty programs really work, or are these companies just wasting their money? Can a loyalty program change how people behave and get them to spend more money with the company, while reducing the likelihood that the customers will move their business to a competitor? Bellizzi and Bristol (2004) believe that although loyalty cards offer points to customers, loyalty cannot be gained simply through loyalty cards and programmes.

The focus of this research is on grocery retail market. This sector was chosen because, in the last decade, firms operating in this industry had to face growing competition. As a consequence, retailers had to reconsider the way they had usually managed their relationships with customers, now seen as critical source of competitive advantage (Christy et al., 1996). Moreover this sector was selected because it is considered one in which the proliferation of loyalty programs has been so marked to suggest that saturation point has been reached (Wright and Sparks, 1999). In this research an attempt shall be made to examine the extent to which Loyalty Programmes do or do not address the potential offered by Relationship Marketing by closely analysing the giant grocery supermarket namely Tesco in the UK through the method of quantitative analysis.

Therefore, the objectives of this study can be identified as following:

* The aim of this study is to determine the role of loyalty programs in supermarkets for building favourable customer relationships.

* The understanding of the main criteria and determining the factors affecting the consumer choices in grocery market.

* Evaluate the extent to which loyalty marketing makes its contribution to Tesco's success

* The examination of the relationship between frequency of visits consumer demographic variables and the use of loyalty cards.


Grönroos (1994, 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 could be defined as “customer's commitment to do business with a particular organisation, purchasing their goods and services repeatedly, and recommending the services and products to friends and associates” (McIlroy and Barnett, 2000, p. 348).

The origins of modern relationship marketing can be traced back to a passage by Grönroos (1994) where he finds that businessmen have concentrated far more on how to attract more customers than on how to retain customers. The costs of attracting new customers include advertising and promotion, but loyal customers also act as word of mouth advertisers and will generally spend more. On an average it costs a firm five to six times as much to attract a new customer as it does to implement retention strategies to hold an existing one (Lovelock and Wright, 1999). It is claimed by Reichheld and Sasser (1990) that a 5% improvement in customer retention can cause an increase in profitability of between 25 and 85 percent (in terms of net present value) depending on the industry. However, the rationale behind modern Consumer loyalty programme (CLPs) is still the same, to build lasting relationships with customers. The ultimate goal of every CLP, according to Stauss et al., (2001), is to increase general operational profitability by customer retention. However, Butscher (2002) argues that profitability should be considered as a medium- or even long-term goal which can only be achieved if other intermediate goals are reached first, such as building a strong customer database.

Two aims of customer loyalty programs stand out. ‘One is to increase sales revenues by raising purchase levels, or increasing the range of products bought from the supplier. A second aim is more defensive - building a closer bond between the brand and current customers in the hope to maintain the current customer base' (Uncles, et al., 2003). The popularity of these programs is based on the argument that profits can be increased significantly by achieving either of these aims (Uncles, et al., 2003).

Loyalty is a concept central to marketing's new paradigm: Relationship Marketing (RM). As Jacoby and Kyner (1973) argue 'brand loyalty is essentially a relational phenomenon'. Sheth and Parvatiyar (1995) add that this relational quality also applies to store, person and process loyalty. The basis of relationship marketing is customer loyalty because retaining customers over their life will contribute to enhanced profitability (McIlroy & Barnett, 2000). According to McIlroy & Barnett (2000), the successful implementation of relationship marketing is dealing with the establishment and growth of customer loyalty in competitive business environment. Recognising the proximity of these two concepts, Loyalty Schemes (LS) have been hailed in marketing literature as examples of RM in action (Palmer 1994, Gilbert 1996, Grönroos 1996). This implies that companies have to learn continuously about their customers' needs and expectations which are ever changing and often unpredictable.

Taking a different approach, the seminal loyalty ladder' proposed by Christopher et al (1993) explicitly links RM with loyalty in its description of the different types of loyalty in customers. In proposing the idea that consumers begin as 'prospects' who then become customers, clients, supporters and finally advocates of the marketer, they introduce a notion of increasing consumer commitment to the firms and its offers. There is, however, no research which suggests the extent to which those engaged in loyalty marketing actively pursue customers up this ladder of loyalty and indeed, Christopher et al (1993) suggest that ‘too many firms over-emphasise the identification of prospects and focus on trying to convert them into customers' (p22).

Oliver, 1980 argues that customer loyalty is a function of customer satisfaction, which again is a function of comparison between perceived experience and actual experience. Loyalty should not be confused with customer satisfaction. According to Jobber (2004) once a product has been bought, customer satisfaction depends upon its perceived performance compared to the buyer's expectations. If the product matches expectations, the consumer is satisfied; if it exceeds them, the consumer is highly satisfied; if it falls short, the consumer is dissatisfied (Kotler, 2003). Although loyalty is built on satisfaction, organizations can have satisfaction without loyalty. As Miranda et al (2005) summarize several factors influence store satisfaction while shopping such as: Location of store, pricing strategy, in-store promotions, sales personnel, and loyalty cards. This was further supported by Wright and Sparks (1999, p. 431), who considered these as “the main elements that drive customers to patronise particular retailers”. However, Mitchell et al (1998) did not find strong relationship to support that loyal customers have better knowledge of their store' attribute than the customers that are not loyal. Loyalty is a term which is neither easy to gain nor maintain, rather it is vulnerable, where “even if its customers are satisfied with the service they will continue to defect if they believe they can get better value, convenience or quality elsewhere” (McIlroy and Barnett, 2000, p. 349).

There are three popular conceptualizations proposed by Uncles, et al., 2003 which explain the concept of customer loyalty which would be covered in detail in the dissertation. Concepts are: “loyalty as primarily an attitude that sometimes leads to a relationship with the brand, loyalty mainly expressed in terms of revealed behavior (i.e. the pattern of past purchases) and buying moderated by the individual's characteristics, circumstances, and/or the purchase situation”(Uncles, et al., 2003, p2).

This research attempts to assess the effectiveness of Loyalty programmes on relationships between firms and customers thus focusing on the relationship based approach. Sharp and Sharp (1997) and Noordhoff et al. (2004) found a relationship between the possession of a loyalty card and loyalty. It is acknowledged, however, that these findings conflict with Bellizzi and Bristol (2004) and Divett et al. (2003) to name a few who found that loyalty cards and programmes do not make customers more loyal.

Bellizzi and Bristol (2004) conducted a research to verify if the loyalty cards introduced by supermarkets actually had an impact on customer loyalty in US market in 2004. Overall, their findings demonstrate that there is no association between loyalty cards and supermarket loyalty. In fact, frequent users of loyalty cards are found to have more than one card and shop in more than one store. According to Maslow's Hierarchy of needs as mentioned in Keegan, 2005 as countries progress through the stages of economic development, more and more members of society operate at the esteem need level, having satisfied physiological, safety and social needs and from the study of Hall, 1976 about high and low context as a way of understanding different cultural orientation, US and UK are categorized as low context cultures where negotiations proceed quickly and responsibility for organizational error is pushed to lower level. From these studies, interpretation can be made that US and UK cultures are quite similar hence this gives an opportunity to replicate Bellizzi and Bristol, 2004 and examine again the findings and finally analyze the changes made in the loyalty programmes for building customer relationships in the grocery industry in UK in 2010.


A quantitative approach was preferred to a qualitative one because according to Hooley and Hussey, (1999) quantitative technique offers a wealth of opportunities to explore data afresh and gain new insights into marketing phenomena. Quantitative research is defined as “a research technique that seeks to quantify data and typically apply some form of statistical analysis” (Malhotra, 2004, p.164).

According to the purpose of this study, the discovery of customer's outlook and the exploration and understanding of their attitudes, method of questionnaire administered through face to face interviews would be used (Flavian, Martinez and Polo, 2001). This instrument therefore appeared to be the most adequate means of gathering customer opinions, and allowed a precise classification of their answers and enabled quantitative comparison (Creswell, 2003). The questionnaire would be designed in order to search and cover the development hypothesis. The questionnaire design and structure shall be based on similar studies such as, Bellizzi et al., (2004), Wright et al. (1999), Garton (1995). Finally conducting the interviews personally, the researcher could help participants to understand the questions better in order for them to provide more accurate answers, while making sure not to influence them in the reasoning (Malhotra, 2004).

The specific research questions addressed were:

Ø How are retail loyalty schemes evaluated by customers and what are the implications, if any, for RM?

Following sub research questions addressed are:

Ø What is the effect of loyalty card participation on supermarket loyalty?

Ø Is there a relationship between selected consumer demographic variables and card usage?

The survey would take place outside number of different Tesco's in Manchester city with the permission from the store manager and adhering to all the ethical issues as outlined by MRS and also Snowballing technique (a non-probability sampling technique in which an initial group of respondents is selected randomly, subsequent respondents are selected based on the referrals or information provided by initial respondents, Malhotra, 2004) would be used whereby survey would be put online and Clubcard holders shall be skimmed for further analysis. The sample size is estimated to be ranging in 300-500 with minimum 200 respondents; this is known as convenience sampling (Malhotra, 2004). Hooley and Hussey, (1999) state that in convenience sampling, the sample selection process is continued until your required sample size has been reached.

Respondents will be asked to indicate how much of their grocery budget they spent at various Tesco stores, these responses would help in creating three-category nominal measure of supermarket loyalty (e.g. very loyal; moderately loyal; not loyal) (Bellizzi and Bristol 2004). Respondents would also be asked about loyalty card ownership and usage, to know if they are frequent user, occasional or on user (Bellizzi and Bristol 2004). Regarding factors that might lead to store loyalty, respondents will answer questions to assess items on likert scales involving store features and characteristics and to indicate how likely each factor would be used as a potential factor contributing to their store loyalty. These results would be analysed using SPSS, Chi-square analysis will be used to examine the loyalty card use and store loyalty variables. Analysis of variance will be used to identify relationships between selected demographic variables (gender, and age) and the different loyalty factors.

The following hypotheses were developed, to be tested for this study based on research done by Bellizzi and Bristol (2004).

H1: The existence of a loyalty card scheme can be one of the main criteria of choosing a supermarket to be a loyal customer.

H01: There is no relationship between store loyalty and age.

H02: There is no relationship between store loyalty and gender.

H03: There is no relationship between the frequency of loyalty card usage and age.

H04: There is no relationship between the frequency of loyalty card usage and gender.

From this research we expect that the results should conclude the most prominent finding that loyalty cards do not promote store loyalty, supporting the universally accepted belief that location is primary driver for supermarket loyalty and also price is still a meaningful consumer requirement in the grocery business (Bellizzi and Bristol, 2004). As Flavian, Martinez and Polo, 2001 say, “the consumer is loyal, in part, because he lives close to the store where he shops” (p.87). One of the limitations of the survey is that the data would be collected only in the area of Manchester and it does not cover all country. If the consumer's habits and behaviour are similar to any other area of the country the results would anyways be accepted. Another limiting issue is that the survey assumes that all card holders of the chain have the same attitude and habits as the ones that would be interviewed. Also as a backup plan for this research if questionnaires don't work is face to face structured interviews from the customers as my second option.


Bellizzi and Bristol, 2004 point out that the essence of good grocery retailing lies with the quality of the in-store offer and the competitiveness of the pricing. As O'Brien and Jones (1995) say, “the full potential of value sharing through rewards is realized only when customers become sustainably loyal” (p.77). Moreover the companies have to realise that not all customers are equal, if a company wants to enhance its customer loyalty and improve profitability, it must give its best value to its customers. Unfortunately many firms consider their customers as equal, providing the same value to everybody. As the author put it ‘A company that offers average value product and services to everyone wastes resources in over satisfying less profitable customers while under satisfying more valuable loyal customers'(O'Brien and Jones, 1995).Companies should therefore take into account those long term benefits and educate their customers in loyalty.


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