Customer Loyalty Schemes in Automotive Sector

The creation of customer loyalty in the automotive sector

Marketers push for brand loyalty, across all product ranges, from toothpaste to larger purchases such as a new car. Within the automobile industry there is little product differences in each segment, as partnerships, coalitions and takeovers bind manufacturers together.

Each manufacturer is striving to obtain brand loyalty, not only at the point of purchase, through servicing the vehicle, supply parts and encouraging repurchases. This adds value to the organisation, and increases profits.

Loyalty schemes have been a success in supermarkets and other retail outlets, can this form of marketing be transferred to the automotive industry.
This paper sets out to review the current literature of the subject, discuss what loyalty schemes the automotive industry offers its customers, and to focus on one Manufacturer Volvo.

Volvo have in the last decade turned around flagging sales, this was achieved through placing a higher value on their customers, who responded by increased usage of their service departments.

3.0 Introduction

The ultimate obtainment for marketers would be for complete brand loyalty, across all product ranges, from toothpaste to larger purchases such as a new car. Although without any brand loyalty, organisations could not survive. So is it possible to increase brand loyalty through schemes that target the consumer?

One of the hardest areas to increase brand loyalty is the automotive industry. Manufacturers are constantly offering discounts, free insurance, sales and other packages to attract new customers and to resell to existing consumers. Consumers expect a good service and deal as it will be their second largest purchase (a house being the first).

The result of partnerships, coalitions and takeovers in the automobile industry has bonded manufacturers together. This has left very little product differentiation, with more marketing on the brand than product. Manufacturers have to look for different methods to attract customers.

Each manufacturer is motivated to obtain brand loyalty, not only at the point of purchase, through servicing the vehicle, supply parts and encouraging repurchases. This adds value to the organisation, and increases profits. The added value can be the emotional tie the customer has with the brand.

Customer loyalty is not a new notion, although it is now the focus of many PR actioners, retaining existing customers is more important than attracted new. If you lose your core customers a higher level of resources is required to maintain the same level of sales. Therefore it’s vital to maintain loyal customers to utilise economies of scales.

Loyalty schemes have been a success in supermarkets and other retail outlets. Some schemes involve several brands collaborating to give the consumer a choice of where to spend. The question is can this form of marketing be transferred to the automotive industry.

This paper sets out to review the current literature of the subject, discuss in general what loyalty schemes the automotive industry offers its customers, and to focus then on one Manufacturer Volvo.

Volvo was chosen for this research as an example of using customer loyalty as a change agent to turn the organisation around. Brand loyalty is very strong with Volvo, although this did not correlate with the dealerships.

Volvo has introduced methods to increase loyalty with their dealerships. They have taken loyalty a step further and strengthen all supply chains

Volvo traditionally had a strong brand recognition, but went sales went into decline the organisation had to re-focus on core values. The methods that Volvo used to build the brand and to increase customer loyalty will be discussed, comparing them to the literature.
We are loyal to brands; our degree differs as to how we value the closeness of the product. Can this be influence by strong marketing tactics? With such a large purchase as a vehicle can the manufacturers sway our opinion, or do we remain loyal to what we know and trust?

4.0 Methodology

This chapter discusses the research methods used for the project and the justification for the choice of methods. It discusses methods that were not used, with justification of why they were not included. Included is a critique of methods selected, and with hindsight identifies any changes that would have enhanced the research.

This paper evaluates brand loyalty within the automobile industry. Selection of the topic was stimulated and formed out of all manufacturers offering loyalty schemes; therefore could they individual schemes succeed. The nature of the research was discussed with colleagues and fellow students this not only added practical ideas and suggestions, it opened new avenues of thought. This was the discussed with lecturers sounding out ideas, gauging opinions and clarifying the question. Focusing in on the question was obtained by employing relevance trees, narrowing the research area. This gave direction tithe research, although with reviewing the literature this changed several times (Buzan, J. 1995).

Next, a research proposal was compiled, with the benefit of organising ideas and setting a time-scale for research. Theoretically, the proposal would highlight any difficulties with the research question and access to data. Creating a time-scale would focus on targets and meet deadlines in the completion of the paper.

The literature review, discussing theories and ideas that exist on the topic formed the foundation of the paper. The findings from the research are then tested on theories for validity (Saunders, M. et al1997). The literature review was challenging, there is very little academic research specifically on the topic area, although is a lot of research in the wider markets for example Supermarket loyalty schemes. Journals and books were the back bone for the review, together with internet sites.

Tertiary data sources, such as library catalogues and indexes were used to scan for secondary data. This produced journals and newspaper articles, books and Internet addresses. With the amount of literature, it took time to sort out relevant material to the research. Narrowing down the search Bell’s (1993) six point’s parameters was applied. Applying key words that were identified in the first search produced relevant and up-to-date material (Bell, J.1993).

A limitation on the literature search was the amount of time to read all articles and books on the subject. Whilst reviewing the literature references to other publications were followed and reviewed. Bells checklist on identifying the relevance of literature found was a practical method to reduce the amount of reading (Bell, J. 1993).

Ethical considerations in research fall into three categories, during design, collection, and reporting of the data. These areas were carefully considered at all stages of the research (Oppenheim,A.1996:84). The data sought throughout the research should remain within the scope of the project (Saunders, M. et al 1997).

Case studies of organisations that through varying factors have use customer loyalty schemes to improve market share have been reviewed and compared to the literature. The case studies discuss the organisations strategy in the use of the data they have collected. This information was gathered from secondary data and their web sites.

To produce primary data on brand loyalty within the automobile industry proved to be a vast task, taking a lot of time to produce results. Internal and external operations of several organisations would have tube compared to reach any level of validity. Instead it was decide to review previously published case studies, interviews and surveys. This was then compared to the literature review.

Other methods of data collection were considered and rejected. Focus groups would have offered free flowing information. This could have been facilitated with discussion led by the researcher. The idea was rejected due to the limited resources.

The major limitation of the study lies in its relatively small sample size and the limited coverage. This was mainly attributable to the limited time and other resources available for the study.

5.0 Literature review

This chapter will review and discuss all the relevant published material on brand loyalty. This starts of wide to gain insight into brands and the theory that has driven brand loyalty.

5.1 Brands

Kotler (2000) described a brand as a “name, term, symbol, or design (oar combination of them) which is intended to signify the goods or services of the seller or groups of sellers and to differentiate them from those of the competitors” (Kotler (2000) cited in Groucutt, J etal 2004:275). The brand is part of the products tangible features, it’s the verbal and physical clues that help the consumer identify what they want and to influence choice (Groucutt, J et al 2004).

The actual word “brand” is derived from a Norse word which means to “burn”. It is assumed that this means to imprint ideas or symbols on product. This then gives the product identification and leaves lasting mark on the consumer (Groucutt, J et al 2004).

Because product features are easily imitated brands have been considered a marketer’s major tool for creating product differentiation. Even when differentiation based on product characteristics is possible, often consumers do not feel motivated oracle to analyse them in adequate depth. Therefore the combination of brand name and brand significance has become a core competitive asset in an ever-growing number of contexts. Brands incite beliefs, evoke emotions and prompt behaviours (Aaker, D. (1991) cited in Kotler, Pand Gertner, D. 2002:249).

The brand in the automobile industry is of great importance, purchasing vehicle is a status indicator for the consumer. Manufactures brand their vehicles to attract the target audience; the next step is retaining the customer to the brand. This is not just for repurchase, there is great value in retaining the customer to the brand through out the life of their purchase (Kottler, P et al . 2005).

5.0 Global Brands

There are very few car manufactures products that are not a global brand. Their appeal can span in a multitude of markets. Each manufactures portfolio is designed to attract a wide audience.

The rapid development of telecommunication and strong consuming capability of youth have created common demands, tastes and values globally in last two or three decades, which thus has driven international marketers to increasingly focus on the importance of global brands. In recent years, global branding has not only taken root, it’s in full bloom. As Peter Doyle (1998:165) said: “Brands area the heart of marketing and business strategy The purpose of marketing is to create a preference for the company’s brand”. The trend towards global branding, moreover, is accelerating rapidly. Successful global brands are powerful to obtain a number of benefits.

Consumers are willing to pay a premium price for global brands; they imply credibility, high quality and up-to-date global trend. To the consumers, brand choice somewhat reflects a certain lifestyle, taste, image or even social status beyond the product. If they feel the brand fits into this category, they’ll not only prefer it, but are also willing to a higher price for it. Consumers perceive added values, it’s the “the subjective beliefs of the customers” (Doyle 1998:168).

Global branding can benefit the organisation by considerably cut costs, not only because of “the significant scales of economy it achieved”(Aaker 2000:306) in terms of new brand development, packaging and manufacturing, but also because with global reputations can enter new markets at lower cost than new national brands: if you move into a Newmarket with a brand that is already global in scope, it reduces the cost of introductory and follow-up marketing programs.

Suppliers and distributors obtain a comparatively stable marketing environment and can obtain higher profit, with less risk by trading as business partners with global brands. Therefore companies that market global brands posses’ powerful trade leverage, in bargaining with for efficient service and lower costs, they have more options on choosing its suppliers and retailers.

Although there are many advantages to a global brand, each area has tube considered as an individual market. Firstly, culture and custom difference can lead to market difference, which enhance the difficulty of growth of global brand. To meet the different preference of consumers in different countries, global brand may have to adjust its marketing strategy accordingly and customise products. Secondly, localisation and increase in nationalism to some extent may resist the marketing development of global brands. Thirdly, the political factories considered as another main barrier to global brand. Last but not least, along with the technology improvement and product innovation, the rise of local competitors is becoming an inevitable threat to global brand.

5.3 Brand Building

Once a brand is established it requires nurturing, to bring out the full potential and add value to the organisation.
Kashia (1999) believes that powerful brands are built over time through a conscious management effort. This is achieved through strategic decision making and appropriate actions. All brands “need tube based on values and attributes that are permanent and, purposeful and fundamental to its strategy” (Kashia (1999) cited in Groucutt, Jet al 2004:285). Therefore by creating such values in an organisation it will provide direction and a future for the brand.

A brand with strong “brand equity” is a valuable asset to an organisation. This asset is difficult to measure; although it has emerged as key strategic asset. A powerful brand enjoys a high level of consumer awareness and loyalty, with the organisation benefiting from lower marketing costs relative to revenues. Consumers expect more outlets to carry strong brands; therefore the organisation has more leverage when bargaining with retailers. This all adds to the “brands equity”, which needs to be managed by the organisation (Kotler, P. etal 2005).

This brand asset management is a concept that is closely related to positioning, since certain brands are central to a company’s current and future performance. They need to be managed, enhanced and protected as assets. This allows brand names like Coca-Cola, Sony, Intel and Disney to extend into new product categories, and produce product variants and services (Kotler, P. 2004).

Brand asset management is an area of increasing importance to marketers today, particularly as organisations move toward attempts to communicate ever complex and intangible messages, as part of brand management strategies (Davis, 2000; Goodchild and Callow, 2001). Brand managers are concerned with how to develop a better understanding of the appropriate relationship between brand equity and customer loyalty, particularly in relation to the multitude of known variables to customer loyalty (Davis, (2000) Goodchild and Callow (2001) cited in Taylor, S. et al 2004:219).

It is vital that marketers position the brand correctly, and consider the fit with its attributes, values, culture, benefits, and personality. For example Mercedes suggests that it attributes are “well engineered and well built, it is durable, high prestige, fast and expensive”. These attributes tell the consumer the benefits and values that are placed in the product. These attributes represent the German philosophy and culture, which reassures the consumer the high value of the product. The personality of the product is wealthy, well-built and reliable (Kotler, P. 2005).

Within the Motor Industry it is difficult to extend products without inexpensive development and launch of a new vehicle, although continual research and development are vital to maintaining market position. Many manufacturers have extended their brands by introducing for example clothing, toys, consumables and sporting equipment. These are retailed mainly through their network of dealerships, utilising economies of scale. These items are inclusive to them, adding value to the products(Johnson, G & Scholes J 2004).

The emerging literature suggests that customer brand loyalty is generally considered the ultimate desirable marketing-based outcome from strategic marketing activities (Chaudhuri, (1999) Gwinner et al.,(1998); Kumar, (1999) Mittal and Lassar (1998) Reichfeld and Schefter,(2000) Strauss and Friege, (1999) Kotler (1999) have all published article that point to loyalty as the ultimate attainment in marketing. This assertion is largely based on the growing influence of the relationship marketing orientation on marketing theory and practice (Taylor, S. et al 2004:219)

5.4 Brand Loyalty

Brands have a personality and speak for the user. They enhance the perceived utility and desirability of a product. Brands have the ability to add to or subtract from the perceived value of a product. On one hand, consumers expect to pay lower prices for unbranded products or for those with low brand equities. On the other hand, they pay premiums for their treasured or socially valued brands. Brands have equity for both customers and investors. Brand equity translates into customer preference, loyalty and financial gains. Brands are appraised and traded in the marketplace. Brand equity has been pointed out to include many dimensions, such as performance, social image, value, trustworthiness and identification (Kotler, P and Gertner, D. 2002)

The four types of brand loyalty are characterised as (1) No loyalty: No purchase at all, and a complete lack of attachment to the brand, no social influences to be even cognitively loyal to a brand. (2) Covetous loyalty: No purchase but, unlike the case of ‘no loyalty’, the individual exhibits a very high level of relative attachment to the brand as well as a strong positive predisposition towards the brand, which is developed from the social environment. (3) Inertia loyalty: An individual, although purchasing the brand, does so out of habit, convenience or for some other reason, but not as a consequence of emotional attachment to the brand or a real social motive. (4) Premium loyalty: An individual exhibits a high degree of relative attachment tithe brand, a high instance of repeat purchases, and appears to be highly influenced by social pressure. Premium loyalty is characterised by the greatest degree of consumer attachment to the brand, and in this case the consumer purposefully seeks to purchase the particular brand, while attempting to overcome obstacles (Gounaris, S. and Stathakopoulos, V. 2004).

Chaudhuri and Holbrook (2001) proposed a model of brand loyalty that suggests that purchase loyalty tends to lead to greater market share, while attitudinal loyalty leads to higher relative brand pricing. Morgan (2000) suggests that the term “loyal can be interpreted indifferent ways, ranging from affective loyalty (“what I feel”) to behavioural loyalty (“what I do”)”. Thus separating loyalty into emotional and actionable (Chaudhuri and Holbrook (2001) and Morgan(2000) cited in Taylor, S. et al 2004:221).

There are different levels of trust that affect brand loyalty, they are(1) calculus-based trust, the consumer believes it is in the service provider interest are not to suffer the loss of reputation and profits(2) Knowledge-based trust, as the name suggests, is based on knowing the service firm well and being able to anticipate its actions. Effective two-way communication is important for knowledge-based trust to develop because it ensures that the parties exchange information about their preferences and approaches to problems. (3) Customers with identification-based trust have full confidence in the service company and believe that it will act in their best interests. The service provider has in-depth knowledge of customers’ needs and desires, and customers perceive that their desires are fulfilled, and they shared values (Liljander, V. and Roos, I. 2002)

In terms of brand purchase expectations, the implicit assumption is that a satisfied customer will remain “loyal” to the brand (all other factors being equal). In the modern automotive marketing environment, this is indeed a fair assumption to make. The degree of price competition at the retail level is so intense that, when factoring in discounts, rebates and low interest finance rates, price parity inevitably results.

Furthermore, the growing oligopolisation of the manufacturing industry (e.g. Ford owning/controlling Jaguar, Mazda,Volvo and Aston Martin) and co-operation between manufacturers (e.g.Ford/VW, Ford/Nissan, GM/Toyota) has resulted in few, if any, sustainable product differences (Liljander, V. and Roos, I. 2002)

Is brand loyalty resistance to change? The literature accepts that commitment is central to relationship marketing. There is a link between commitment, trust and loyalty. Pritchard et al. (1999) define commitment as “the emotional or psychological attachment to a brand”. They argue that resistance to change is the root tendency of commitments well as the primary evidence of commitment, and that resistance to change is a key antecedent to loyalty (Pritchard et al. (1999) cited in Taylor, S. et al 2004:221).

5.5 Relationship Marketing

Organisations should build a stronger relationship with their profitable customers. There are five different levels of relationship marketing that can be practiced. The basic level does not really involve building a relationship, for example it is when a car salesperson smiles and sells you a car and waves good-bye as you drive it off the lot. You never see him again; if you need service you talk to someone in the service department. Very few auto dealership systems succeed in building such a strong bond between the dealership and the client that the client keeps buying from the same dealership (Kotler,P. 1992:52).

Reactive marketing is the next level of relating. At this level, as the salesperson wave’s good-bye to the customer, he says, “By the way, if there’s any problem, please call me. You don’t have to call the service department; I am responsible for your satisfaction” The employee has taken on some of the responsibility of managing the customer’s needs(Kotler, P. 1992:52).

A higher form of relationship is accountability. At this level, the salesperson calls the new car owner within two weeks of the sale and asks how he likes the car, and if there is any way the car could have been better. Those salespeople often get an earful. The customer might say, “I wish the door had a pocket for maps. I wish there was a rear window wiper.” At that point, the dealer should ask, “How much would it have been worth to you if the car did have a map pocket in the door and rear window wiper?” That type of information will help the automobile manufacturer continuously improve its product (Kotler, P. 1992:52).

Still, a higher level is proactive, where the salesperson will call the customer from time to time and say “The manufacturer has developed product that will help you save fuel, it’s something we can add to your engine and it will reduce your fuel costs.” Customers get a sense that the company still is interested in their needs. Partnerships are the ultimate form of relationship marketing. They involve actually living with the customer and are mostly confined to business-to-business relationships (Kotler, P. 1992:52).

Each level requires more cost, so it is important for organisations to determine when it is worth going to the next level. Two dimensions that are particularly critical are the margin that the firm makes on the business and the number of customers making purchases. For example, allow-margin business with many customers, for example selling toothpaste would operate at the basic level. The organisation has so many customers for that product and makes so little per unit that it would not be cost-effective to develop a high-level relationship (Kotler, P.1992:52).

There are five levels of response for each customer service and retention tool. Those levels vary within companies; an organisation might be reactive with respect to technical assistance, accountable with respect to service and basic in terms of value-added. The important thing is to know where your competitors stand, what is their profile with respect to relationship investments, and what things should you do to be superior to the target market.

5.6 Service Quality

The organisation has to decide and implement which level of value-added service it will offer its customers. This experience of the customer will reflect in brand loyalty.

Relationship marketing strategy will decide the level of service customer will receive. For example on the basic level technical assistance might be a owner’s manual, yet on the reactive level perhaps help line, at the level of accountability, perhaps an occasional visit to the customer to see if the customer is using the product correctly and efficiently(Kotler, P. 1992:52).

Training of employees would appropriate at the proactive level. This can offer the customer a higher level of service, making them feel valued by the organisation. Many manufacturers offer in house training to the employees within the dealerships. This not only trains employees to a similar level of customer service skills, it reinforces the brand. The customer’s experience of the brand is uniform across the manufacturer’s network (Kotler, P. 1992:52).

Frequently organisations move from one strategic initiative to another with little consideration of their natural progression. This has been the case for many companies that have moved from an emphasis on quality in the 1980s, to customer satisfaction in the early 1990s, to customer loyalty and retention today. Managers proclaim that they have moved beyond quality and customer satisfaction to focus on what really matters, namely loyalty and profitability. Although it is argued that there is “no such thing as moving beyond quality and satisfaction. They are essential building blocks toward building loyalty and a valuable business organisation.” (Gustafsson, A. and Johnson, M. 2002:249).

The service quality perceived by the customer varies across the spectrum. Relationship benefits are perceived advantages that the regular customer receives over and above the core service. These are rewards; the individual has gained over time by being a regular customer. The benefits tie him or her to the company by making it unattractive to switch providers. They may take the form of loyalty programmes, which are offered to all customers, or benefits that can be customised to individual consumers (Liljander, V. and Roos, I. 2002)
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This then becomes a relationship benefit, but only when it is not offered to any customer who enters the dealership, regardless of relationship length. However, companies may believe that they are offering benefits, but only customers can tell if they are experiencing any. Therefore the level of service received is subjective (Liljander,V. and Roos, I. 2002)

5.7 Customer Value

Customer value management (CVM) has become a major focus in current marketing, as value marketing has become a slogan among marketing practitioners. Sinha, I and DeSarbo, W. (1998) defined this as “in the marketplace, value often is defined as quality at the right price” and is seen as more important to consumers than quality, because value is quality that the consumers can afford (Sinha, I and DeSarbo, W.1998:236).

Zeithaml (1988) reports considerable heterogeneity among consumers in the integration of the underlying dimensions of perceived value. They define the perceived value as a trade-off of “higher order abstractions,” such as perceived benefits and sacrifice, which are formed from both intrinsic and extrinsic product attributes, including texture, quality, price, performance, service, and brand name (Zeithaml(1988) cited in Sinha, I and DeSarbo, W. 1998:236). Zeithaml 1988:236)

There is a strong link between relationship marketing and customer value, the higher value placed on the customer will reflect in their purchasing choices. True and spurious relationships are the extreme points on a continuum. At the lower end, customers may be behaviourally committed to the service but satisfaction is only latent. At the higher end, customers are more manifestly satisfied and more affectively committed to the service (Liljander, V. and Roos, I. 2002)

Berry (2000) proposed three relationship levels of customer perceived value. These are based on financial, social and structural bonds. Financial bonds, such as loyalty programmes, are considered the weakest form and may only lead to spurious relationships Social and structural bonds are more closely related to true customer relationships. According to Berry (2000), “structural bonds offer value-adding problem solutions that are not dependent on individual service representatives, and which are difficult for competitors to copy” (Berry (2000) cited inLiljander, V. and Roos, I. 2002:598)

5.8 Customer Loyalty

Customer satisfaction can be considered the central determinant in all phases of the contact chain. Multi-dimensional recording of customer loyalty reveals clear differences in the interactions first with brand loyalty and, second, with dealer loyalty. In contrast to the opinion widely held in practice, customers in the automotive sector definitely do not perceive the brand and the dealer as one unit. The results obtained are so fundamental that they can be translated into implications even by internationally operating companies (Huber, F and Herrmann, A 2001)

The relationship between the purchase intention and customer satisfaction has been widely investigated (for example, Oliver 1980;Bearden and Teel 1983). The evidence suggests that there is a strong positive relationship between the two. Several of these studies indicate that higher levels of satisfaction lead to greater customer loyalty (Yi (1991); Anderson and Sullivan (1993) Boulding, Staelin,Kalra, and Zeithaml (1993) all cited in Dervaraj, S. et al 2001:425)

Consumers who purchase higher quality vehicles expect to receive higher quality service, therefore the assumption is made that poor service will lead to greater dissatisfaction among those that purchase the higher quality vehicles. Conlon, et al (1997) observed that “customers who purchase higher quality rated vehicles are more likely to use dealer facilities to maintain their vehicles” (Conlon, et al(1997) cited in Dervaraj, S. et al 2001:425)

An explanation for such behaviour is that there is a correlation between the perception of vehicle quality and the perception of the quality of service at dealer facilities. Therefore, high customer expectations of service quality can lead to better service performance which, in turn, this positively influences customer satisfaction with service. Therefore in the higher end of the industry there is greater loyalty (Dervaraj, S. et al 2001:425)

Oliver (1999) suggests that “ultimate customer loyalty is a function of perceived product superiority, personal fortitude, social bonding, and their synergistic effects. His arguments generally support the assertion that measures of loyalty that are constrained only to repurchase considerations fail to capture the richness of the loyalty construct “ (Oliver (1999)cited in Taylor, S. et al 2004:219).

If loyalty is essentially an irrational and emotional attachment to product, service or business, then marketers need to focus on elements that create this emotional attachment. In developing a strategy that draws on the irrational attitudes of consumers, brand equity plays an important role. All the elements that contribute to the development of brand equity are difficult to mea