Topic: How customer loyalty can be increased in the restaurant industry? The case of Nandos.
Why customer loyalty is important?
What Nandos is doing and how it can be better develop?
Loyalty marketing, loyalty programs, how to manage it? Techniques? Benefits? Problems? Conclusion.
Definitions Of Customer Loyalty
The main change concerns in the organization of marketing activities are certainly one of the more remarkable doctrines marketing. The concept of traditional marketing put at the centre of its priorities the creation of a preference for the service, the needs and desires of consumers. The marketing approach, as observed in the theory and practice in recent years focused more on the notion of exchange and the relationship is the focus of analysis.
More recent approaches of marketing focus on the customer and make the quality of the relationship the key to loyalty. Indeed, a quality relationship inhibits choice and represses the effect of preferences. Thus, the relationship with the client becomes a primary concern managerial and academic. The market-oriented generates necessary behaviours to create superior value delivered to customers (Kohli and Jaworski 1990) and place the interests of the client first (Deshpande et al. 1993) for a continue satisfaction, permanent, which undergone constant refinement. This satisfaction is no longer about the only service provided by the company, but includes elements of the relationship, such as trust and commitment. For this, we seek an ongoing relationship and oriented in the long term in the context of a relationship marketing (Dwyer, Schurr et Oh 1987, Sheth et Parvatiyar 1994) and in this context that develops loyalty policies (Dawkins and Reichheld 1990).
Kyner and Jacoby (1973) define loyalty as follows: “Loyalty is defined as a behavioural response bias because non-random (not spontaneous) expressed over time by an entity decision, finding one or several brands taken in an overall, according to a decision process.” In this definition, loyalty requires:
A repeat purchase behaviour resulting from several background variables and complement each other;
A positive attitude of consumers that must be controlled or directed. This attitude reveals a favourable perception towards the brand, service, differentiating it to the loyalty from routine behaviour.
For others loyalty rooted quality and delivered on the positive gap between perceived expectations and post-purchase evaluation. For Shapiro and Varian (1999) loyalty is to the consumer when efforts to change brand, product or supplier are too large to expect a significant gain change. The authors of this school of thought attempt to explain loyalty by “exit barriers” that prevent a kind of free choice of the client (a client may be considered faithful to a company only because it has characteristics of geographical proximity). Another school of thought on the loyalty is that which gave birth to the management of customer relationship management (CRM) with the emergence of ideas of “Life Time Value. It aims to analyze the lifetime value of its current contribution but also on the basis of its potential to better allocate the resources of the company. It is now for an analysis in terms of portfolio of clients (each client has a value for the company that can be measured by the margin generated).
Customer loyalty can be defined as the tendency of a customer to choose one company or product/service over another for a particular need. Customer/s can be described as being brand loyal because they tend to choose a certain brand of product more often than others. Customer loyalty is evident when it is the customers who make choices and take actions. Customer may express high satisfaction levels in a survey with a product or company, but there is a big difference between satisfaction and loyalty (Kumar (2008). Loyalty is shown by the actions of the customer, who can be satisfied and still not be loyal. The satisfaction with the product is ultimately a condition for loyalty. In fact, satisfaction is necessary for loyalty but not sufficient. It is true that the satisfaction is not only based on the product and service but also the relationship with the staff. Satisfaction towards the product concerns intrinsic attributes: quality, features, design, durability, benefit. Ultimately, the quality-price emerges as a global assessment. The service specifically covers guaranteed delivery, solving problems and handling complaints. It introduced the relational aspects of accessibility, courtesy, competence and communication. Experience has shown that the first reason why customers leave a company with whom they do business, is that they do not feel that their needs are important to the company, and vice versa for the remaining loyal to the company for a long time, they feel valued and important. This perception and feeling to be considered is the emotional bridge between customer satisfaction and customer loyalty (Ghaury and Cateora 2006).
Companies use a series of programs as relationship marketing, Database marketing, permission marketing or customer relationship management (CRM). Loyalty has a direct effect on sales of a company, and even better on its profits. However, the increased level of loyalty stems directly from the attitude and behaviour staff to clients. Motivation staff is the most powerful vector loyalty which itself contributes to profits. Meanwhile, business processes influence largely on how the staff behave with customers.
It is in the interest of the company to develop a long-term relationship with clients where both parties benefit each other. It is much less costly for the company to keep its existing customers than to seek new ones. The scale of customer loyalty has 5 types of customers starting with:
Suspect: A suspect is someone who comes across the companies’ promotion. They are a potential suspect for the company.
Prospect: If the person is interested in the promotion they become a potential prospect.
Customers: A customer is someone who purchases either the product or service.
Clients: Clients are those who come back to the company.
Advocates: Promotes the business on the company’s behalf. They are so happy about the product/service that they tell others.
(http://www.learnmarketing.net/ladder.htm Accessed on 02/08/2009)
Marketing And Loyalty
There are many definitions of marketing applying to loyalty programs. Several of them have focused these objectives in view of the value of the customer more profitable for the company. Today, programs and loyalty cards are found everywhere on standard credit cards, restaurants, etc… “Loyalty programs are widespread in all sectors that deliver goods or services used. They rely on marketing databases built from information from the loyalty cards that identify the client and record information about its behaviour. Their rules often refer to the use of methods from the traditional promotional techniques, encouraging consumers to increase and sustain their purchases in order to obtain a reward. In this context, they can be distinguished from the sales promotion of their defensive focus to longer term. The objective of the promotion is offensive, and when it stops, there is nothing that prevents consumers to come back to their old habits (Ehrenberg et al. 1994). In contrast, a loyalty program seeks to preserve market share by locking consumers through tangible benefits deferred (promotional techniques) or intangible (individualization, privileges, etc…) and acts somewhat like a permanent promotion in the long term. The effectiveness of a loyalty program thus depends on its characteristics and tangible benefits but also intangible, that is to say, the expected value of the potential relationship that is likely to generate and develop.” The consumer joining a loyalty program seeks, in making their purchases at shopkeepers, obtaining dividends, gifts. The trader in investing in this program seeks to seduce and imprison the consumer. This method, better known as retention, is actually a rather simple technique by which the consumer is faced with the efforts invested in the bonus points and is losing everything in case of abandonment of the program. A loyalty program is a relationship between the customer and the merchant in which, technically, the 2 parties have benefits. In promoting their businesses, traders undertake several actions to attract customers. For the management of immediate rewards, they offer special discount store. By managing customer loyalty program, they offer rewards delayed. “In contrast to the sales promotion where earnings appear at the same time as the cost or effort, this ratio is reversed in the context of delayed rewards, since an individual must first make an effort to more or less long term for earnings in the future.
Investigations on human behaviour have shown that some individuals possess a strong motivation to engage in efforts leading to the award of future earnings (Atkinson 1957, Nicholls 1989). It is this aspect that loyalty programs appropriated in the construction of systems with delayed gratification the aim of managing the length of the relationship (retention) and discrimination. “(Meyer-Waarden (2002). P. 2-88). Curiously this strong motivation is akin to the quest for a reward. In other words, the effort is motivated by greed. Some experts say that consumer motivation fades over time as more becomes aware that the bonus is spaced in time, the more likely he become discouraged with the efforts required for obtaining the reward. (Meyer-Waarden (2002), P 2-89) Thus, programs must allow consumers to obtain the benefits of the program while also locking in this program. To counter this behavioural aspect, 2 types of programs are offered: proportional and landing. “The first principle is to proportionately reward the best customers. The second system encourages them to consume more to reach the next threshold points providing more benefits. Thus, it offers a minimum of points to small unprofitable consumers, maximum points for customers who are very profitable, and few points to very large consumers who buy anyway.” (Meyer-Waarden (2002). P. 2-89) Greed is thus increased to obtain a value of gift supported by the consumer’s effort. The number of points necessary for obtaining a reward is related to the amount invested in the market by the consumer. By cons, consumer choice to join or not this kind of program that demonstrates the lure of gain accessible to long-term investment requires not only money but also time. There are several types of loyalty programs. Some programs offer a specific product free after a number of agreed purchase (coffee, compact disk, etc..) Or reductions applicable on each purchase while the issuers of credit cards offer privileges such as travel insurance and car insurance during a rental. Some cards also allow a percentage discount or return money. In practice the system of loyalty cards is simple. It is generally sufficient to consumers to use when buying the card issued or accepted by the merchant to qualify for benefits. The card companies also offer credit to their customers bonus points programs. Unlike cards issued by participating merchants, using credit cards leads automatically, no matter where it is used, the accumulation of points and can sometimes match the accumulation of these points to another program loyalty. It is important to mention the strategy department stores growing strongly consumers use their credit cards to earn double the points they would get by paying cash or get loyalty points better at the price of an interest rate up to 28.8%. More specifically, programs that offer frequent flyer points accumulated encourage consumers to use the card as often as possible when making purchases to earn points available for every penny spent, which will be redeemable against products or services available through a catalogue of premium or cons of coupons or discounts available with designated partners. (Benavent. Christopher. and Lars Meyer-Waarden. 2001. Loyalty Programs: Strategies and Practices). Some loyalty card segment their customers by offering them the opportunity to pay an additional fee to join an enhanced program that offers them a better ratio spent pounds / points accumulated. The holders can be considered as incidental to their privileged relationship with the issuer of the card. From the outset, the consumer, by joining the loyalty program, provides data that feed the database of the issuing company. Subsequently, all transactions for which the loyalty card is used by the consumer are stored in this database comes to prepare a record of its habits. “The program relies on both the declarative, where the consumer fills out the questionnaire affiliation, but also on buying behaviour, thanks to its history.” (Frenove, A.S. Hivet, N. Joly, P and Josquin, C. 2003. Topic: The Ethics of supermarkets). The ultimate goal of these programs, in addition to customer retention is to allow traders to analyze the data collected in order to increase the value of the customers shopping cart.
The Concept Of Customer Life Cycle And Types Of Loyalty
The Concept Of Customer Life Cycle:
One of the key concepts of customer-oriented marketing is the life cycle dynamics of the customer, based on the idea that the flows of revenues and costs vary over time as requirements change in customer / business relations, contrary to the classical analysis and static demand. The first feature of the approach is that it is done individually and not aggregated, underscoring again the importance of marketing database, made possible thanks to the performance of information technology. Another interesting aspect is that the analysis is performed dynamically. The main idea is that the opinion of a client may occur more or less intense, and we can assume that it is forming a cycle. Practically, these cycles represent changes in purchasing power, but also modes, changing preferences, the phenomena of learning and forgetting. These cycles depend on several factors: the first is age. During the aging characteristics of opinion trends, tastes and attitudes can occur. Aging is characterized by a higher loyalty, more conservative, more risk aversion. Another factor is the generation based on the assumption that successive generations have value systems and own beliefs relatively distinct from others. This generation effect partially covers the different types of experiences. This manifests itself in innovative behaviours that vary with the gap between innovation and generation. This management based on cycles of life is clear to solve three problems: acquiring the customer, maintain, expand consumption and profitability. According to Dwyer, Schurr and Oh (1987), in the sense of relationship marketing, the life cycles of the relationship between a brand, product and a consumer have three distinct phases characterized by changes over time the amount used: (1) initialization or acquisition, (2) maturation or development and (3) breaking.
The beginning of the cycle is quite understandable and is in customer acquisition, with a time of discovery of the other as a potential partner. Both parties calculate the attraction of the relationship, the costs and benefits of continuing it. Marked by the process of adoption and learning, this phase is characterized by a positive rate of consumption growth, but with high costs. In a second phase, presumably the consumer’s level of consumption stabilizes after having fully explored the use of the service. The expectations of the relationship and its benefits are confirmed, which leads to a continuation trade and then the notion of commitment, which results in the ignorance of competitive offers. Incomes of the company increase first and then level off as costs decrease. Finally, a third cycle is where a revival / reactivation, retention or separation from the client must be considered because the contribution weakens. The decrease in sales of service may occur at any time or gradually, indicating a process of wear or a more brutal, reflecting the substitution phenomena. Indeed, the dissolution occurs when the unmet expectations of increased transaction costs, the weakening of the switching costs of changing needs. Both partners must make a trade off between the benefits and costs brought by the relationship to decide whether or not its continuation. Any company engaged in the marketing approach dynamic client needs to adapt its strategy according to these phases. Three types of strategies should be considered in terms of life cycles that match:
- The customer acquisition,
- The loyalty and customer retention,
- And the augmentation of customer loyalty which represent a real challenge.
Abandonment is considered when the costs of retention are higher than income generated by the client. (Abandonment=Costs loyalty > Income generated by the client). Once the company has determined the position of the life cycle by customer segment, it becomes clearly evident that this strategy must lead to an individualized approach to lead to a balanced allocation of resources. The problem is that each individual has a different value each time t for the company, which requires segmentation based on the potential and value of customers.
Types Of Loyalty
Customer loyalty is the result of well-managed customer retention programs. Before developing these successful programs, it’s important to know there are two types of loyalty: behavioural loyalty and the emotional loyalty.
Behavioural loyalty is the loyalty to a brand demonstrated by repeat sales and responses to marketing campaigns by the customer. He behaves exactly like the company wants, by purchasing good or service. Behavioural loyalty’s measures include response rate to direct marketing to the customer base. Emotional loyalty is the loyalty to a brand driven by favourable perceptions, opinions and giving recommendations. The customer feels empathy and attachment to a company or brand and he is willing to recommend it around him. It is better for the company if the customer has the both types of loyalty, but when it’s not the case specific strategies are developed to achieve both. (Chauffey, Chadwick, Mayer, Johnston (2006)).
Benefits Of Efficient Customer Loyalty Management
First, a loyal customer will continue its purchases over the years. Its purchase volume should also normally increase simply by economic growth and inflation. It should accept offers for complementary products and additional (Cross-Selling and Up-Selling). In any event, transaction costs should not increase proportionately. Consequently, they will decrease as a percentage of the cost and improve profitability (Kumar (2008)). Finally, a satisfied customer refers an average of 3 customers should in the best case follow the same progression. A study by the Harvard Business School published in the journal of the same name, shows an improvement in the percentage of loyal customers by 5% per year for 5 years to double, not sales, but profits.(CRM Odyssey Inc (2003)www.crmodyssey.com Accessed on the 09/08/2009
Another benefit from customer loyalty is it creates allow to the company to protect its markets from competitors; the more the customer is satisfied, the less he will be to buy to another product or service to the competitors. Automatically barriers are created against the competitors trying to enter in the market(s) (Ghaury and Cateora (2006)).
Finally the word of mouth behaviour of loyal customer increase brand awareness. Customer share their positive feelings and experiences with their friends, family or mates when they are loyal to the company or product. They still purchase to the company and recommend it to others. It means a reduction of advertising cost; the money can be used to boost the word of mouth by making strategies to reward loyal customers.
Reichheld goes even further in 1996 in his book “The effect of loyalty” by writing: “the benefits of loyal customers are increasing over time and can recruit new consumers at reduced cost by using the legal Customer faithful because it is supposed to be a good speaker for the company.” It also shows in his work as a loyal customer makes purchases more often, he tends to buy for a higher amount and is less sensitive to the variable price. He becomes a captive of the company and therefore gives a kind of barrier to entry for potential competitors. The work of the TARP (Technical Assistance Program Reseach) supports these observations. They show that winning a new customer returns four to five times more expensive than keeping a customer is already active. Jones and Sasser (Jones 1995) focused on the relationship satisfaction / loyalty and showed a sense of satisfaction may not necessarily result fidelity as a loyal customer may nevertheless want to take advantage of a promotion with another supplier, test another product or refer to another offer. By cons, they also show a sense of dissatisfaction may cause disloyalty if dissatisfaction is not taken into account by the company. These gains must obviously be taken with caution because they rely heavily on industries. There is however no doubt that customer retention can benefit a significant leverage effect on profitability. The main reasons are:
- lower costs for customer acquisition, the net margin updated on the life of the customer to cover these costs;
- reduced management costs, a loyal customer knows the business better and less prone to use his front office to make purchases (reservations)
- effect of recommendation;
- Increased revenue per customer
The Cost Of Lost Customers:
A defensive marketing is cheaper than an offensive marketing, which often requires a direct confrontation with the competition.
The cost of keeping a customer is five times less than the cost of converting a prospect, and it can cost up to sixteen times more to achieve with the new customer, the profitability of a customer acquired. So it’s the rate of customer retention rate that is essential, and not the attraction.
The company must carefully monitor the defection of customers and minimize the amplitude. There are four stages:
- Define and measure retention. This may be the reuse of the services.
- Know the different reasons for discontinuation, and identify those which can be remedied.
- Estimate the lost profit per customer lost.
- Calculate how much it would reduce defections.
We have already mentioned the theory of Reichheld and Sasser that a company can improve profitability by 25% to 85% by reducing its rate of defection by 5%. Thus, loyal customers are often more profitable than occasional customers. Specifically, in the service activities and the Business to Business, customers of a company tend to increase their purchase from the company as they know it and appreciate it better.
A positive word of mouth:
In many cases, loyal customers of a business will spontaneously promote to their surroundings, and become, through word of mouth, very effective recruiters because disinterested and credible. For all these reasons, the loyal customer service of a company is considered a real capital, called the customer capital.
Retention and its challenges:
This new focus puts the customer and his control in centre of our concerns. Given the incredible proliferation of professional works in the field, it seems essential to discuss strategic issues and objectives of retention, by reviewing customer orientation and loyalty policies to give a definition and a clear positioning of loyalty.
The retention strategy:
Loyalty, recognized as indispensable goal of any customer relationship strategy, not confined to mere promotional programs: Some rules must be respected.
Rule 1: Be selective: Customers do not all contribute equally to the profitability of the company. Therefore, retention should be selectively adapting any loyalty action from an analysis of customer value.
Rule 2: Propose an attractive loyalty offer and truly innovative. The loyalty offers are numerous, but not all have the same impact. The company can arbitrate according to its objectives between different options:
Immediate benefits often focus on value and price (price preference …);
Privileges, providing intangible benefits to customers (priority systems, assistance …);
Rewards delayed in time, seeking to establish lasting relationships with customers the most profitable and likely to extend their relationship with the company.
Whatever the choice of the selected offer, interest for customers is based on five attributes, determining its overall perceived value:
The perceived value of any premium or net worth;
Accessibility through time;
The freedom given to the customer in the choice of options;
Simplicity of the offer.
Rule 3: Anticipating the costs: The need to assess the costs in advance of any approach to loyalty is essential. Too often, a company focused on profits resulting from the proposed strategy, without taking into account the costs generated before and repeatedly. These costs may be related to both the growing number of customers affected, and ways and means of dealing with relationships with clients, sometimes completely new to the company.
Rule 4: Consolidate and exploit customer information: The challenges that the company have just highlighted described the need to build its strategy of strong customer loyalty for the company. Two main lines of action are considered:
• The opportunity to integrate operational databases (sales / billing, marketing …) in a baseline.
• The interest of exploiting every opportunity to contact customers to gather information about them.
This database will allow the tracking of the customer relationship over time, and identification of customer profiles profitable and unprofitable, which will determine the choice of targets to retain.
Problems Linked To Customer Loyalty
Difficulties In Marketing:
Obtaining a good efficiency requires a good understanding of customer behaviour and causes of abandonment. One must distinguish the causes of termination which are inevitable (and often unpredictable) from other, more or less predictable and can be combated.
The causes are unavoidable, for example: a change of personal or professional lifestyle, financial problems, death…
Preventable causes are: inadequate tariff, a history of poor service and complaints. The challenge is to build something, based on information often dispersed.
In anticipation of the termination for inadequate tariff, must be able to say what was the invoice for each client if they had chosen the optimum rate? How much would he have saved? From what current difference between invoice and optimum bill is there a risk?
To anticipate the claims for termination, you must classify all types of call to customer service (there are easily hundreds) and identify those that increase the probability of termination.
We must also take account of differences in behaviour related to age, family status, and place of residence … and recover to the extent possible this information.
Difficulties In Management
Retention also poses problems of management, for example the coexistence of a culture of acquisition and a culture of loyalty:
In a young market, corporate culture is naturally directed towards the acquisition. This orientation manifests itself in several ways, for example, budgets are allocated primarily to sales, what is important here is the market share of sales. In these circumstances it is difficult to make a place to loyalty because it is cultural opposition on both fronts: its budget is in competition with the acquisition, because what is important here is the retention of customers and not flow of customers.
Difficulties In The Organization:
When the market is young, the sales should be focused on conquering, the measure of the rate of effectiveness is still difficult, and loyalty is part of the Marketing. Then improving customer knowledge, customer service records terminations, understand the causes, loyalty becomes profitable and worthy of large budgets, customer service becomes legitimate to ensure loyalty.
In consumer, all sale actions are public, as far as loyalty is confidential. Loyalty is indeed a clear competitive advantage. It allows to keep or to take market share in all discretion. Confidentiality is necessary for a second reason: do not create perverse behaviour on the part of customers, who know the rules of the game could benefit for future benefits. (Jean Baptiste COUMAU and Henri WIDMER, “La Jaune et la Rouge”,2002)
Rejection Of Customers:
The approach of loyalty can lead to bias by virtue of its objectives: there is concern that the benefits accorded to consumers more loyal to the product or service concerned and not the enterprise. There is a risk of great loss of power marketing consent. Moreover, the strong competition leads to a generalization of loyalty operations that can not only cause fatigue but also a rejection of the approach by customers. The multiplicity of material resources such as loyalty cards generalized in various companies in portfolios causes both a reaction to the trivialization of operation for the customer and a loss of power to the business on target. The implementation of a loyalty operation is tricky: the company must choose carefully because the target must be loyal customers, those holders of profits. This targeting is difficult and requires the development of a database of well-informed. This base is also used to monitor quantitatively and qualitatively loyal customers. These are considerations of costs related to these investments in information that may be a limit. (Fotso Tagne Achille Rostand, La fidelisation client http://www.ougagner.fr/fidelisation.html Accessed on the 09/09/2009)
Means And Factors Influencing Loyalty
Factors Influencing Loyalty
If they are well structured and well implemented, customer loyalty programs cited above can bring measurable benefits to the company that would stand out positively of competition by reducing costs and in the same time increase its income. This situation is favoured by:
Attracting new customers;
A high retention rate of existing customers for a long period;
Increasing the frequency of visits by the existing customers;
Increasing expenditure on new and existing customers;
Making customers in good conditions so they feel appreciated and satisfied then they promote products or services through word of mouth around them.
(Memberson (2008) http://www.memberson.com/Loyalty/CustomerLoyalty.aspx Accessed on 01/08/2009)
Some factors are essential to create and maintain the Customer loyalty. Showing 6 success factors that make some companies
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