Effectiveness of Loyalty Schemes for Supermarkets

Chapter 1

Introduction

It is necessary for organisations to carry out market research before they can come up with a good quality marketing strategy no matter how big or small the company is. Market research is when an organisation studies their customers buying habits and gathers information about the market. The information they find is then analysed to determine the expectations of customers. Market research is necessary because organisations should aim to be marketing orientated and meet the wants and needs of their customers.

As well as meeting the wants and needs of customers marketing orientated companies welcome change. This means they can react to external factors and changes in the market like changes in consumer spending patterns. It is a lot easier for an organisation to put together a good marketing strategy if they are marketing orientated and have carried out the appropriate market research to identify the wants and needs of their target market. It is essential for an organisation to satisfy its customers. Meeting customer needs will improve the organisations reputation amongst its customers which will result in a higher profit and could make potentially make customers loyal to the brand.

In 1995 Tesco introduced their Clubcard. This was the first customer loyalty card introduced in the UK and there are now 13 million Clubcard members. (MIS Quarterly Executive Vol.8 No.2/June 2009, Leveraging Multichannel retailing: the experience of Tesco.com)

Loyalty programs are not just used by companies to offer benefits to regular shoppers and reward customers for their loyalty. Every time a customer uses their loyalty card in store organisations record what products that customer has purchased to find out their specific wants and needs. If the research shows that a product is more popular with customers in a certain area then an organisation could introduce offers to meet customer needs. Therefore loyalty programs are used as a form of market research.

The majority of major retailers in the UK now offer loyalty programs. Therefore the purpose of this research is to examine the benefits and drawbacks of these programs to both organisations and customers to see weather actual loyalty can be obtained through one of these programs. There must be major benefits of Loyalty programs otherwise they would not be so popular. However not every organisation like Asda does offer a loyalty program so the purpose of this research is to determine whether they are worth investing in.

If the majority of customers who shop in an organisations store own loyalty cards is the company able to process all of the information they have gathered. A loyalty card will also only show the retailer what a customer spends in their specific store and not their general buying habits. A customer may buy their weekly shopping in Tesco and use their Clubcard yet may buy meat from another supermarket or from a local butcher. If Tesco knew this they could introduce offers to encourage customers to buy meat in their store. The Clubcard however would not provide Tesco with this information. Despite this Tesco could use their Clubcard to identify changes in consumer buying patterns. A customer can however own as many loyalty cards as they want which means they can supply information to many different organisations.

When customers sign up to a loyalty program they have to provide name, address, age group and often email address allowing the organisation to contact them regularly with offers. With this information the organisation offering the scheme can understand what kind of person is buying certain products. This helps them segment the market and identify the target market for any product.

This research is important and of value because organisations will benefit from it if they are considering investing in a loyalty scheme. This research will also help companies understand the advantages and disadvantages of loyalty programs and identify ways they can make the most of the large amounts of data they gather from customers. This research will also be off interest to customers who have signed up to loyalty programs and people involved in business.

There are many aims and objectives of this research. The first aim is to understand what loyalty actually is and the importance of loyal customers. Is it actually possible for an organisation to obtain loyalty with a customer? If so can this be achieved through one of these programmes? Also is it possible to measure just how loyal customers are?

The second aim is to study the history of loyalty cards and programs and find out which organisations along with Tesco where first to introduce loyalty cards and gain an understanding of how rapidly the trend has grown since both in the UK and internationally. This information will help organisations understand how loyalty cards became so popular with retailers.

The third aim of this research is to find examples of how the information gathered from customers using their loyalty card in store has benefited organisations when they determine their marketing strategy. This research will determine whether it is possible for a retailer to process all the information provided by loyalty programs considering how popular they are with customers. Is there any reason why a major retailer like Asda does not offer a loyalty program when a lot of its direct competitors do? This study will also help identify how organisations can benefit from loyalty kiosks.

The fourth aim of this research to understand whether loyalty programs really benefit customers or whether it’s just organisations that get the main benefits. In a lot of cases customers have to spend a lot of money in the retailers store to gain loyalty points and money off products. Despite this organisations can use loyalty programs to determine which products are popular with customers and introduce offers. Therefore being part of a loyalty program could benefit the customer without them really realising it. This study will also help identify how customers can benefit from loyalty kiosks.

The final aim is to investigate the different types of loyalty programmes organisations offer and the advantages and disadvantages of the various programmes. This information will hopefully help organisations determine which type of loyalty scheme is most appropriate for them to invest in.

All the aims of this project will be achieved by gathering information obtained through secondary research. A large proportion of this research will be gathered from the academic journals. Research will also be gathered from relevant information found in books, articles, newspaper reports and case studies. Previous literature will be reviewed and critically analysed. After this the research methods will be described and results of this research will be discussed, analysed and related back to relevant theory shown in the literature review. The study will then be concluded showing any limitations. The main lessons learnt from this study will be described showing what future research should be conducted.

Chapter 2

Literature Review

What is loyalty? Can it be purchased?

The word loyal is defined in the oxford English dictionary as being “true to obligations of duty and love” although it is hard to imagine the average consumer feels this way about the supermarket where they buy their groceries. (Uncles, Dowling and Hammond 2003) argue that it is not possible for a consumer to have an emotional attachment towards a brand of tomato soup.

Even if customers are not loyal many retailers may have their personal information stored in their computer database. (Rowley 2000) understands that it is very difficult for supermarket to encourage actual loyalty and claims that “the very technology that supports innovations such as loyalty cards may serve to undermine the concept of loyalty.”

Many people believe that true loyalty is not actually attainable through loyalty programs and that the main purpose of these programs is to provide management with information. (Jenkinson 1995) strongly believes this and claims that:

“The customer’s loyalty is simply not for sale. It cannot be bought for ever by company’s ordeals. Real brand loyalty results from an emotional bond created by trust, dialogue, frequency, ease of use and a sense of value and added satisfaction. Loyalty is the reflection of a customer’s subconscious emotional and psychological need to find a constant source of value, satisfaction and identity.”

(Jenkinson 1995) does make a valid point but it is still possible to obtain loyalty through loyalty programs it’s just not very easy. (Stone et al 2004) believe that customers are unlucky to become loyal to an organisation just from being part of one of these schemes. However they understand that a scheme could produce information that could help an organisation find ways to offer suitable rewards to meet the needs of customers which is likely to lead to loyalty amongst customers. (O’Brien and Jones 1995) extend this theory and understand that the only way an organisation can obtain loyalty through a loyalty programme is if the organisation offers rewards that are of value to the customer. They claim there are 5 elements that determine value. (see appendix)

Even though loyalty can be obtained through loyalty programmes it is necessary that every employee at the organisation is fully committed to the program. Therefore as well as any initial financial investment there also needs to be an investment in staff training when an organisation introduces a loyalty card. (Omar 1999) understands this and believes that a loyalty program will not be successful unless everyone within the organisation is committed. This includes the cashier who simply smiles and asks a customer if they own a loyalty card. (O’Conner 1996) shares this opinion and understands that customers will come back to a store and become loyal customers if employees are friendly.

As well as being fully committed to their loyalty program organizations need to be sure that customers are not just signing up to their loyalty program just for the sake of it. (Omar 1999) understands that some customers may sign up to a loyalty scheme just to get the discounts and may not be actually loyal to the organisation. It is important that Organisations are aware of this when starting up a loyalty program.

Even though (O’Brien and Jones 1995) have already shown that an organisation can obtain loyalty through a loyalty programme if they offer rewards that are of value to the customer there are also many other factors that can affect how loyal customers are. (Wright and Sparks 1999) have identified that it is possible to achieve customer loyalty through a number of means. This includes where the store is located and how easy it is to access. Also the loyalty of customers very much depends on the quality and price of the goods being sold.

(Bellizi and Bristol 2004) understand that a consumer that is part of a lot of loyalty schemes is more likely to be affected by other factors and judge a supermarket on the speed of its checkout lines and it’s variety of fresh produce. (Gounaris and Stathakopoulos 2004) extend this theory and suggest that customer loyalty is something that can be influenced by a combination of 3 factors. These are the reputation of the brand and the amount of choice available in the market, social influences and recommendations from peers and the degree of risk aversion from the consumer themselves.

According to them these influences can create four types of loyalty:

1. No loyalty
2. Covetous loyalty: This is when a consumer has a strong attachment to a brand possible due to social influences yet there is no purchase. Many customers may be interested in premium brand products but choose to buy a less expensive alternative to save money.
3. Inertia loyalty: This is when a customer purchases a certain brand due to habit or convenience but has no emotional attachment to the brand itself. A customer may choose one supermarket over another simply because it is closer.
4. Premium loyalty: This is what every organisation should aim for. It is when a customer regularly buys a company’s products due to a high attachment to the brand.

However customer loyalty is obtained it is important not to under estimate the value of having loyalty customers. Every organisation should be aiming to encourage loyalty. (Omar 1999) understands the importance of customer loyalty and points out that a store is likely to be unsuccessful without loyal customers because they are likely to buy more products and will be willing to pay more. They are also more likely to recommend the organisation to friends and family which will bring in new customers.

Organisations usually have to spend a lot of money on promotions to try and attract new customers to a business. It costs a less money for an organisation to obtain customers then it does to attract new ones. Also once customers are loyal to an organization they are less likely to be interested in the promotions other companies are offering. (Christopher and McDonald 1995) therefore understand that by retaining customers an organization could stop new companies from wanting to enter the market. (Halowell 1996) has also found evidence to show that there is a definite connection between the loyalty of customers and the amount of profit an organisation makes.

(Oliver 1997) correctly sums up customer loyalty by defining it as.

“A deeply held commitment to re buy or re patronize a preferred product/service consistently in the future, thereby causing repetitive same-brand or same brand-set purchasing despite situational influences and marketing efforts having the potential to cause switching behaviour.”

(Whyte 2004) suggests that loyalty programmers may just create customer loyalty for short amount of time that may not result in full commitment. This however isn’t true because there are major differences between loyalty schemes and incentive schemes. (Hirshman and Goldstucker 1978) understand that loyalty programs are more long term and can help an organisation improve its reputation amongst customers and establish a relationship. This is definitely true as general incentive schemes are likely to be short term promotions or offers to make customers interested in a specific product or just to draw their attention to the brand.

Loyalty programmes are therefore a lot more expensive to run then simple incentive schemes but a lot more beneficial at the same time. Loyalty schemes can even help organisations come up with appropriate short term offers and promotions which can be directly issued to the target market. (O’Conner 1996) has identified that incentive schemes are usually a final resort for organisations if their loyalty scheme fails.

Even though (O’Brien and Jones 1995) have already shown that an organisation can obtain loyalty through a loyalty programme if they offer rewards that are of value to the customer it is still very difficult for an organization to measure how loyal its customers are. (Omar 1999) identifies that Store loyalty is a function of customer satisfaction. This is definitely true as satisfied customers are more likely to keep coming back to the store and become loyal customers. However (Omar 1999) goes on to suggest that a number of variables can be used to determine how loyal a retailers customers are. (See appendix)

The variables listed above could definitely be used to measure the satisfaction of customers. Despite this customers may appear to be satisfied and still decide to shop somewhere else if they are attracted by promotion. Therefore it is very difficult for an organisation to measure actual levels of loyalty.

The History of Loyalty programs and Loyalty cards

Organisations have been aiming to encourage customer loyalty for a long time and the introduction of loyalty cards has definitely helped them achieve this goal. Loyalty cards are now very popular both in the UK and internationally. (Sharp and Sharp 1997) have identified that since loyalty cards have been introduced, they have been used effectively by organisations to increase levels of satisfaction amongst customers. Further research will be conducted to show examples of this.

Today the majority of retailers now offer loyalty schemes. (Rowley 2007) is aware of the popularity of Loyalty schemes and identified that they are now “an established feature of the retail and services landscape.” (Uncles, Dowling and Hammond 2003) suggested that competitors are likely to copy a loyalty scheme if it appears to be successful. This seems fairly understandable as organisations are often influenced by the activities of the competition. O’Malley (1998) realises that there is a chance customers may begin to expect a reward every time they visit a store as loyalty cards have led to them being bombarded with promotions and money off vouchers for products they regularly buy.

The above literature suggests that the introduction of loyalty cards is the only reason for organisations being so obsessed with obtaining the loyalty of customers. It is obviously a major factor but (Omar 1999) has identified that loyalty schemes have been growing in popularity for a lot longer than this and suggests that “such a remarkable shift to loyalty-building activity has been made possible because the cost of recruiting each consumer into a loyalty scheme has fallen substantially in real terms since the early 1970s.”

(Omar 1999) also believes that the popularity of loyalty schemes may lead to their downfall by understanding that the majority of loyalty schemes are now run in pretty much the same way. He is therefore able to identify that the differentiation these schemes provided when they first became popular is slowly being lost. This could well be the reason why Asda have chosen not to invest in loyalty scheme even though the majority of their direct competitors have.

(Omar 1999) even suggests that: “loyalty cards could start a more sophisticated round of mark-down wars which held the high street stores to ransom in the late 1980’s and early 1990’s.” However this seems unlikely.

How loyalty programs benefit the organisation:

(Walters and Hanrahan 2000) have been able to identify the numerous benefits for organisations that use loyalty programmes to store the purchasing details of their customers. Loyalty schemes can help an organisation decide where it places its products and how they allocate their space in store. They can also use the information they have stored in a database to introduce in store promotions and offers on products where they have identified interest from customers. Loyalty programmes can also more importantly help an organisation find out who its target market is.

Tesco have had a lot of success since launching their very successful Clubcard scheme. (Uncles, Dowling and Hammond 2003) have identified that Tesco have been able to use their Clubcard to aid brand extension. Tesco have definitely shown that they understand the importance of customer loyalty. (Turner and Wilson 2006) were however able to identify Clubcard is not the only reason for Tesco’s loyal customers and major market growth.

It is necessary for an organisation to know who its target market is and offer rewards to the right customers. (O’Brien and Jones 1995) understand that it is important for organisations to consider the value of their customers. If they fail to do this an organisation may waste time and money satisfying the customers of less value whilst the greater value customers are not satisfied and loose loyalty as a result. An article by (Media Week 2009) suggested that loyalty schemes with the most members may not be the most successful ones. The article described how “today’s loyalty efforts are more concerned with the quality of membership and not just the quality.” This makes sense as organisations are aiming to obtain loyalty and therefore don’t just want customers to sign up for loyalty schemes just to get the discounts.

It is still difficult to understand how a retailer is able to process all the information provided by loyalty cards considering how popular they are with customers. (Uncles, Dowling and Hammond 2003) identify that a popular loyalty scheme is likely to gather a lot of unnecessary data which is of no use to anyone. (Omar 1999) therefore suggests that “any loyalty scheme must be driven by a database to ensure that it adds a significant new element rather than being simply another promotional activity.” (Omar 1999) makes a very valid point although organisations are still dealing with a very large amount of information..

Loyalty cards have become increasingly popular within the last few years due to advances in technology like the growth in computer memory capacity (O’Connor 1996) believes that it is therefore now possible for an organisation to track, identify and respond to the buying behaviour of customers. Also with this information a retailer can contact customers through direct mailing.

(Passingham 1996) argues that not all customers who shop in a retailers store will sign up to a loyalty scheme so some of the data that is being stored may be inaccurate. Loyalty schemes also don’t provide retailers with information about customer buying habits outside of that specific store. However a large proportion of regularly shoppers are likely to be part of the organisations loyalty scheme so this is unlikely to be a serious concern of organisations as they will still be able to get an overview of the buying habits of specific groups of customers.

One of the main reasons that customers may refuse to sign up to a loyalty scheme is because they are worried that the organisation may give out their personal information to third parties. (Sarathy and Robertson 2003) have identified that customers may be concerned about their privacy when it comes to loyalty schemes due to recent corporate mismanagement scandals. However customers will be less likely to worry about this if they are attracted to the rewards being offered by the scheme.

The following research by (Schriver 1997) which was carried out just as loyalty cards were becoming popular in the UK. He was able to identify 6 factors that surprisingly made consumers less loyal today than in the past. He also identified that the 6 factors can increase consumer doubt leading to more complaints and a lower level of loyalty as well as greater price sensitivity.

How loyalty programs benefit customers

(Potter 1998) identifies that customer’s deserve to be treated well by organisations. This is true as they are unlikely to come back and re visit a store if the experience they received was not a pleasurable one.

It is clear that loyalty cards benefit organisations but how much do they benefit customers. (Schultz and Bailey, 2000) believe the rewards that customer receive are simply given to them as compensation for the information they provide. This section proves that this is not entirely correct and that loyalty programs can benefit customers. Despite this (Uncles, Dowling and Hammond 2003) have identified that the main reason organizations invest in loyalty schemes is because they expect the program to benefit them. This is because the main aim of any business is to make a profit and being marketing orientated and meeting the needs of customers is the main way of achieving this aim

Rowley (2000) has identified that loyalty style kiosks are becoming an increasingly popular way for organisation to encourage loyalty amongst customers in the USA. She describes how the kiosks themselves are placed at the front of stores and she is able to identify that they offer a lot more benefits then simple promotional leaflets. By offering one of these kiosks organisations are therefore likely to increase the satisfaction of their customers. This is because they are likely to feel valued as they get to choose their rewards instead simply being given a voucher they could potentially discard. Omar (1999) has already identified that loyalty is function of customer satisfaction.

Despite customers receiving points every time they use their card in store (Omar 1999) believes that a number of schemes are purely set up to provide retailers with a database so that they can advertise their products directly to customers via emails. This is definitely a valid opinion. Therefore research will be carried out to find examples of how organisations have used their schemes in order to contact target groups of customers directly.

If customers don’t benefit from an organisations loyalty scheme the business is unlikely to be successful (Dowling and Uncles 1997) point out that this may make customers frustrated resulting in them losing loyalty.

Different types of Loyalty Programs:

There are many different types of loyalty programmes which can be used by organisations offering a wide variety of products and services. There is no single type of loyalty programme that is guaranteed to be successful. A study from (Wanswink 2003) showed that brand managers believe that all loyalty programmes can have an impact on the buying behaviour of customers. The study also showed that the most cost-effective loyalty programmes were the low and moderate ones.

However another study by (Gordan and Mckeage 1997) showed that loyalty programmes are more likely to be successful if the organisation is offering a product or service that the customer considers to be high involvement because of the financial, social and physical risk involved.

American express also offer a club yet they charge a fee to join. Although this could prevent customers from joining the loyalty programme (Shiffman and Kanuk 2007) can see a benefit of this by suggesting that “this increases the customer’s investment in the relationship which may lead to greater commitment and increased usage loyalty”

Some companies reward loyal customers by giving them points so they can gain more goods or services from the organisation. This kind of point system is very popular with hotel chains and airlines. (Shiffman and Kanuk 2007) believe that this could act as an exit barrier because customers would have to give up the points if they started a new relationship.

Chapter 3

Methodology

Now that the relevant literature has been reviewed further research has been conducted to examine the benefits and drawbacks of loyalty programs to both organisations and customers. The purpose of this research was too help organisations who offer loyalty cards identify ways in which they can make the most of the information they gather whilst benefiting organisations that don’t currently offer a scheme by helping them identify if loyalty schemes are beneficial or not. Customers who are part of loyalty programs and people involved in business will also benefit from this research.

Several aims and objectives of this research were established before the research was carried out. The first aim was to find out what loyalty actually is and whether actual loyalty can be obtained through a loyalty scheme. After this the history of loyalty cards and loyalty programs were researched to identify how rapidly the trend grew in the UK and internationally. This was followed by research into the benefits of loyalty programs for both organisations and customers and research into the different types of loyalty programs in which customers can sign up for.

In the end all research that was conducted was secondary and not primary. This was partly due to insufficient funds as it would cost a lot of money and take a lot of time to arrange interviews with members of the major organisations that were studied. There were also plans to hand out questioners to people in supermarkets although these never went ahead due to ethical reasons. Despite there being some limitations of this study all the information found from the secondary research did relate to the aims and objectives and therefore will be of benefit to the reader.

The research process consisted of examining several articles, various figures and company websites in order to achieve the aims and objectives. The majority of this research was taken from journals, newspaper articles and from The Grocer magazine. A number of case studies were also examined during the research process.

An article in the Grocer from the 18th April 2008 entitled “Service with a smile” was examined because it described some of the various ways organisations could encourage loyalty amongst customers. However one of the main purposes of this research was to identify if loyalty can be obtained through loyalty schemes. Are loyalty schemes able to reach large groups of shoppers? Another article in The Grocer from the 6th February 2010 entitled “retailers need to work harder to increase loyalty card appeal” was examined in order to answer this question.

Research was conducted to find out how many loyalty cards are currently in operation in the UK and internationally. This will help gain an understanding of how rapidly loyalty schemes have grown in popularity over the last 15 years. A number of sources where found which featured sections that showed exactly how popular loyalty schemes were on a national and global basis in different years and the relevant figures are shown and analysed in the results section.

One of the sources used is an article from (University Of Minnesota 2009) entitled Leveraging Multichannel Retailing: The experience of Tesco.com which describes how Tesco have grown to dominate the UK market. Figures were also taken from a case study in a book by Omar (1999) entitled Retail Marketing. An article from Media Week entitled “the brave new world of loyalty marketing” featured results from a state by state analysis by the COLLOQUY Loyalty Census which describes the popularity of loyalty cards on a global scale and by how much this has increased since 2007.

Several major organisations were researched to find out which loyalty schemes had been successful and the reasons for this. Most major organisations now offer a loyalty program. How do independent retailers encourage loyalty? An article in the Grocer from the 5th February 2010 entitled “Independent chains seek to win loyalty with card schemes” helped to answer this question.

Organisations value the customer’s loyalty and their purchasing activity data. However a lot of money is spent on loyalty schemes and therefore research was carried to find out whether loyalty schemes are worth investing in. An article from the BBC written on the 17th February 2003 entitled “The cost of Nectar loyalty” explains why this may not be the case. Dispute this many organisations have benefit from loyalty schemes and Tesco is definitely an example of this.

A lot of research was therefore based around Tesco as they currently dominate the UK market. Page 17 of the Walters D, Hanarahan J (2000) book entitled Retail Strategy described some of the major benefits loyalty club members at Tesco receive. The article by the (University of Minnesota 2009) was also examined again because it described why Tesco had been so successful. Page 94 of this article described how Tesco were able to manage customer relations and use their ClubCard to aid direct marketing.

Why Asda do not offer a loyalty scheme? The answer to this question can be found in the results section. The answer was taken from an article in the Grocer from the 7th November 2009 entitled “Why Asda rejected launching its own loyalty card scheme” explains exactly why. However another article in the Grocer from the 20th February 2010 entitled “Is Asda paying the price for not joining the loyalty club? Suggests reasons why this decision made by Asda may have been a mistake

Asda are owned by Wal-Mart which is a major American retailer who currently has the 2nd largest database in the US behind the US government. T