“The first step in managing a loyalty-based business system is finding and acquiring the right customers.” FREDERICK F.REICHHELD Loyalty is an old-fashioned word traditionally used to describe fidelity and enthusiastic devotion to a country, a cause or an individual. More recently, it has been used in a business context, to describe a customer’s willingness to continue patronizing a firm over the long term, preferably on an exclusive basis, and recommending the firm’s products to friends and associates. Customer loyalty extends beyond behaviour and includes preference, liking and future intentions. WHY IS CUSTOMER LOYALTY IMPORTANT TO A FIRM’S PROFITABILITY? * Profit derived from increased purchases: Over time, business customers often grow larger and so need to purchase in greater quantities. Individuals may also purchase more as their families or income size grows. Both types of customers might be willing to consolidate their purchases with a single supplier who provides high quality service. * Profit from reduced operating costs: As customers become more experienced they make fewer demands on the supplier (e.g.: less need for information and assistance). They may also make fewer mistakes when involved in operational processes, thus contributing to greater productivity. * Profit from referral to other customers: Positive word of mouth recommendations are like free sales and advertising, saving the firm from having to invest as much money in these activities. * Profit from price premium: New customers often benefit from introductory promotional discounts; long term customers are more likely to pay regular prices when they are highly satisfied and tend to be less price-sensitive. Moreover customers who trust a supplier may be more willing to pay higher prices at peak periods or for express work. THE WHEEL OF LOYALTY:
* First, the firm needs a solid foundation for creating customer loyalty that includes targeting the right portfolio of customer segments, attracting the right customers, tapering the service and delivering high levels of satisfaction. * Second, to truly build loyalty, a firm needs to develop close bonds with its customers that either deeper the relationship through cross-selling or bundling or add value to the customer through loyalty rewards and higher level bonds. * Third, the firm needs to identify and eliminate the factors that result in “churn”-the loss of customers and the need to replace them with new ones.
FIGURE 1.1 STRATEGIES FOR DEVELOPING LOYALTY BONDS WITH CUSTOMERS
Encouraging Loyalty through Financial and Nonfinancial Rewards: Few customers buy from only one supplier. This is especially true in situations where service delivery involves separate transactions rather than being continuous in nature. In many instances, consumers are loyal to several brands (polygamous loyalty) but avoid others. In such instances, the marketing goal becomes strengthening the customer’s preference for one brand over the others gaining a greater share of the customer’s spending on that service category (share-of-wallet). Well-designed loyalty programs can achieve increased share-of-wallet and reward based bonds. Incentives that offer rewards based on the frequency of purchase, value of purchase or a combination of both represent a basic level of customer bonding. Rewards can be financial or nonfinancial. FINANCIAL REWARDS:
Financial rewards are customer incentives that have a financial value (also called “hard benefits”) such as discounts on purchase and loyalty program rewards such as frequent flier miles or the cash-back programs provided by some credit card issuers. Besides airlines and hotels, more and more service firms ranging from retailers(such as department stores, supermarkets, book shops and...