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1. Introduction
New generation of CRM The past decade has seen many firms (re)adopt a customer focus ± often through
tactics created a formal program of customer relationship management (CRM) (e.g. Brown,
2000; Kalakota and Robinson, 1999; Peppers and Rogers, 1997). Recent
advances in information technology have provided the tools for marketing
managers to create a new generation of CRM tactics. One such tactic that
thousands of firms have considered, and which many have adopted, is to
establish a customer loyalty program. Examples of these schemes can be found
in Japanese retailing, US airlines and hotels, French banks, UK grocery stores,
German car companies, Australian telecommunications, Italian fashion stores,
US universities, and many other areas. Typically these programs offer financial
and relationship rewards to customers, and in some instances benefits also
accrue to third-parties such as charities[1].
Two aims of customer loyalty programs stand out. One is to increase sales
revenues by raising purchase/usage levels, and/or increasing the range of
products bought from the supplier. A second aim is more defensive ± by
building a closer bond between the brand and current customers it is hoped to
The authors would like to thank Jack Cadeaux, Robert East, Jennifer Harris,
Byron Sharp and Chris Styles for their constructive suggestions. Also, all those who
commented on earlier drafts of this paper at workshops organized by the Marketing
Science Institute, University of New South Wales and University of Melbourne. The
assistance of an Australian Research Council (Small Grant) is acknowledged.
294 JOURNAL OF CONSUMER MARKETING, VOL. 20 NO. 4 2003, pp. 294-316, # MCB UP LIMITED, 0736-3761, DOI 10.1108/07363760310483676
maintain the current customer base. The popularity of these programs is based
on the argument that profits can be increased significantly by achieving either of
these aims[2]. While loyalty programs can have many other peripheral goals ±
such as furthering cross-selling, creating databases, aiding trade relations,
assisting brand PR, establishing alliances, etc. ± we do not assess these goals in
this paper.
But, how effective are these programs in enhancing the number, the loyalty,
and/or the sales from customers? Are they likely to be profitable when fully
costed? To answer these questions we first discuss what is meant by the term
``customer loyalty''. A review of the literature reveals that this task is not
straightforward ± generally people have in mind one of three different
models (section 2). We consider whether these models are based on
competing or complementary theories (section 3). This provides a platform
for thinking about a loyalty continuum (section 4). We show that it is crucial
to define and understand customer loyalty if the demand-side benefits of
loyalty programs are to be properly evaluated. Next, drawing on these
conceptualizations, we review the goals, successes and failings of loyalty
programs (section 5). We show that, at one extreme are programs for niche
products that presume customers are committed to ``a favorite brand''. At the
other extreme there are promotional programs that cater to the divided
loyalty of their customers. In between, and widely represented across many
different products and services, are loyalty programs that are best described
as ``for the brands people already buy''. Future prospects are discussed
briefly (section 6).
Direct competition The focus of this paper is on established repeat-purchase markets where there
between branded products is direct competition between branded products and services. These markets
and services include most packaged goods, personal services such as banking and travel
agents, food and beverages, hotels, transport, retail, OTC pharmaceuticals,
basic cosmetics, and media. They are hugely important in terms of the share
of disposable consumer income for which they account, and they have been
the focus of much research.
2. Customer loyalty
At a very general level, loyalty is something that consumers may exhibit to
brands, services, stores, product categories (e.g. cigarettes), and activities
(e.g. swimming). Here, we use the term customer loyalty as opposed to brand
loyalty; this is to emphasize that loyalty is a feature of people, rather than
something inherent in brands.
Popular conceptualizations Unfortunately, there is no universally agreed definition (Jacoby and
Chestnut, 1978; Dick and Basu, 1994; Oliver, 1999). Instead, there are three
popular conceptualizations:
(1) loyalty as primarily an attitude that sometimes leads to a relationship
with the brand (Model 1);
(2) loyalty mainly expressed in terms of revealed behavior (i.e. the pattern of
past purchases) (Model 2); and
(3) buying moderated by the individual's characteristics, circumstances,
and/or the purchase situation (Model 3) (see Figure 1).
Jacoby and Chestnut, 1978; Foxall and Goldsmith, 1994; Mellens et al.,
1996; Reichheld, 1996). This is seen as taking the form of a consistently
favorable set of stated beliefs towards the brand purchased. These attitudes
may be measured by asking how much people say they like the brand, feel
committed to it, will recommend it to others, and have positive beliefs and
feelings about it ± relative to competing brands (Dick and Basu, 1994). The
strength of these attitudes is the key predictor of a brand's purchase and
repeat patronage. This is what Oliver (1997, p. 392) has in mind when he
defines customer loyalty as:
A deeply held commitment to rebuy or repatronize 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 behavior.
Where brand loyalty In the fields of advertising and brand equity research this model receives
increases revenue streams much conceptual support (e.g. Aaker, 1996; De Chernatony and McDonald,
become more predictable 1998; Keller, 1998). The approach also appeals to many practitioners in
advertising and brand management because it is empathetic with the search
for strategies to enhance the strength of consumers' attitudes towards a
brand. Moreover, there is some evidence to suggest it is a profitable strategy.
Ahluwalia et al. (1999) have shown that attitudinally-loyal customers are
much less susceptible to negative information about the brand than non-loyal
customers. Also, where loyalty to a brand is increased, the revenue-stream
from loyal customers becomes more predictable and can become
considerable over time ± as analyses of cases such as Federal Express,
Pizza Hut franchises, and Cadillac dealerships have shown (Gremler and
Brown, 1999).
An extension of the ``attitudes define loyalty'' perspective is to suggest that
consumers form relationships with some of their brands. A good example of
this perspective is provided by Fournier (1998), who sees loyalty as a
committed and affect-laden partnership between consumers and brands. It is
a partnership that will be even stronger when supported by other members of
a household or buying group, and where consumption is associated with
community membership or identity. Examples in support of this argument
include Skoal smokeless tobacco among some North American cowboys,
Nevertheless, the nature of the market in which customers buy and brands
compete will govern what is normally observed ± thus, in highly competitive
repeat-purchase markets acceptance is to be expected more often than the
other models. We elaborate below.
Brand distinctiveness The concept of CBA is the base case of customer loyalty in competitive
affected repeat-purchase markets. It draws heavily on Model 2, but also brings
together some elements of Models 1 and 3. The contribution of Model 2 is
that customers exhibit loyalty to a number of brands because there is little
reason to develop exclusive attitudinal loyalty to any one of the brands
purchased. A prime reason for this is that a proliferation of brands in most
markets has destroyed one of the key reasons for exclusive loyalty, namely
brand distinctiveness. Weilbacher (1993) and Ehrenberg et al. (1997) argue
that in many product categories, both the functional and the perceived
differences among competing brands are small, so it is not surprising that
customers perceive few critical and meaningful differences across competing
brands. For many of these brands the advertising messages and loyalty
programs are fundamentally similar too (compare the similar car hire
advertisements in travel magazines or the near-identical benefits of
alternative airline frequent-flier programs).
Need arousal is a trigger to Figure 3 summarizes the concept of CBA in terms of the familiar five-stage
the purchase process model of consumer choice. Need arousal is included as a trigger to the
purchase process ± but this operates mainly on product category decisions,
not brand-based ones. For instance, because of a desire to stay sober the need
is for low-alcohol beer, but not necessarily for any particular brand of low-
alcohol beer. Since this is a model of ongoing CBA for frequently-purchased
products, the (external) information search and evaluation stages are
assumed to have been completed after the initial one or two purchases in the
category, and so are not explicitly included in the diagram. Choice among
the functionally equivalent alternatives will reflect the accessibility,
availability and conspicuousness of a brand at the point of purchase. Most
likely, this will be seen as a set of acceptable brands that are ordered as first
favorite, second favorite, third favorite, and so forth (Hammond, 1997)[4].
Typically, the relative likelihood of buying each brand will endure over
successive purchase cycles, assuming the brands remain functionally
adequate and accessible. Satisfaction with past purchases, and any
consequential habit formation, explain most of a person's ongoing
propensity to buy one or a number of acceptable brands.
CBC
Brand component that The first exception to CBA concerns those consumers who value
drives choice and psychological and social value more than function. This is easiest to see
commitment when these consumers are buying high-identity products (luxury goods,
expensive cosmetics, etc.) and thinking of life-choices (education, sporting
allegiances, etc.). Here there may be a brand component that drives choice
and commitment for a significant number of customers, especially the initial
adoption of some distinctive brands such as the Apple Macintosh, the Sony
Walkman and Harley-Davidson motorbikes. We label this CBC. In this
CBB
The second exception to CBA concerns those consumers who exhibit very
low levels of loyalty. Their choices are shaped by considerations of
immediate availability, price, promotions, etc., and ± at most ± weak
attitudes (e.g. users of an online travel agency may express liking for it
because it obtains for them best price airfares). The concept of CBB is
closely allied to Model 3, where contingencies are the co-determinants of
choice, and not simply nuisance factors.
In summary, our contention is that CBC and CBB are the exceptions rather
than the rule in most repeat-purchase markets. One way to see this is as a
sampling problem (Figure 2). Consider the example of car rental: if we were
to draw from a large sample of the population, most customers of Avis or
Hertz would be characterized by CBA, and only a few by CBC (committed
to my Hertz) or CBB (renting from literally any car hire firm that happened
to be discounted at the time of purchase). Some researchers however have
Notes
1. Loyalty programs are schemes offering delayed, accumulating economic benefits to
consumers who buy the brand. Usually this takes the form of points that can be exchanged
for gifts, free products, or aspirational rewards such as air miles. Airline frequent-flier
programs have been a prototype for many of the schemes. Affinity programs are a
specific type of loyalty program. They are designed to enhance the emotional bond
between customer and brand. Mechanisms are set up to enhance two-way communication
in order for the customer to get to know the brand (or company that stands behind it)
better, and for the company to learn more about the customer. No direct economic benefit
is offered to the customer. Examples include telephone help lines, club memberships,
alumni associations, newsletters, Web site ``chat'' groups, etc. Hybrids also exist. For
instance, where the focus is on enhancing the emotional bond between customer and
brand, and a third-party (e.g. a charity) receives a financial benefit. Or the establishment
of a club where consumers pay for membership, in return for access to special events and
offers. This latter format is prevalent in countries like Germany where privacy and trading
laws prohibit incentive-based schemes, e.g. Volkswagen Club, Swatch the Club,
Mercedes Mastercard (Butscher, 2002).
2. See, for example, Reichheld (1996). While this generalization is often made by
consultants, it takes no account of the company's specific circumstances, particularly its
target market, marketing strategy and cost structures (Niraj et al., 2001; Shaw, 1998).
Indeed, there is some evidence to suggest declining profitability from long-term
customers in the context of catalogue buying in the US (Reinartz and Kumar, 2000,
2002).
3. In this context, use of the word ``loyalty'' is debatable. Some prefer to use the term
``spurious loyalty'', in that any pattern of buying here is likely to result from the
recurrence of contingent factors (e.g. Mellens et al., 1996). It is pointed out that if the
contingent factors are removed, buying may change. Nevertheless, we argue that Model 3
is the basis of brand acceptance and weak loyalty, neither of which should be regarded as
spurious.
4. The main exception ± where exclusive buying is observed ± is among consumers who are
light buyers of the product category and therefore of any brand in the category. Among
these buyers, monogamous ``loyalty'' may merely reflect a very limited number of
purchase occasions (e.g. the infrequent holiday traveler versus the international business
executive). Exclusive loyalty is also a function of the length of the observation period ± in
a short period most people will appear to be exclusively loyal because they have had so
few opportunities to buy.
5. The bias is towards a consideration of customer issues, reflecting the customer-focus
logic of marketing. Therefore, our comments about the contribution of loyalty schemes to
profits focus largely on consumer-related demand-side issues. It would be useful for
others to consider other perspectives. For example, some of these programs could be
viewed as a form of indirect price cut that is desired by one segment of customers but is
ultimately paid for by all customers. Programs that offer air miles as their reward could be
viewed as the outcome of airlines wanting to sell excess capacity at a price greater than
marginal cost. There are also broader issues of business policy and marketing strategy
that need to be addressed. For instance, from the perspective of one business partner in a
loyalty program, the success of the endeavor may depend on an ability to negotiate a
particularly attractive deal with the other business partners ± irrespective of whether the
program has much impact on customer loyalty. We regard this as a very important, but
separate, issue.
These divided loyalties make it more difficult for marketers to take actions
aimed a promoting loyalty. It would seem the case that the focus on loyalty to
the exclusion of other elements in consumer behaviour could result in
misplaced marketing strategies. Moreover the loyalty strategies employed by
different brands are very similar. I suspect that many consumers do not
distinguish between loyalty campaigns and other forms of sales promotions.
We know that the point of frequent flyer programmes, for example, is to