Loyalty program design through CRM. , Slides of Customer Relationship Management (CRM)

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Customer Relationship

Management

Session 15

(Design - Loyalty Programs)

Recap: Defining a Loyalty Program Core Program The underlying structure of a loyalty program’s rewards and how they are earned, redeemed and expired Layered Program These are additional member benefits and program behaviors that run contiguously with the core program Promotions These are limited time offers that target specific member segments to motivate incremental visit and purchases behavior Outcome? Structure?

Efficiency Profits

• Efficiency profits result from a change in the customer‘s buying behavior induced by the LP
• Change of behavior can be measured in several ways:
  • Basket size
  • Purchase frequency acceleration
  • Price sensitivity
  • Share of category requirements (SCR) or share of wallet
  • Retention
  • Lifetime duration
• The most widely used measure of behavioral loyalty is SCR which describes the extent of purchases in a category that are served by focal brand or retailer
• Assumption:
  • Customers build up switching costs. The accumulation of loyalty-based assets encourages them to

forgo their free choice because the expected reward makes this reduction appear worthwhile

Efficiency Profits – Criticism

1. For a customer to engage in an LP, the overall utility of being in the LP must be higher than the utility of not being in an LP.
2. The cost for the firm to entice the customer to change behavior accordingly may be higher than it would be without the LP Money that could be invested in, for example, cutting prices
3. The customer segment most likely to join the LP consists of those who are truly loyal anyway, so their business is already likely. In this case, the question arises about whether LPs actually change buying behavior

Value Alignment

Design Characteristics

Design Characteristics of Loyalty Programs

Rewards Structure

Reward Structure - Tiering of Rewards

Drivers of Loyalty Program Effectiveness

Customer Characteristics

• Skewness of customer value distribution varies across industries (value heterogeneity)
• Similar usage and customer profitability of individual customers or accounts (e.g.: gasoline industry)
• Different usage and customer profitability of individual customers or accounts (e.g.: financial services or the telecom industry)
• Value alignment feasible in industries such as airlines, hotels, rental cars, pharmacies, telecom and financial services

Firm characteristics

• Perishability of a product
• Hotel LPs: frequent users get upgrades to “better” rooms subject to availability Upgrades are only given when there is excess capacity that night. The reward of an upgrade comes at very low marginal cost
• Airline seats
• Breadth and depth of the firm offering the product at the store/retail level results in higher efficiency profits because:
• A buyer is more likely to fulfill his needs
• A buyer has more opportunities for one-stop shopping (attributed to more time saving)
• A buyer has more opportunities for behavioral loyalty (attributed to more purchase occasions)

Sample Restaurant Loyalty Program Brand Characteristics Restaurant Group A Restaurant Group B Restaurant Group C Concept Quick Casual, Convenient quality Casual Dining, fun, relaxed, family-friendly Casual to fine dining, rich experience and atmosphere Operations Speed Quickness, Efficiency Pampering of guests Menu Coffee, sandwiches, desserts Upscale pub food, with seasonal variations Full-menu, multi-concept, emphasis on different cuisines Loyalty Strategy???

Sample Restaurant Loyalty Program Brand Characteristics Restaurant Group A Restaurant Group B Restaurant Group C Concept Quick Casual, Convenient quality Casual Dining, fun, relaxed, family-friendly Casual to fine dining, rich experience and atmosphere Operations Speed Quickness, Efficiency Pampering of guests Menu Coffee, sandwiches, desserts Upscale pub food, with seasonal variations Full-menu, multi-concept, emphasis on different cuisines Loyalty Strategy Drive visit frequency Motivate frequent visits and build long-term relationships Build relationships, encourage cross-concept visits, convert business diners to personal guests