Dissertation Consumer Loyalty in Retail - An
Investigation Into Loyalty Schemes
Dissertation Introduction
Consumer loyalty is one of the most valuable assets a retailer could possess. With increased competition
from rival stores and brands, a vast range of product choice and variations, and the expansion of
internet trading and comparison websites, loyalty is scarcely existent in the modern retail environment.
With the retail world saturated in plastic cards, point schemes, and a whole spectrum of consumer
loyalty tactics, the investigation into loyalty schemes establishes their effectiveness in living up to their
name. Research has expanded knowledge of previous authors, and examines what does and does not
make a consumer loyal, taking into account the effect of loyalty cards for both the consumer and
retailer. It attempts to develop an understanding of the most effective way for retailers to turn a mere
consumer into a loyal customer. The development of loyalty models and analysis of research begin to
suggest that loyalty schemes are successful when offering sustainable benefits to the consumer such as
special offers, reduced pricing, and free gifts, however the effectiveness of loyalty schemes are
dramatically reduced when the participants privacy is invaded with purchase tracking and direct mail.
However, it is discussed that loyalty schemes should be used only as one part of a customer loyalty
strategy, and that other techniques such as building staff and customer relationships should be
emphasised to begin to increase the wavering loyalty levels within today's disloyal retail environments.
Dissertation Contents
CHAPTER ONE
Introduction
Aim of the Study
Objectives
Chapter Outlines
CHAPTER TWO
Literature Review
Consumer Loyalty
Loyalty within the modern retail environment
The Importance of Capturing Loyalty in the Retail Sector
Most Likely Loyalists
The Loyalty Card Phenomenon
Are Loyalty Schemes Successful?
Problems and Issues surrounding loyalty marketing
An Alternative Answer
Gaps in the Literature
CHAPTER THREE
Research Methodology
Research Philosophy
Secondary Research
Advantages of Secondary Research
Limitations of Secondary Research
Primary Research
Quantitative Research
Advantages of Questionnaires
Limitations of questionnaires
Qualitative Research
Advantages of Depth Interviews
Limitations of Depth Interviews
Samples
Analysis of Research
Research Ethics
CHAPTER FOUR
Primary Research Findings- The Consumer & Loyalty
Age Groups
Ownership of Loyalty Cards
Store Loyalty
Shopping Factors - The Most and Least Important
Attraction to Loyalty Schemes
Loyalty Scheme Pros or Cons
Influences of Loyalty towards a Store or Brand
Loyalty Schemes Vs Loyalty
Loyalty Most Likely
Significant Reasons for a Decline in Consumer Loyalty
Primary Research Findings - The Retailer & Loyalty
CHAPTER FIVE
Primary Research Analysis
Consumer Loyalty
Supermarket Loyalty
Age & Loyalty
Consumer Opinion of Loyalty Schemes
What Consumers want from a Loyalty Scheme
The Loyalty Card Pyramid
Can loyalty be influenced?
The Retailer%u201Fs View
The Retail Loyalty Model
CHAPTER SIX
Conclusion
An Understanding of Loyalty and Consumers
An Understanding of Loyalty and Retailers
Investigation into Loyalty Schemes and their Effectiveness
Recommendations for Further Research
Think Your Customers Are Loyal? Think
Again
The psychology at the heart of customer buying patterns is far more complex than
previously thought. The different variations of customer loyalty must be understood if a
company is to win the long-term battle for customers, increase market share and achieve
high performance.
By Woodruff W. Driggs, Steven S. Ramsey and Paul F. Nunes
Outlook Journal, September 2006
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You've gone to great lengths to identify and nurture the most
valuable segments of your customer base. You've closely
monitored them through surveys and focus groups, and you
know they consistently indicate they are "highly satisfied"
with your company and its products. But... are they loyal?
If you're like most companies, you don't really know—at
least, not for sure. And that's a problem.
The loyal customer is perhaps the most elusive subject in all of management science. And a
recent Accenture customer loyalty study suggests that the psychology at the heart of customer
buying patterns and preferences is far more complex than previously thought. Different
variations of customer loyalty must be understood if a company is to win the long-term battle for
customers and market share.
Loyalty and High Performance
Understanding, nurturing and ultimately serving these different forms of loyalty is essential to a
company's "market focus and position"—one of the three building blocks of high performance
identified by ongoing Accenture research (see "The Right Place, The Right Time," Outlook,
October 2005).
Through their market focus and position, high performers achieve a kind of strategic decision-
making capability that enables them to compete in the best markets and maximize growth
opportunities, without reaching or scaling beyond their capability to do so. Companies with an
overly simplistic view of loyalty and of their customers are likely to have a misguided market
focus and position, taking them down errant and expensive paths that can leave them poorly
equipped to compete.
What makes customer loyalty such a vexing matter? Some loyalty challenges are inherent in the
current market. Customers, for example, are harder to reach and impress than they used to be.
Many traditional marketing channels have been weakened as consumers pursue various "market
of one" activities: iPods, video games, movies on demand and personal video recorders that
allow commercial skipping. In the hypercompetitive Internet age, customers also have more
pricing information and more buying options than ever before.
But a number of misconceptions about loyalty have also led companies to make misguided
investments in customer management programs.
The notion that loyalty is all about improving customer "satisfaction" is perhaps the most
common mistake. The frustrating truth is that what customers say about being satisfied turns out
to be a poor indicator of loyalty. In fact, a consistent finding from customer research is that 60
percent to 80 percent of lost customers across all industry segments reported on surveys just
prior to defecting that they were "very satisfied" or "satisfied."
Another misstep is thinking that because a company has a loyalty program in place, it is doing all
it can to improve customer loyalty.
Loyalty programs are one part of an overall loyalty strategy, but they lack the nuance that gives
companies the ability to target the most profitable segments. Our research has found that loyalty
cannot be sustained by incentives alone. In Accenture's loyalty survey, for example, only 20
percent of consumers said they had switched providers in the past year because of the absence of
loyalty perks and rewards. And just 22 percent said they have stayed with a provider because of
frequent-buyer rewards.
Senior management has also diluted efforts to encourage customer loyalty through the attitude
that "it's marketing's job." Marketing has a vital role to play, to be sure. But developing customer
loyalty is a team sport. Human resources, product development and pricing, operations, and sales
and service must all be pulling in the same direction to generate the kind of loyalty that produces
high performance.
The True Drivers
To attract and retain the most loyal and profitable customers, a company must first understand
the true drivers of loyalty—the customer attitudes that, in turn, drive the different kinds of
behaviors that must be understood and nurtured.
Accenture has developed a loyalty model—based on our own
research and client experience as well as on leading academic
studies—to enable better analysis of different kinds of loyalty
drivers. At the heart of the model (see Figure 1) is a better
delineation of the different types of loyalty customers exhibit. These
types can be understood as spectrums of attitude and behavior along
three dimensions.
Involvement with the Product Or Service Category
How interested are customers in the category's products and services? Are they active and
engaged participants in loyalty programs? Are they "heavy" users of the category and
enthusiastic about the category in general?
Commitment to the Brand
How passionate are customers about the brands they buy? Do they identify themselves with a
brand and develop deep ties to it? Do they care about the fate of the brand? Are they willing to
pay a premium for the brand? Are they advocates for the brand with people within their family
and social network? Much as educators have discovered that teaching a subject helps a person
understand the content more deeply, leading companies have discovered that the very process of
advocating a brand to others creates deeper loyalty to that brand.
Likelihood to Reevaluate
How prone are customers within a particular product or service category to reevaluate their
current buying choices? What are the most important shopping triggers? What barriers exist or
might be erected against switching brands? For example, do changes in personal circumstances,
such as income level or moving to a new home, trigger a reevaluation of alternatives?
By analyzing the behavior and attitude indicators of this three-part model, different loyalty
segments emerge, each with its own distinct loyalty drivers. Companies that recognize these
nascent segments can improve their market focus and position by identifying previously unseen
markets within markets. They can then design marketing, sales and service strategies to deliver a
unique customer experience within each subsegment. (For more on the customer experience, see
below.
Applying the Loyalty Model
The following examples demonstrate how this loyalty model can help companies compete on
customer loyalty.
Variety Seekers
With the equivalent of 238 billion bottles sold annually worldwide, beer is a $413 billion global
business. The marketing efforts of many of the largest brewers have, for the most part, been
aimed at retaining brand loyalists by appealing to their competitive nature, asking them to
identify with a brand much as they would with their favorite sports team. Using our three-part
loyalty model, this means beer companies have been targeting customers with high category
involvement (that is, they like beer), high brand involvement (that is, they are loyal Heineken or
Kirin or Miller drinkers, for example) and a low likelihood to reevaluate.
Yet a marketing approach targeted primarily at brand loyalists ignores a significant subsegment
of the "high category involvement" customer base: drinkers of microbrewed, or "craft," beers.
These customers are after not only quality but also variety. They are loyal, not in the sense that
they can be counted on to order their favorite brand of beer again and again, but in their
commitment to a diversity of experience. Such buyers constitute a growing market. In the United
States, for example, craft-beer output rose 9 percent in 2005, even as production for domestic
large brewers fell by 2 percent.
To respond to the unique characteristics of this market, some craft brewers have begun providing
"seasonal" varieties of their beers. The Samuel Adams brand, for example—owned by US-based
Boston Beer Company—offers Octoberfest, Summer Ale, White Ale and Winter Lager to meet
its customers' seasonal taste changes. This gives the company a better chance of holding on to
the microbrew customers within its overall Samuel Adams suite of brands, even though these
buyers technically would still be categorized as having a high tendency to reevaluate their beer-
buying habits. By meeting a customer's need for variety within the overall brand, companies can
build greater long-term loyalty in a segment that might otherwise have seemed to defy loyalty.
Habitual Buyers
Consider another category of buyers whose loyalty patterns can fool
companies: habitual buyers. If your company sells soft drinks or snack
foods, for instance, you can easily take for granted the steady business from
your retail outlets. But as one soft drink maker found out several years ago
in a spat with Sainsbury's Supermarkets, the third largest grocery retailer in
the United Kingdom, nothing is a sure thing. Sainsbury's pulled the brand
from its shelves and substituted its own private-label brand. Within months,
the private-label brand was one of the best-selling soft drinks in the United
Kingdom. What happened? Shoppers were more loyal to the store than to
the soft drink brand.
In the context of our loyalty model, the brand commitment for these customers appeared high,
but for a substantial segment of the market it was, in fact, quite low. Because reevaluation was
also quite low, it was only when customers were forced to rethink their purchase that the true
nature of this segment's loyalty became apparent. So if loyalty comes more from purchase habit
than brand preference, what becomes crucial is the third dimension of the loyalty model: that is,
what the company must do to reduce the likelihood of reevaluating. (See below.)
One method used by market leaders to lower the risk of reevaluation is to embed themselves
inside the supply chain of buyers through approaches like vendor-managed inventory and
continuous replenishment. These suppliers restock store shelves (for example, snack foods in
grocery aisles) and companies' production inventories (say, cooking oil) on a continuous basis,
relieving the buyer of the need to constantly reorder to maintain supply. Becoming a quiet but
essential player in the supply chain not only adds value for buyers in terms of ease of
management, it also avoids the risk of buyers rethinking their supplier choices every time they
fill out a purchase order.
Electronics giant Panasonic has recently instituted this type of strategy in its cooperative
relationship with such retailers as Best Buy. Using a vendor-managed inventory model,
Panasonic has taken on responsibility for the inventory of its products in the retailers' supply
chains. Everyone wins with this model. The retailers eliminate or reduce the costs of owning the
inventory but then share their higher margins with Panasonic. For its part, Panasonic gets an
even greater benefit: an end-to-end view of its retailers' supply chains in real time, enabling
Panasonic to better manage its business activities, including production timing.
Loyalty Engineering
Creating the right loyalty capabilities in a company, and then effectively managing customer
loyalty, demands what might be called an "engineering" perspective. That is, it requires a data-
driven approach that enables a company to analyze and understand the different configurations
of loyalty drivers among its customers, and that supports long-term initiatives to shift and evolve
the market focus and position of the company based on those customer configurations. The
Accenture Customer Loyalty Management Framework (see Figure 2), for example, combines
detailed steps involving insight, strategy, execution and measurement, as well as essential
enablers such as leadership, technology and organizational design.
Here are some practical steps for creating differentiated customer loyalty-building capabilities.
Understand Loyalty in the Context Of Your Business Model
Most organizations continue to place more emphasis on customer acquisition than on customer
loyalty. That can be an expensive mistake. A rigorous analysis of the comparative costs of
acquiring new customers and retaining existing ones can be eye-opening. For example, one
telecommunications service provider recently conducted an analysis of different customer churn
models, mapping various churn percentages to the number of customer acquisitions that would
be required to offset the losses. The company found that more effective customer loyalty
programs were more important than customer acquisition programs.
Only by challenging long-held beliefs with hard facts and figures rooted in the company's
business model and financial targets will change be effective. It is absolutely imperative that the
full costs and benefits of a revitalized loyalty strategy are explored across all aspects of the
organization to ensure that initiatives gain senior-level endorsement as part of the company's
overall growth plan.
Develop A Detailed Mapping Of Loyalty Drivers
Understand the different types of loyalty that exist within your current customer base and across
the wider market, and how each type influences the risk of defection and the possibility of
achieving even greater loyalty than you currently have. Leverage loyalty driver insights to plan
distinctive customer experiences that create and sustain each type of loyalty.
Plan a Comprehensive Response, Integrated Across All Relevant Dimensions of Your
Company
Use an integrated approach to generating customer loyalty that
involves a coordinated series of initiatives across the following five
dimensions.
Insight. Use sophisticated data mining tools, behavior
analyses and external research to understand different
segments of the customer base over time.
Strategy. Align loyalty drivers to the customer experience, and ensure that the brand
values are consistent with the needs of targeted customer segments. Define loyalty
metrics and who owns them.
Execution. Implement customer treatments across channels, organizational boundaries
and technologies. Make sure that a rewards-based loyalty program delivers clear business
benefits and that it is flexible over time. Appoint a clear owner of the entire "customer
experience."
Measurement. Track loyalty measures at each customer touch point. Proactively address
the causes of excessive customer churn. Make sure that loyalty programs have a clear
purpose within the loyalty strategy and that the return on investment for such programs
can be measured.
Enablers. Build technology capabilities that enable data mining and cross-organization
integration. Align leadership, culture and values toward a customer-centric approach. Put
in place governance and journey management capabilities to ensure that silo-based turf
warfare does not derail the necessary change.
Test New Loyalty-Building Programs Before Scaling Them Across The Company
A common practice among loyalty leaders is to pilot loyalty-building initiatives to prove their
value and gain broader organizational buy-in before making sizable investments in long-term
programs. The key is to start with a high-impact first phase and then scale quickly. ExxonMobil
Corporation, for example, used a pilot approach to test the potential of its Speedpass system,
which is based on a small key-tag device that customers pass in front of a reader at the gas pump
to expedite their purchases. With more than 7 million users, Speedpass has created a loyal
subsegment within the company's customer base, and is helping to drive additional revenues.
ExxonMobil continues to improve the Speedpass system by pilot-testing related programs.
A Comprehensive Approach
Loyalty is the result of multiple factors involving brand, customer characteristics, category
involvement, cultural issues and a myriad of other considerations. Companies that continue to
base their market focus and position on a monolithic and overly simplistic view of customer
loyalty may be investing in the wrong things for the wrong reasons. Even well-intentioned
loyalty programs can hamper competitive effectiveness if they are not based on the right
customer loyalty drivers.
The advantage of the approach to building customer loyalty recommended here is that it
integrates strategy, analytics and measurement to quickly put into practice the strategic changes
that can have the greatest impact on business performance. By using this approach, companies
can shape and deliver optimal customer experiences based on the unique loyalty characteristics
of a complex customer base.
This approach can help companies better understand what their customers are thinking and what
motivates their purchasing decision—and, thus, can help companies keep those profitable
customers. It's a far better method than basing strategic decisions on how customers have acted
in the past, which is often not the best predictor of future behavior. In the end, companies may
find that the loyal customers they seek have been there all along, hiding in plain sight, simply
waiting to be identified, understood and marketed to in the right ways.
The Customer Experience
When marketers use the phrase customer experience, it is not merely a matter of semantics. One
of the most important developments in management science in recent years has been the insight
that we are in an "experience economy." Customers are not buying just a product or service from
a company; they are buying the total experience around its consideration, purchase, use and
service.
Companies that master this experience—that can understand
it and deliver it better than their competitors—have an edge in
the marketplace. Research backs up this point. The Accenture
High Performance Marketing study, for example, revealed
that a positive customer experience accounts for 33 percent of
a company's ability to achieve strong customer loyalty (see
"Marketing Mastery Matters," Outlook, May 2006).
The Importance of Loyalty
Cultivating loyal customers is essential to achieving high performance for several reasons.
Reliable studies continue to point to the fact that it is far more expensive to attract customers
than to retain them. Loyal customers also buy more. In a recent Accenture survey, 81 percent of
consumers said they will continue buying from companies to which they are loyal, and about half
said they would buy more or respond to specials from such a company. In short, customer loyalty
provides pricing power in the marketplace and better protection from competitive threats.
Loyalty provides a platform for stronger, deeper relationships with customers; it can also
increase market share and revenue, and lower the overall cost of customer acquisition.
The bad news is that when customer loyalty is measured, the numbers are pretty dismal. The
annual customer defection rate has grown from 16.9 percent in 2003 to 19.1 percent in 2005.
One study found that, on average, US corporations lose half of their customers every five years.
A recent Accenture survey of UK and US consumers—customers across a range of service
providers—found that 60 percent of them had switched loyalties in the past year, and 64 percent
said they are likely or very likely to stop doing business with a company they currently
patronize.
About the Authors
Woodruff W. Driggs is the managing partner of the Accenture Customer Relationship
Management service line. Previously, he headed the Operational CRM practice within the global
CRM service line and established Accenture's Sales Transformation practice. Mr. Driggs spent
17 years in the company's Communications & High Tech operating group, focusing on
enterprise-level application delivery and serving as managing partner of the group's SAP
practice. He is based in Wellesley, Massachusetts.
Steven S. Ramsey is a Chicago-based partner in the Accenture Customer Relationship
Management service line, responsible for leading the Marketing & Customer Strategy practice.
His primary areas of focus are related to helping companies with sales, marketing and customer
service go-to-market issues, helping them drive higher return-on-marketing and CRM
investments.
Outlook Senior Contributing Editor
Paul F. Nunes is an executive research fellow at the Accenture Institute for High Performance in
Wellesley, Massachusetts, where he directs studies of business and marketing strategy. His work
has regularly appeared in Harvard Business Review and other publications. His most recent book
is Mass Affluence: Seven New Rules of Marketing to Today's Consumers (Harvard Business
School Press, 2004).
Naomi Kasolowsky, a London-based senior manager in the Accenture Customer Relationship
Management service line, contributed to this article.
