Crm - Customer Relationship Management

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Key objectives

Customers, who engaged in LPs, prefer to command the services of this company, because they receive certain benefits, such as presents, discounts, privileges from partners, etc. There are four categories of the key objectives of introducing LPs:

- Building true loyalty, including both attitudinal and behavioral kinds of loyalty;

- Efficiency profits;

- Effectiveness profits;

- Value alignment

It does not mean that every company has these four objectives at the same time, sometimes they pursue just couple of them.

It is better to explain every single goal shortly. Building true loyalty is based on WOM (world of mouth), commitment and building communities, that is why, it is more proper for branded products. It is more difficult for them to have another competitive advantage over similar companies and manage customer interactions.

Companies can estimate efficiency profits by evaluating customer behavior changes. It can be measured with the help of basket size, purchase frequency acceleration, price sensitivity, retention, etc. However, the most famous and widely used measure is share of category requirements or share of wallet, which means the quantity of purchases in a category that are served by this focal brand (Kumar and Reinartz, 2012, p.185).

Companies are trying to explore customers’ preferences; it is correlated to effectiveness profits. LPs help to collect data about the customers, afterwards companies can use this information in appropriate way. This type of goal is the most successful in achieving highest profits in long-term and creating competitive advantages.

The last of the key objectives is value alignment. With this goal, companies implement the customer differentiation scheme. They analyze which customers bring them more money and concentrate on these groups of people. Customers are not equal for the company. It sounds unfair, but, actually, with this approach companies treat their loyal and better customers with the best service. This objective is most suited for such industries as airlines, rent-a-car, and industries with skewed customer value distribution (Kumar and Reinartz, 2012, pp.186-187).

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Design characteristics of Loyalty Programs

While designing the LP, designers have a variety of choices what should they include in the program. Therefore, designers use some key dimensions, which are characterizing LPs:

- Reward structure;

- Participation requirements;

- Payment function;

- Sponsorship (existence of partner network);

- Cost and revenues of loyalty programs.

2.2.1 Reward Structure

The first key dimension is reward structure, which consists of seven components. This dimension is so important because participants of LPs wait for some kind of benefits for their repeating purchases. The first component separates rewards on soft and hard ones. Hard rewards refer to financial and tangible rewards, such as discounts and free products, so customers receive the material benefits. While soft rewards are connected to a special recognition of the customer. It is a pleasure for customers to be special and honorary. Of course, soft rewards often come with hard rewards.

Product proposition support relates to the type of benefits you get. Customers can receive company’s products or unrelated goods. For example, participants of different sky programs receive their “miles”/”points” for flights and they spend this bonuses on flights. They can save “miles” and then get a ticket even for free. However, some LPs offer to spend bonuses on goods, which are nor related to the focal firm. There is a special program in Russia, when you get bonuses for eating in restaurants, visiting the cinema. Certain percentage of your bill is going on your card, then in the Internet you can order something on this money, for example, magazine subscriptions, cups, etc. The next component is aspirational value of reward, which refers to hedonic consumption of products. Researches figured out that customers prefer to have some emotions from receiving a benefit; they expect something more than utilitarian goods.

Rate of rewards is one of the main drivers of LP enrollment; it is estimated in monetary terms and refers to the ratio of reward value to transaction volume. Tiering of rewards refers to asset accumulation but as a function of spending behavior of the customers. These rewards programs could follow some functions. Constant function is related to stable incentives, which customers receive from the company. While hierarchical rewards change with spending levels. Offer-related rewards mean exclusive benefits, which can be used in a particular time. Cyclical function refers to special occasions, when people will be surprised to receive a bonus or a present, for example, their birthday.

Timing of reward, which is also called “lock-in”, helps companies to retain customers by creating redemption rules, which leads to long term accumulation. Companies should be aware of “breakage” or the amount of rewards, which are never redeemed. The longer it will take to build up a certain reward level, the greater “breakage” will be. Final component is the rewards, which are based on specific criteria. To these specific criteria we can refer time period, person, categories and distribution channels. If we are talking about time period, we mention specific period, when companies try to increase revenues or sales during weak sales period. When companies refer rewards to certain group of people, they try to “awake” customers, who have not bought anything for a long time. If specific criteria are categories, brands and distribution channels, organizations are trying to increase sales in spheres, which are not so popular, by using rewards.

2.2.2 Participation requirements

The next dimension of LPs is participation requirements for attending a program and the ways to collect points. Who can actually take part in such programs. First, companies should choose between automatic and voluntary enrollment. In the first situation,