Introduction
Marketing is one of the most important managerial functions in every business. It helps companies to communicate their value propositions to the existing and potential customers. In the contemporary business environment, customer relationship management (CRM) has emerged as one of the most essential marketing roles.
As competition intensifies in most industries, businesses are increasingly finding it difficult to attract and retain new customers. Consequently, the focus has shifted to retaining the existing customers. Loyalty is fundamental in retaining existing customers. Hence, most companies are adopting loyalty programs.
Implementing these programs involves rewarding customers for making repeat purchases or shopping from the same firm. The rewards include prizes, discounts, cash and reward points among others.
Traditionally, loyalty programs were implemented through point-based systems in which customers earned redeemable points for their purchases. However, the emergence of e-commerce has prompted a shift to internet-based loyalty programs.
In this case, companies use their websites to run the programs. The purpose of this paper is to discuss the application of internet-based loyalty programs in the context of the hospitality industry. The components of loyalty programs, as well as, their use in CRM and marketing will be highlighted.
Practical Application
How Loyalty Programs Add Value and Fit into CRM
Empirical studies indicate that the hospitality industry is leading in the use of loyalty programs in the US. This trend is attributed to the intense competition that characterizes the industry. Besides, some segments of the industry such as hotels, normally, depend on seasonal demand. Hence, the need to implement loyalty programs becomes apparent.
In this context, loyalty programs create value in the following ways. To begin with, the programs help in increasing the frequency of purchases. The main objective of loyalty programs is to ensure that customers buy from the same company as frequent as possible.
Customers tend to feel appreciated when they are rewarded for their purchases. Besides, rewards such as discounts have real economic benefits to the customers. Thus, a loyalty program that offers real benefits is likely to increase sales and revenue. For instance, fast-food restaurants often reward their frequent patrons with free meals in order to ensure loyalty and high sales.
Loyalty programs play a fundamental role in building a comprehensive database that contains accurate and relevant information about purchasing behavior. The programs capture important information such as the type of products that are frequently purchased, the expenditure patterns, and the seasonality of purchases.
This information is fundamental in executing marketing functions such as market segmentation, product development and running promotional activities. In the hospitality industry, loyalty can only be achieved if the customers’ preferences, as reflected in their purchasing behavior, are taken into account during product development.
For instance, most customers will refuse to make a repeat purchase in a hotel where they previously had an unpleasant stay experience.
Internet-based loyalty programs provide a good platform for implementing sales campaigns. In this regard, the program readily provides the marketers with customers’ contact information. Hence, reaching the targeted customers become easy.
Additionally, customers who are activity participating in the programs often visit the company’s website on a regular basis. Since most customers can be reached through the company’s website, expenditure on advertising through other media is eliminated. Finally, loyalty programs help in brand building initiatives. Concisely, they link perceived, as well as, complementary rewards to a given brand.
Internet based-loyalty programs fit into CRM in the following ways. They facilitate the provision of excellent customer services. Unlike call centers, loyalty programs create accounts for each customer through which inquiries can be made and the responses can be obtained immediately.
Most online loyalty programs have inbuilt analysis capabilities which enables CRM executives to understand the needs of the customers. Proper understanding of customers’ needs enables managers to give the right and timely responses. In hotels and restaurants where purchases can be done online, internet-based loyalty programs promotes collaboration among departments that are responsible for CRM functions.
For instance, the customers can make inquiries, pay for their bookings and earn points through their accounts. Finally, the programs enhance relationship building efforts by allowing customers to take control of the interactions. Since customers have full access to their accounts, they can easily select the reward programs that meet their needs, track the progress of their points and opt out of promotions.
The Components of a Good Loyalty Program
Research indicates that a 5% increase in customer retention through an effective loyalty program leads to approximately 75% rise in lifetime value. However, this success can only be achieved if the loyalty program is implemented successfully. In this regard, a successful loyalty program should exhibit the following components.
Financial Performance
A loyalty program is likely to fail if its financial objective is not clearly articulated. Most managers tend to ignore the financial aspect by defining loyalty programs in the context of marketing, as well as, customer relationships. In a good loyalty program, the managers should be able to predict the break-even date. Furthermore, the expected incremental revenue must be stated.
Similarly, the programs accrual and redemption terms must be stated at the onset. Successful implementation of the program can only be realized if its actual and contingent costs are known. The financial objectives can be achieved if the program facilitates an increase in sales and defends the company’s products against competitive offers.
There should be multiple ways of earning points in order to increase purchases. For instance, offering double points for certain purchase can significantly increase sales. The program should be superior to those offered by competitors in order to retain customers.
Segmentation and Membership
The objective of loyalty programs is to retain the most profitable customers. Consequently, the program should enable the managers to identify the segment of their customer base that should be targeted and the factors that attract that segment. Additionally, the program’s features should be aligned with the services that are being provided. The scarce marketing resources should be spent on the best customers.
In this regard, a spending minimum should be adopted as a requirement for participation in the program. This helps in ensuring maximum returns on investment. Besides, limiting membership will create a feeling of privilege among the participants. The program should be marketed through awareness campaigns in order to enhance its attractiveness to customers.
For instance, a hotel can unveil a catalog for its loyalty program in order to attract foreign tourists or non-regular patrons. Furthermore, the program will be effective if it promotes member referral. For instance, customers should be able to earn extra points by referring new customers.
Reward System
A good loyalty program must provide real benefits to customers on a regular basis. These benefits can be categorized broadly as soft and hard rewards. Soft rewards are offered in terms of effective personal, as well as, business services. These rewards should create a personal or emotional attachment to the company and its products. The competitors should find it difficult to imitate these services.
Hence, the services should be unique and their details should not be public. Soft rewards increase sales through incentives rather than discounts which reduce the profit margin. Hard rewards are offered in terms of the points earned per dollar spent.
They are used to increase purchases and to attract new customers. It is important to distribute the benefits on a regular basis. For instance, a loyalty program that offers a free meal after two years is likely to fail.
Service Delivery
The loyalty program must meet the expectations of the customers. In this regard, the process of earning and redeeming points should be easy to understand. Moreover, the documents required for participation should be defined. Improving customer service should be the main focus of the program.
This can be achieved by empowering employees to recognize and appreciate members. The employees should be rewarded for offering excellent customer services in order to motivate them. There should be no lapses in service quality in order to maintain high customer satisfaction.
The infrastructure
A good loyalty program must be delivered through an effective communication system. This requires adequate investment in information and communication technology. Generally, the company should acquire computer hardware and software that facilitates automation of the program.
The communication interface should facilitate effective dialogue between the customers and the company. Internal controls must also be put in place. For instance, there should be effective coordination between the company and third party organizations that are assisting in the implementation of the program.
Managing Loyalty Programs for Different Customer Segments
The concept of segmentation in loyalty programs is based on the premise that a group of customers with a homogeneous socio-economic background will have more or less similar purchasing behavior. Consequently, high customer satisfaction can be achieved by developing tailor-made services for each segment. In this context, managers should consider the following elements of customer segmentation in their loyalty programs.
Identification
The management should be able to identify loyalty program members from their pool of customers using the existing segmentation criteria. Some hotels use a tier system to differentiate the members. Similarly, some hotels use status cards to denote the status of each participant. The rationale of implementing an identification system is that it helps employees to recognize participants in the program.
This enables employees to offer high quality services, especially, to the high status members. Furthermore, adopting a means for signaling status enables members to showcase their achievements. Consequently, enrollment in the program is likely to increase as new and existing members work heard to improve their status.
Sustainability
Sustainability in a loyalty program refers to the size of each customer segment (tier) or the amount spent by each segment. In a restaurant that serves the mass market, the spending per customer is likely to be low. Thus, the size of each customer segment should be big enough to ensure profitability and sustainability in the program. In luxurious hotels, the spending per customer is often very high.
In this case, a customer segment can still be profitable even if its size is very small. Thus, it will still be possible to run a sustainable loyalty program for small segments. Generally, tiers lose their value and become difficult to serve as their sizes increase. An effective tier system should follow a pyramid format where majority of the members belong to the base tiers.
Accessibility
Companies must collect adequate information about their customers at the enrollment stage of the program. This information will enable managers to contact customers and to provide customized services for each segment. For instance, most hotels have tracking systems that enables them to predict their customers’ room preferences.
Stability
Stability refers to the extent to which the attributes of each segment will remain the same over time. The characteristic of customer segments tend to change over time. Thus, the loyalty program might lose its value if the tastes and preferences of each segment change. In this regard, flexibility will enable the program to offer rewards that reflect the changes in each segment.
Responsiveness
Customers tend to respond differently to various rewards. Hence, managers must be able to identify the benefits that appeal to each segment. Customers are likely to be responsive if the rewards and the reward system are customized according to their needs.
For instance, a value driven reward system can be used in a lower-tier program where customers earn points by making frequent purchases. This gives the company the opportunity to win customers’ loyalty at an early stage. As customers ascend through the tier system, rewards can be based on status in order to ensure differentiation.
Differentiating the Program
A company can differentiate its loyalty program in the following ways. First, it is important to use a simple point-system to reward customers. Most companies tend to use complex reward systems that are very difficult to understand. Second, a tier system should be used to segment the customers. Each tier provides unique services and rewards which facilitates customer retention.
Most loyalty programs often fail because the customers are treated equally irrespective of the longevity their stay in the program. Third, non-monetary programs should be structured around the customers’ values. The mangers must understand the customers’ values in order to differentiate their loyalty programs. Financial rewards tend to be the most common benefit of loyalty programs.
However, financial rewards might not ensure emotional attachment to the company and its products. For instance, hotels usually do not refund customers who cancel their bookings even if they have genuine reasons. This often leads to high dissatisfaction among customers.
In this case, hotels can differentiate their loyalty programs by allowing customers to resell their tickets to other customers through the company’s website. Generally, loyalty programs can be differentiated through services that ensure high customer satisfaction.
Fourth, the loyalty program can be differentiated by incorporating a sales promotion game in it. The differentiation will be successful since companies are not likely to pursue the same promotional game. The game can also be very effective in motivating customers to participate in the program.
Fifth, a creative reward system should be used to ensure loyalty. For instance, rewarding first-time customers can be better than the traditional loyalty system which focuses on existing customers. Finally, the loyalty program can only be different to others if it offers personalized services.
Using Internet-based Loyalty Programs as a Direct Marketing Tool
First, internet-based loyalty programs shed light on customers’ spending habits. They provide information such as customers’ preferences, frequency of purchases and customers’ demographics. The availability of this information eliminates the cost of collecting new data when marketing research is being done. Moreover, the information helps marketers to develop products that meet customers’ expectations.
Second, loyalty programs facilitate the implementation of sales promotions. The rewards that are associated with the sales promotion can be incorporated in the loyalty program.
Besides, the customers’ contact details can be easily obtained from the loyalty program in order to convey the information about the promotion. Internet-based loyalty programs also provide multiple communication channels such as emails and social media which make it easy to create awareness about the sales promotion.
Third, internet-based loyalty programs help in enhancing brand equity. For instance, customers who have successful redeemed rewards from a hotel are likely to share such positive experiences with other potential customers. By linking the company’s website to social media such as twitter and facebook, sharing such experiences becomes very easy.
Fourth, internet-based loyalty programs enable managers to analyze the return on investments for their marketing expenditures. The infrastructure for delivering internet-based loyalty programs often consists of analysis tools that enable marketers to track marketing expenditure. Additionally, the managers are able to match the marketing expenses with the actual returns.
This analysis makes it easy to arrive at the right marketing decision. Finally, internet-based loyalty programs facilitate cost-effective communication with customers. Through these programs, marketers will focus on using the company’s website to reach customers rather than placing adverts in print and electronic media.
Conclusion
Internet-based loyalty programs involve rewarding customers for their purchases. The programs are usually run through the company’s website. The main objective of internet-based loyalty programs is to enhance customers’ loyalty to the company. Thus, these programs create value by increasing the company’s sales through repeat purchases.
They also facilitate CRM and marketing functions. Concisely, internet-based loyalty programs provide a platform for engaging customers in a dialogue that improves their relationship with the company. Additionally, the programs provide important information about purchasing behavior. This information is used to make effective marketing decisions.
A good internet-based loyalty program should consist of effective reward and membership systems. Moreover, it should meet its financial objectives. The effectiveness of the programs can also be improved by differentiating them. This can be achieved by using a tier membership system, as well as, reward systems that are easy to understand.
References
Hansen, J., Deitz, G., & Morgan, R. (2010). Taxonomy of Service-based Loyalty Program Members. Journal of Services Marketing, 24(4), 271-282.
Lacey, R., & Sneath, J. (2006). Customer Loyalty Programs: are they Fair to Customers? Journal of Services Marketing, 18(4), 67-70.
Rosenbaum, M., Ostron, A., & Kuntze, R. (2005). Loyalty Programs and a Sense of Community. Journal of Services Marketing, 19(4), 222-233.
Uncles, M., Dowling, G., & Hammond, K. (2003). Customer Loyalty and Customer Loyalty Programs. Journal of Consumer Marketing, 20(4), 294-316.
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