Customer loyalty programs are one of the key marketing concepts that have been researched extensively especially in the purview of services (McCain, Jang, and Hu, 2005; Yang and Peterson, 2004). Customer loyalty is critical for organizational success and researchers and practitioners have keenly worked to comprehend the issues related to customer loyalty and its determinants and implications of customer loyalty in service sector firms.
Customer satisfaction has been identified as one of the key determinants of customer loyalty. On the contrary, low perceived value coerces the customers to switch brands which leads to diminishing customer loyalty. It is the perceived value of the brand and service provider that induce trust amongst customers instilling customer satisfaction loyalty. Moreover, corporate image and brand image also act as key influencers of customer loyalty and customer satisfaction (Kumar, Batista, and Maull, 2011).
Understanding customer loyalty
Customer loyalty can be understood as a profound personal pledge to make repeat purchases or patronize a particular product, brand, or service regularly. This means repeating the same brand or the corporate umbrella brand irrespective of momentary influencers and marketing efforts of the counterparts.
Depending on the frequency of purchase, there are two kinds of loyalty: proactive and situational (Bello, 2010). Proactive loyalty denotes the commitment of the customers for repeated purchases of a brand and not giving in to offerings by competing businesses. On the other hand, situational loyalty is when a consumer makes a purchase of a product or service on special occasions. This is seen more in services which are purchased in long durations like insurance, holidays etc. Thus, customer loyalty not solely connected to the frequency and volume of rebuys of a brand as compared to others, but is also linked with situation or opportunity that arises.
Customer loyalty is gaining momentum due to the intensifying competition and businesses realizing the need of retaining existing customers. Thus, businesses are focusing on nurturing loyalty amongst the customers.
Customer retention cost less than acquiring new customers
The biggest advantage of customer loyalty to organisations is lower costs linked with retention of customers instead of attracting new ones especially in full-grown and highly competitive markets. This requires effective ways of market segmentation on the basis of the phases of customer loyalty. It also depends on marketing strategies adopted for establishing sustained relationships through meeting the requirements of the customers (McMullan and Gilmore, 2007).
Competitive advantage from customer satisfaction and retention
Bagram and Khan (2012) opined that customer loyalty is directly proportionate to customer satisfaction and customer retention. Customer satisfaction includes perceived value and perceived quality, and customer retention is the outcome of product attributes such as customer relationships and the trustworthiness of the brand.
Many enterprises especially service-oriented organizations have initiated customer loyalty programs as an integral part of their relationship-building activities. Customer loyalty is a vital source of achieving competitive advantage and also sustaining it.
Impact of loyalty programs on consumer behavior
The prevalent global economic slowdown is the latest motive for businesses to strive to retain their customers and ensure profit generation. Contemporary tendencies like:
- reduction of product life cycles,
- amplified specialization in services provided and,
- the need to emphasize significantly on the constantly rising consumer preferences
have compelled businesses to adopt customer relationship management techniques with more aggressive approach to sustain long term profitable relationships (Lee, Chang and Liu, 2010). This has motivated scholars to research extensively on the customer relationships and its role in marketing practices and firms’ investment in the customer relationship strategies.
Loyalty programs are one of the strategies that are being widely used worldwide by businesses across industries especially in hospitality, tourism, aviation and retail. Loyalty programs are gaining tremendous popularity due to their ability to establish relationships with customers, drive product usage, repeated sales and most significant, customer retention.
Building trust and commitment towards the brand with loyalty programs
The loyalty program is an assimilated system of customized marketing activities that intend to enhance customer loyalty through developing individualized relationships that influence purchase behavior. Usually, loyalty program rewards are established on accumulative purchases and thus may encompass switching costs. Loyalty programs also motivate psychological, sociological, and interpersonal stimulators that will gradually have a positive impact on the customer’s trust and commitment to the company and products which may arouse the pleasure of having some products or services without paying the actual price.
Tracking consumer behavior with loyalty programs
Apart from the repeated purchase patterns, loyalty programs also facilitate data tracking. This feature is the catalysts for establishment of the business model based on efficacy of both the program as well as the data-driven knowledge model which allows managers to design customized strategies and enticements to cater to the unique needs of the different sections of the customers based on the information on purchase patterns (Mayer- Waarden and Benavent, 2009).
Businesses are striving extensively to establish long-lasting relationships with customers and foster loyalty in them as a dedicated customer base that generates an array of benefits for the marketer. Parahoo (2012) highlighted these benefits in his study. The loyal customer base is responsible for significantly adding to the revenue inflow of the company as they are more profitable in the long run than attracting new customers. The profitability of individual customers gradually shows an upward trend in the due course of their relationship with the company.
It has also been observed that faithful and dedicated customers showcase less sensitivity to the price fluctuations, in particular, price inflation. Moreover, the companies have to spend fewer amounts on promotion and advertising to cross-sell to their loyal customers as they are already assured about the corporate and the umbrella brand of the offering.
Making customers as brand ambassadors
Loyal customers are the best brand ambassadors of a company as they may act as opinion leaders for their reference groups. Having loyalty amongst its customers, companies can use it as an integral source of competitive advantage. This manifests through activities that customers engage in beyond the usual act of purchasing a product. Such activities require additional time, such as attending events, interacting on the company’s official website, participating in brand clubs and chat rooms, receiving updates, etc. Such activities reflect customer-brand bonding (Menon, 2016).
Increased compassion and belongingness to the brand from loyalty programs
Apart from the financial benefits, loyalty programs also offer its members a sense of compassion and belongingness to the brand. Moreover, some loyalty programs prompt a sense of pride especially of prominent hotels, aviation service providers, and retail chains. Such reward programs instill a sense of pride as they are rewarded for their loyalty and long term association with the corporate brand or the product or service brand.
Thus, it can be said that loyalty programs are a perfect blend of extrinsic and intrinsic rewards delivered simultaneously to facilitate financial benefits to the customers and foster stimulators of long term relationships through modification of consumer purchase behavior. Extrinsic benefits are discounts, redemption gifts, and purchase vouchers, etc. while intrinsic benefits are the sense of trust, faith, recognition, special treatment and belongingness (Carmen and Teodara, 2012; Henderson, Beck and Palmatier, 2011; Liu, 2007; Jain and Singhal, 2012).
All these advantages are solely based on how the company works upon the two imperative marketing variables, perceived service quality and perceived value. The criticality of these variables escalates manifolds in context of service centric firms like hotels where service is the core product.
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