Competitive advantage and profitability

Loyalty card schemes have been implemented by many UK retailers during the last decade. Loyalty is linked to competitive advantage and profitability. Issues raised in the literature review include the fact that customers possess many loyalty cards which suggests the schemes are not resulting in loyalty. According to journal articles, there are concerns over whether loyalty schemes have reached saturation point. This research aimed to ascertain if this is the case. Customer’s behaviour in regards to loyalty schemes was researched, including how many schemes have been discarded and how many have been refused.

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Research methodology involved the use of questionnaires. Research findings confirmed that most people have a loyalty card with an average membership of 1. 62 schemes per respondent. Customers are still joining schemes with 27% of loyalty cards acquired in the last year. Most people have not disposed of any loyalty cards, however many have declined offers of new loyalty schemes in the last six months. To further validate the research findings, a larger study is needed, questioning groups other than students. Other research methods could also be used including diaries and interviews.

In order to entice customers to join and use loyalty card schemes, the benefits need to be worthwhile and scheme offerings should be differentiated. Due to the nature of this study, in order to introduce the concept of customer loyalty card schemes, a literature review was completed first in order to gain background knowledge. The following section will introduce the concept of loyalty, provide some history and provide background on loyalty card schemes. Why did UK retailers introduce loyalty schemes? The definition of loyalty, history of loyalty schemes and how loyalty cards work have been included in appendix 1.

0. The overall objective of UK retailers is to make profit. They can increase profits by increasing customer retention rate, increasing the number of referrals, increase cross-sales and up-sales, enabling companies to use the customer profile to find more loyal and responsive customers (Hughes, 2003). Some rules that need to be followed by companies embarking on a customer loyalty scheme are not to treat all customers all the same. Resources should be used to reward the most profitable customers, the most loyal customers do not need to be marketed to but just be retained.

Control groups should be set up to measure success and show if the scheme has worked, work out lifetime value of customers and use this to evaluate the success of the strategy. Customers like to receive communications and any communication has been shown to increase sales and retention rates. It is not worth investing in offers to entice new customers as it has been found that, “offering discounts to attract new customers produces disloyal customers” (Hughes, 2003). Loyalty schemes should offer value to the customer and be supported by everyone in the organisation (Butscher, 2002).

Loyalty schemes aim to encourage customers to consolidate their shopping to one store in order to get rewards. For example, if someone used to buy flowers from their local flower shop, they may now buy them at Tesco in order to get rewards. There is usually a 1-4% sales increase in retailers that launch a loyalty scheme (Shabi, 2003). Why concentrate on customer loyalty? According to Payne et al, 1998, companies could be doing more to improve loyalty and retention of existing customers, which would result in competitive advantage and higher profitability.

Marketing programmes and promotions can’t create sustainable loyalty on their own; value is derived from product quality, service, sales support and availability. All these departments need to be coordinated to provide more value and earn customer loyalty (Payne et al, 1998). Loyalty schemes do seem to work; there was a one percent fall in sales at Sainsburys and Tesco gained 60,000 new customers when Air Miles stopped being offered by Sainsburys and were added to Tesco’s Clubcard scheme.

There are still ten million regular users of Tesco Clubcard which is the same number as when it was launched in 1995, so the use of loyalty cards is not decreasing. In summary, “Loyalty does exist-but you can’t buy it, you have to earn it. ” (Dunn, 2002). How loyalty card information can be used Loyalty card information can be used by retailers to find new markets, plan new ranges, manage fresh food and save money. They can also save money on market research, advertising and direct mail. Some analysis can be sold on to manufacturers (Shabi, 2003). Why have some loyalty card schemes failed?

In the 1980’s, with improvements in technology, most supermarkets collected information about customers purchasing habits but many did not know how to use it properly. The principle is that, “Database Marketing is effective in building customer loyalty and repeat sales only if the customer benefits from it. ” (Hughes, 2003). If the loyalty card scheme doesn’t present value to the customer, they will ignore communications, and not use the loyalty card (basically, refuse to become loyal). This is possibly a reason some companies have been unsuccessful in database marketing (Butscher, 2002).