Literature review

Introduction

The purpose of this chapter is to review and analyse literature that has been made available regarding the subject of relationship marketing and loyalty. Data gathered in this section will form the basis of the research framework in relation to the research question that was stated in the previous chapter. The first section of this chapter will investigate the transformation of marketing and the evolution of relationship marketing. The concepts of relationship marketing will then be discussed. Then, concepts and theories of loyalty will be reviewed along with an exploration of loyalty schemes. Finally, this chapter concludes with an examination of loyalty cards and its effectiveness in the grocery industry.

Marketing (Definition, concept) 500

According to The UK’s Chartered Institute of Marketing (2005), Marketing is defined as marketing function is responsible for identifying, anticipating, satisfying consumer requirement profitably. Marketing is the important department in organization that connects between customers and various processes within the firm (Day, 1994).

Development of Marketing

Marketing practices can be traced back as far as 7000 B.y of marketing (Egan, 2004).

Flaws of the Marketing Mix

C (Carratu, 1987) (from Sheth, J.N. and Parvatiyar, A., (1995)). Between the years 1950 and 1970, this period has been considered the heyda

The Evolution of Relationship Marketing

Relationship Marketing

The interest of marketing is extended to relationship marketing because firm is more interested to build relationship with customers to achieve long term profit. According to Buttle (1996), marketing is no longer only about developing, selling and delivering product. It is more concerned on development and maintenance of mutually satisfying long-tern relationship with customer.

Core concept of Relationship Marketing

According to Gummerson (2002), relationship marketing is a marketing based on interaction with networks of relationship. Relationship marketing is defined by Gronroos (1994) as the process related to establishing, maintaining, and enhancing relationship with customers and other partners in order to improve customer base and profitability. The core concept of relationship marketing is to establish relationships with consumers. Each customer is viewed as an individual and great emphasis is placed upon the life time value that they provide (Blythe, 2005). Companies move from focusing on fixed transaction to build long term relationship with customers for long term benefits in between (Berry, 1983).

The Need for Relationship Marketing

Little and Marandi (2003) claim that relationship marketing is the best way to add value in order to retain customers in the long run, and that results in gaining competitive advantages. As competition within the market place has highly intensified, competitive advantage is sought after. It is believed that strengthening relationships with existing customers enables this as it further instigates customer retention (Sheth and Parvatiyar, 1995 and Gronroos, 1994a). Involvement of this stature results in close interactive relationships with suppliers, customers and other value chain partners of the firm (Parvatiyar, Sheth and Whittington, 1992). Bejou et al (1998) relationship marketing is to develop and maintain long term customers’ satisfaction which can results in customer loyalty. Similarly to Jones and Farquhar (2003), sustainable competitive advantage can be derived from forming strong relationships with consumers. The results of strong bonds are therefore likely to increase customer retention.

Criticisms of Relationship Marketing

According to Blois (1998), the research explores that there can be five possible negative factors in relationship marketing including loss of control, indeterminateness, resource demanding, preclusion from other opportunities, and unexpected demand.

Relationship Marketing in Banking Industry 500

Customer Loyalty

Definition of Customer Loyalty

According to Yi (1990), loyalty is defined as behaviour that has been linked to customer satisfaction. This behaviour can result in continuing purchase services. Loyalty is also defined as attitude attached to a product, service, and organization (Fornier, 1994). Reicheld and Sasser (1990) explain that loyalty behaviours increased scale and scope of relationship that results from customers’ belief, and this can bring profit through revenues, reduce costs to acquire customers, and lower customer price sensitivity. Javalgi and Moberg (1997) cited by Egan (2001) — book also define loyalty onto two terms including behavioural and attitudinal terms. Loyalty in behavioural term is based on the number of purchase which can be measured by frequency of such purchase, but in attitudinal term incorporate consumer preferences and disposition towards brands to determine levels of loyalty. Tepeci (1999) concludes that loyalty is a function of both behaviour and attitude, and it contains some degree of commitment toward the quality of the brand that is a function of both positive attitudes and repetitive purchases.

Importance of Loyalty

According to Reichheld, there are many advantages of loyalty which are continuous profits, market cost reduction, revenue per-customer increases, operating cost decreases, referrals increases, price premium increase and competitive advantage. The explanations of those are s follows. Firstly, continuous profits resulting from loyalty mean the longer customers are loyal to the companies, the more profit business can get from them. Secondly, if customers are still loyal to the companies, the cost to attract new customers can be reduced or eliminated. Thirdly, the customers tend to increase their purchase if they became loyal to the companies. Fourth, when customers are familiar with the company’s products and practices, customers are less dependent on its employees and services which companies can reduce cost of services. Next, loyal customers tend recommend to their friends, so companies can have more new customers from loyal customers. Then, loyal customers are willing to pay more with existing companies because they perceive unique value rather than purchasing service from others. Finally, companies have more competitive advantage because loyal customers are less price-sensitive which can be a barrier to switch to others.

Factors Influencing Loyalty

Customer Demographic

Customer characteristics may contribute to loyalty (Morgan and Dave, 1994). Tepeci (1999) claims that customers with higher income prefer premium brands because they think those brands can contribute to their social status. Moreover, the author claims that people with higher household income are less switching because their preferences are independent from monetary considerations. Gilbert and Jackaria (2002) found that the personal characteristics of a consumer affected purchasing behavior. Moreover, Kotler and Keller (2006) states that purchasing behavior is different between males and females. Bellizzi and Bristol (2004) studied loyalty in grocery industry and have determined that demographics play an important role in understanding the extent of loyalty in the grocery industry. Mason (1991) states that those under the age of 45 or fully employed are more loyal shoppers. Studies further show that people from higher socio economic background are more loyal to their preferred brands but they are more susceptible to purchasing substitute products if their brand of choice is out of stock (Verbeke, Farris and Thurik, 1998). Some restrictions such as limited time, transport accessibility and money impact their shopping to stores that are accessible under these circumstances (East, Harris, Willson and Lomax, 1995).

However, Cunningham (1956) conducted a study on this by identifying the relationship between the personal characteristics of a consumer and the perceived level of customer loyalty. The characteristics measured were based on variables such as age, gender, occupation, etc. The results of the investigation showed no apparent correlation between personal characteristics and the level of store loyalty.

Trust

According to Little and Marandi (2003), trust is considered as an important requirement in building successful relationship. Trust definition was explained by Moorman, Deshpande, and Zaltman (1993) cited by Little and Marandi (2003)— book as a willingness to rely on an exchange partner in whom one has confidence. A betray of customers’ trust can result in customers’ dissatisfaction and defection. The belief that a party’s word or promise is reliable and the party will fulfill its obligations in an exchange relationship (Schurr and Ozane, 1985). A party’s expectations that another party desires coordination, will fulfill obligations, and will pull its weight in a relationship (Dwyer, Schurr and Oh, 1987). The belief by one party that its needs will be fulfilled in the future by actions taken by the other party (Anderson and Weitz, 1989). Crosby, Evans and Cowles (1990), state that trust is a key element of relationship marketing which has the ability to create customer loyalty. Relevant to Morgan and Hunt (1994), relationship marketing is about healthy relationship characterized by trust and that trust is an important criterion for enhancing loyalty.

Commitment

Commitment similar to trust, it is one of the most important variables in understanding and measuring the strength of marketing relationships. It is a useful construct for measuring the likelihood of customer loyalty and predicting future purhasing frequency (Ndubsisi, 2004; Gundlach, Achrol and Mentzer, 1995; Morgan and Hunt, 1994 and Dwyer et al., 1987). Commitment is a relationship that both parties will be loyal, reliable and show stability in the relationship with each other (Storbacka K., Strandvik T., and Groonroos C., 1994) cited by Egan, 2001)—book. Commitment is also considered the most common dependent variable in buyer seller relationships and can be used to analyse both individual and organizational behavior (Wilson, 1995 and Becker, 1960).

Commitment is an essential to complete a successful long-term relationship. This implies that a higher level of obligation or commitment is required in order to make a relationship success and to make it mutually satisfying and beneficial (Gundlach et al., 1995 and Morgan and Hunt, 1994). If commitment is higher among individuals within a relationship with a supplier, they will be willing to reciprocate the efforts on behalf of a firm such as through word of mouth advertising and referrals (Mowday, Steers and Porter, 1979).

Value

The perceived value that a consumer gains from a provider is considered to be an important factor in relationship marketing and thus enhances or reduces customer loyalty. The ability for the company to provide superior value to its customer has been regarded as one of the most successful competitive strategies in marketing. Value is defined as the tradeoff between the benefits gained and the sacrifices made in a market exchange. This is compared to the costs associated with achieving the benefit (Bagdonienė and Jakštaitė, 2007; Zeithaml, Bitner and Gremler, 2006; Ulaga and Eggert, 2005 and Grönroos, 2004). This proposition has become a considerable means of creating competitive advantage and the ability to sustain it is key (Grönroos, 1994a; Heskett, Jones, Loveman, Sasser, and Schlesinger, 1994; Treacy and Wiersema, 1993; Nilson, 1992; Christopher et al., 1991; McKenna, 1991 and Quinn, Doorely and Paquette, 1990).

By adding more value to the core product such as improvements to product quality or other additional supporting services, companies are able to enhance customer satisfaction. This results in strengthening of bonds among consumers and the service provider and thus customer loyalty is thereby achieved. Increasing the benefits for the customer means adding something to the core product that the customer perceives important, beneficial and of unique value. A good core product or service combined with additional services increases the benefits of the consumer which in turn has a positive effect on customer – perceived quality. Implementing a scheme that ensures this will make certain that the relationship between the consumer and the provider is enhanced over the long run and thus facilitating loyalty to the brand (Ravald and Gronroos, 1996). Heskett et al., (1994) also concluded that increased customer satisfaction enhances customer loyalty. However, the extent to which a customer feels that the service provided is of ‘value’ is a subjective concept. This is because value will represent different things to different people and therefore will be vary in changing circumstances (O’Malley, 1998).

Customers will remain loyal to a company if they perceive to gain a higher value from the given organisation when compared to its competitors. According to Wansik and Seed (2001), the main criteria for a loyalty program to be successful is the customer’s perceived value of the offering. Reicheld (1996) further stresses that value is a key background element for one’s loyalty. The perceived value has the ability to stimulate the purchase of goods and services and prevents a consumer from taking alternative deals into consideration (Pura, 2005). The loyalty program must therefore enhance the value proposition of the product or service and this in turn should be reflected in the concept of loyalty scheme success (Arantola, 2002 and Dowling and Uncles, 1997).

Loyalty Programmes

Overview of Loyalty Schemes

According to Wright and Sparks (1999), a loyalty scheme is a mechanism which has been created to identify and reward loyal customers. The research also concludes that there are a lot of activities in loyalty schemes and loyalty card is of them. Loyalty card should be provided customers with values added reason and benefits to carry the card. Loyalty programmes can change customers’ behaviours in terms of their shopping behaviours after they join the programmes because the programmes can prevent customers to switch purchasing from competitiors (Waarden, 2005). Loyalty programme is one tool to maintain customer relationship because it is a way to reward customers for their loyalty (Liu, 2007 and Berry et al., 1983).

Successful loyalty programme can build longer customer relationship because it can lengthen first year customers to be like tenth year customer. This group of customers can build business by increasing their buying, paying premium prices and bringing new customer to the business by referrals and word of mouth (Farquhar, 2003; O’Brien and Jones, 1995 cited by Jeon and Yi, 2003). Relevant to Gilbert (199), loyalty schemes have been increasing to build customer loyalty and retention for developing long term relationship which lead to increasing of sales and profits.

In the beginning of loyalty programmes, many industries such as retail, finance, and travel employ loyalty programmes and some research identify that more than half of U.S adults are enrolled in at least one loyalty program (Kivetz and Simonson, 2003 cited by Liu, 2007). According to an investigation carried out by Souvenirs, Gifts & Novelties on customer loyalty (2007), the result shows that 66 percent of respondents would use the products more often if they have loyalty card and 57 percent say that they are willing to join more than one loyalty programmes if they are offered.

However, there are some research claims that loyalty programmes will be successful in the case that customers realize the value to join the programme, and it provides multual beneficial relationship (Ferrari, 2007; Todor, 2007; Keiningham, Vavra, Aksoy and Wallard, 2005). According to Liu (2003), loyalty scheme is concluded as a forming of long term relationship. A commitment of this degree fosters a sense of goodwill towards the company and therefore deepens the relationship between the two parties.

Consumer Benefits

The benefits gained from a customer perspective from joining a loyalty program can be either tangible or intangible (Khalifa, 2004). Ravald and Grönroos (1996) conclude that there are two possible ways of enhancing customer benefits which is to either increase the benefits or to reduce of potential costs for the consumer.

Customers tend to join the programme if they can realize the benefits outweight the potential costs membership fees or cost of providing information (Bagdonienė and Jakštaitė, 2007). There are five possible elements which make customer realize the benefits to join loyalty programmes which are cash value, choice of redemption, aspiration value, relevance, and convenience (O’Malley (1998) and O’Brien and Jones (1995)). According to Dowling and Uncles (1997), joining loyalty programmes has phychological benefits for customers to participate the programmes. Joining a loyalty program provide both financial and non financial benefits (Bagdonienė and Jakštaitė, 2007). Customers receive financial benefits when they are offered discounts, gifts and free services related with the supply from the organisation (Bagdonienė and Jakštaitė, 2007). However, relationship marketing relationship marketing allows for service providers to create tailor made offerings that are specifically aimed at their target groups (Berry, 1983).

Benefits to the Organisation

Organisation also receives benefits from loyalty programmes because it can build long term relationship and the benefits of the relationship can reward organization in terms of economical benefits and strategic benefits.

Economical Benefits

According to Dowlings and Uncles (1997), there are four areas that benefits to organization which are cost of loyalty programmes have less costs than attract new customers, customers are likely to be less price sensitive, loyal customers tend to spend more, and finally it can be source of referral. The research shows that the cost of attracting new customers is 6 times of retaining the existing customers (Rosenberg & Czepiel, 1983). Moreover, the report claims that net increase of the present value of profits that results from a 5 percent increase in customer retention can vary from 25 percent to 95 percent over different industries (Oliver, 1999).

According to Reichheld and Sasser, (1990) and Beatty and Kahle, (1988), price change do not have much effect on loyal customers. In addition, research shows that brand loyalty and higher prices are positively correlated and the ability to maintain long term relationships are likely to result in higher average profits per customer (Gronroos, 2007 and Aaker, 1991). Company can have additional revenue from loyalty programmes because they motivate customers to pay and spend more in order to claims reqards (Uncles, 1994).

Strategic Benefits

Loyalty programme is a way to encourage loyal customers to try new products, increase multi pack purchases or even pay premium price for the services provided (O’Malley, 1998). When company has loyalty programmes, the information about customers will be gathered in its database, and customer can use it to persuade customers to purchase other products. It can reduce risk related to products diversification (O’Malley, 1998; Blattberg and Deighton, 1991 and Reicheld and Sasser, 1990). However, loyalty scheme has its costs, so successful programme should go along with improvements in profits or even sales volume (Stone, Woodcock, Gray, Lockhart and Field, 1997).

Drawbacks of Loyalty Schemes 500

Reference:

The UK’s Chartered Institute of Marketing. (2005), “Marketing and The 7Ps”, Available from: http://www3.cim.co.uk/MediaStore/FactFiles/Factifile7ps.pdf [Accessed 16 June 2009]

Day, George S.(1994), “The Capabilities of Market-Driven Organizations”, Journal of Marketing, Vol. 58 (october), p.37-52

Buttle, F., (1996), “Relationship Marketing: Theory & Practice”, Paul Chapman Publishing Ltd, London, P1-16.