Impact of Loyalty on Consumer Buying behaviour

Effectiveness of Loyalty Schemes on the Customers’ Buying BehaviourSubmitted by: Ganesh Adhikari ABE membership number: W07304 28 May 2013 Contents 1. INTRODUCTION, BACKGROUND AND RATIONALE ERROR! BOOKMARK NOT DEFINED. 2. THE RESEARCH QUESTION ............................................................................... 5 3. THE LITERATURE REVIEW .................................................................................. 6 3.1MEASURING LOYALTY .............................................................................. 7 3.2HOW DOES A LOYALTY CARD WORK? .................................................... 7 3.3CRITICISM ................................................................................................... 8 4. THE RESEARCH METHODOLOGY ...................................................................... 9 5. ANALYSIS AND THE FINDING ........................................................................... 11 6. CONCLUSIONS, RECOMMENDATIONS AND LIMITATIONS ............................ 15 6.1RECOMMENDATIONS ............................................................................. 15 6.2 LIMITATIONS…………………………………………………………………..15 7. REFERENCES..................................................................................................... 17 8. APPENDICES ...................................................................................................... 21 2 Declaration I declare that this assignment is my own work and I have appropriately acknowledged the work of others. This assignment is produced in accordance with the ABE regulations and guidelines. ……………………………...... 28 May 2013 3 Total word count: 3585 1. Introduction, Background and Rationale Boots is the leading pharmacy-led health and beauty retailer with more than 3300 stores across the world. Boots has its roots in the mid-19th century when John Boot, an agricultural worker, opened a small herbalist store on Goose Gate in 1849, since then the company grew significantly and now is part of Alliance Boots, an international health and beauty group. To achieve the target of being world's leading health and beauty group Boots is committed to providing excellent customer and patient care; to being the first choice for pharmacy and healthcare and to offering innovative „only at Boots‟ products, with great value. They aim to provide customers with excellent value through executing strong promotional offers and rewarding customer loyalty with Boots Advantage Card points. Boots constantly seek sustainable ways to improve their relation with the customer to gain competitive advantage in the current competitive business environment. In the consumer centric UK retail market it is often necessary for the firm like Boots to measure, manage and track their customers. So it is a major priority for a Boots to have an Advantage card which facilitates the tracking and communication with potential customers. Boots realised that there was a need for them to have electronic cards through which they can reward and give benefits to their loyal customers. Boots launch the Advantage card scheme in 1997 which currently has 17.8 million active cardholders. According to Boots website the current scheme gives four points for every pound spent by customers in store or online. The intent of this assignment is to explore how important the Boots Advantage card is for the company to maximise sales and profit. It is widely believed that if used effectively loyalty schemes help companies to improve their relationships with customers. These relationships in many cases are maintained by different rewards and benefits for the customers as well as promotional offers. Why are loyalty schemes in existence in large quantities? And the most interesting question is does this scheme really gives value to customers or is it just a way of making profit? There 4 are varying thoughts among scholars about the way these loyalty schemes are implemented in market. Therefore to find out to what extent these various loyalty cards are effective in attracting customers and retaining them more research is required. By using Boots Plc as the case company, this research is intended to analyse the impact of loyalty cards on consumer buying behaviour. 2. The Research Question What is the impact of Boots Advantage card on its customers? The Objective of this assignment is to critically analyse the effectiveness of loyalty schemes on the customer’s buying behaviour and their perception about the company. Loyalty is a powerful tool to strengthen the relationship with customers and by improving relationship with customers companies gain competitive Advantage and financial growth. There has been plenty written about loyalty in the past with some believing it is for the benefit of customer while others argue it‟s just another tool of marketing. There is no universal tool to measure the impact of loyalty into customers. This research aims to evaluate the impact of loyalty by executing a survey and reviewing the existing literature. Loyalty is very important aspect of modern business policy. As Peter Drucker (1993) said the main purpose of the business is to attract and maintain customers and it is widely believed that retaining existing customers is often cheaper than attracting new ones. A loyalty scheme is one such tool which has been used extensively by many forms in recent years to gather personalised data about customers to enhance the relationship with them. Boots Plc started its loyalty card in 1997 and it is regarded as one of the most successful schemes for customer retention. Since then it has played a significant role in increasing customer satisfaction and is regarded as one of the most successful schemes in the British retail market according to its website. Through its Advantage card, Boots has been able to gather valuable data on individual spending which helps management to make decisions, help maximise profits and strengthen 5 its relationship with the customer. This research therefore aims to understand the customers‟ perception of the loyalty card. Furthermore, the question intends to examine how Boots Advantage card affects the buying behaviour of the customer and what role it plays in shaping their attitudes. 3. The Literature Review Customer loyalty is seen to be a prime business objective. In an increasingly competitive global market, organisations are constantly seeking innovative ways to create and maintain customer loyalty. One such tool is the Loyalty card. According to the Oxford Dictionary (2013), “a loyalty card is an identity card issued by a retailer to its customers as part of a consumer incentive scheme, whereby credits are accumulated for future discounts every time a transaction is recorded. ” Loyalty programs are formal relationship marketing strategies designed to reward the customer based on the amount and frequency of their purchases (Sharp and Sharp, 1997). Dick and Basu (1994) defined Customer loyalty as the strength of the relationship between an individual‟s relative attitudes and repeat patronage. Therefore, the loyal customer is one who not only advocates a particular brand but also repeatedly buys it. According to the Customer Loyalty Research Centre (2001), “Loyalty is a market segmentation based on the strength of the customer relationship.” A loyalty program is the tool used by a company to reward the customer on their revisit. The development of database technology helps companies to identify their loyal customers and implement their business strategy of rewarding the right customers. Bolton et al. (2000) suggested one benefit of the loyalty program by showing that “members in the loyalty program tend to overlook or discount a negative evaluation of the company vis-à-vis the competition.” To be successful, a loyalty program must target a valuable customer segment and attract them with variety of rewards and benefits. Dick and Basu (1994) suggest that loyalty favours positive recommendations and greater influence among loyal customers. Of course, such findings encourage companies to build and maintain loyalty among customers. 6 Measuring loyalty It is widely agreed that the companies with higher customer loyalty usually experience faster business growth than companies with lower customer loyalty (Hayes, 2011). However, there has been always debate among academics about how loyalties can be measured. Dick and Basu (1994) proposed a two-dimensional conceptualization of loyalty by adding an attitudinal dimension to the behavioural dimension. Their idea was that the quantity and measurement are equally important as advocacy and favourable related attributes to measure loyalty. Additionally, Dowling and Uncles (1997) believes that only a small numbers of customers are 100% loyal to any one brand. Many customers are believed to keep changing their buying behaviour which could be affected by promotion, sales or discounts. According to Oliver (1999) loyalty can be measured through shopping frequency, price sensitivity, customer retention and the spending pattern of the customer over a period of time. Companies must have an effective way to measure loyalty in this dynamic business environment according to the changing environment. Customers who rated a company highly on the “likely” scale purchased more products and services are more likely to recommend the company (Quindlen, 2013). However, it is not clear in which case customers are going to rate highly. Hayes (2013) in his article believes that retention, advocacy and purchase are the general components of customer loyalty which he believes can lead to a financial growth of the company. These three factors provide a factual confirmation about how well the company is doing against its competitors. The modern electronic card is used as a critical tool which gives the real evidence of where and how many customers are spending. How does a loyalty card work? Loyalty and reward programmes are launched using plastic cards with an electronic chip on the back. These cards are given to the customer to use and when they buy from the store they are rewarded with some points. However spending of those points is different from company to company depending upon the nature, type of business and competition in the market. These cards are electronically tracked so 7 the company can find out what types of product the customer purchased and the frequency of the visit. The majority of the cards available in the market are electronic and technically advanced so customers just need to swipe or touch to get rewarded or to spend points. One of the most important advantages for the business is that it captures all the required demographic information about the customer on the application form which helps them to make decisions for the future. In most cases companies send vouchers, catalogue and information to particular customer related to their needs and wants determined earlier through the computer database which help the business to create a personalised service. Criticism There appear to be varying opinions over whether loyalty schemes and card do actually work in favour of the retailer or whether the advantage lies instead in the hands of the customer, or indeed is there a mutually beneficial relationship present. According to O‟Malley (1998) “Loyalty programmes are developed for a variety of reasons including to reward loyal customers, to generate information, to manipulate consumer behaviour, and as a defensive measure to combat a competing schem e.” According to Shabi (2003) at least 85 per cent of UK households have at least one loyalty card. However it is unclear to whom customers are loyal with as most of them have cards of various retailers. Furthermore another question often raised is about loyalty schemes is that these activities cost a huge amount of money which could be viewed as just another version of promotion. Dowling and Uncles (1997) claimed that a loyalty program itself does not play any role in changing the customer‟s perception. However, it plays a role in understanding the needs and wants of potential customers and is also an effective tool of communication. The loyalty card should work as a bridge of trust and mutual respect between business and customer. By maintaining this relationship the company will not only influence the customer to buy more but also attract others through the advocacy of existing customers (Reichheld, cited in ABE manual book 2011). On the other hand Customer will experience benefit through consistent points, discounts, offers and personalised touch from the company. Business should utilise the card in very constructive way to bring consistent benefit for the company as well as the customers through effective and cautious use of data and information. 8 4. The Research Methodology In order to analyse the impact of loyalty schemes on customers, both primary and secondary data were employed. Primary data was gathered through a structured questionnaire and an interview with the Assistant manager of the Boots store. The secondary data was gathered from various Books, Journals and reliable websites. The methodology employed focuses on the effectiveness of the Boots Advantage card on the loyalty of its customers towards the company. Therefore the research requires the development of a way to gather data: in this case a structured questionnaire as well as interview with a Boots store assistant manager was conducted with questions mainly focused on the factors that influence a customer to be loyal. To determine how these loyalty schemes play role in encouraging customers to revisit the store, it was important to find qualitative information too. Therefore this research with the involvement of both open and closed ended questions facilitates the mixed research method. According to Creswell (2009), “mixed methods research is an approach to inquiry that combines or associates both qualitative and quantitative forms.” The purpose of mixed research methods was to critically analyse the factors influencing consumers‟ behaviour. It will also ensure the validity, relevance and validity of the data collected. Often limited information is found through quantitative research therefore to determine emotion, feeling, insights and motives Qualitative questions were also included in the questionnaire. The primary data was gathered through the survey with the help of structured questionnaires in a busy Boots store in west London. It is a very busy shopping mall therefore the questionnaire was short with the purpose of maximising the number of respondents. The nature of the survey was an interview which took approximately 2 minutes and there were 11 questions mainly focused on Boots Advantage card and loyalty. On 23rd of March 2013 from 1pm to 5pm was the scheduled time for the questionnaire. As the researcher has previously worked in the store as a part time customer assistant, it was easier to gain permission in advance through a telephone call with the manager of store. The researcher carried questions with him and asked 9 them to various group i.e. teenager, adult and elderly. However 12 people did write their answers themselves with pen and hard cover made available. Furthermore an in-depth interview with the Assistant Manager of the same Boots store was carried to find out more qualitative information. The interview was scheduled after the survey in the same day after she finishes her shift at 5: 30 pm. The weekly report given by her consists of the data from Sunday 10th to Saturday 16th March 2013 was helpful in analysing further. The weekly sales and the effect of Advantage card in it were clearly showed in the numbers. No pre-determined questions had been set for this interview as the aim of the researcher was to allow the interviewee lead an unstructured discussion and enable author to gain a deeper understanding about the research topic. During the interview some new quantitative information was revealed which was again useful to differentiate the sales figures with and without the card. Similarly this statistical data gathered from her was used to compare and correlate with the findings from survey. Additionally, the qualitative data was useful in analysing the Advantage card and its effectiveness. Whilst the interview and questionnaire results were the major primary forms of data for this research, other secondary data sources have been reviewed and analysed. This has included the report from the Boots store, boots websites and various other journals and Books. The purpose of using different source of data was to establish validity and reliability of the research. Therefore the triangulation approach was applied to understand the research objective from different perspective. According to Patton (2002) triangulation involves using data from different sources and analysis of the similarities and difference in the findings. (Note: the Limitations to this Methodology is included in Section 6. Please see page 15 and 16) 10 5. Analysis and the Findings The research shows that the majority of Boots customers actively use their Boots Advantage card. The numbers of customers interviewed were 40 and surprisingly only 4 among them did not have a Boots Advantage card. Interestingly the frequent buyers are using card less compared with the occasional buyer. This might have happened because the frequent buyers made smaller purchases which they think is not worth using the card. In fact the occasional buyer purchase more and like to gain more points therefore are keen on using the card every time they shop. While spending the card points, the majority of Boots Advantage card holders spend their points more often however a small number of respondents like to spend the points on special occasions. Frequent spending of the points suggests that the consumers are well informed about the function of card. However on the other hand, recurrent use of the card might have made them more aware about their spending of points. Customer spending Number of customers 40 30 20 10 0 Using the card Buying boots spending products card points Never Occasionaly Frequently The overwhelming majority of card holders believe that the Boots Advantage card gives them value for money. It therefore appears from the survey that the Boots card has achieved a high level of penetration of the target market and the card is popular amongst customers. Additionally it is found that the more than half of the respondents have other members within the family with a Boots Advantage card. However, the number of customers using the card for online purchase is relatively 11 low. More than half of the Boots Advantage card holders prefer not to shop online. However the high participation of the elderly people in the survey could be the reason behind the reluctance in shopping online. Value for money Yes No Maybe/Not sure 6% 11% 83% The research suggests that the Boots Advantage card has a great influence on the repeat purchase behaviour of its customers. The major motivation for customers to come back is the value it gives for money and the flexibility in using the card. However according to the Assistant manager the coupon and vouchers that boots send to the customers are also the key factors influencing them to visit the store. She further added that if the card is used in conjunction with the vouchers and coupons, customer can save extra points. These benefits and rewards have created a sense of satisfaction among customers. The evident of this is the satisfaction about the current scheme among the overwhelming majority of Boots card holders compared with other similar cards in the market. Nevertheless most of the customers like to see some changes in current scheme to make it more competitive. 12 Customers View Flexible 14% Value for money 17% Other 69% There were ranges of response to the question about changes to the current Boots Advantage card scheme. Most of the respondents want the current scheme to change. They want the following changes:      Mix and match payment with cash Part payment i.e. some with cash remaining with money Should be able to exchange it for money Increase the points Should give more vouchers Influence and usage the card 35 30 25 20 15 10 5 0 Influence for repeat purchase Family Usage Online Usage Number of cuatomers Yes No More than half of the respondents write their feedback on the possible changes that need to be made to the current scheme. Nearly 95% of them would like to 13 recommend the Advantage card to their family and friends. This shows the card has significant impact on the loyalty of consumers and how the positive word of mouth can help maximise growth. Customers perception 35 Number of customers 30 25 20 15 10 5 0 Yes No Recommendation Satisfaction The weekly report obtained from the Assistant Manager of Boots store is further confirmation of the fact that the Advantage card plays a significant role in maximising the sales. Weekly report from the week Sunday 17th to Saturday 23rd March 2013 shows that 55.1% of total sales were made using the Advantage card and £8791.56 worth of points were issued to those cards in that week. The amount of money issued from the single store in a week is the indication of the level of reward given to customers. The pattern observed from the data is that the customers will come back to spend the awarded money at anytime in future. Similarly it is found that the average value of transactions with the Advantage card was £18.86 compared with £11.78 for those without card. The report clearly shows that people with the card tend to buy more than those who do not have card. 14 6. Conclusion, Recommendations and Limitations Research has clearly shown the Boots Advantage card has a significant impact on its customer. Customers with the card are buying more than the customers who do not have card. The points offered by Boots has significantly influence its customer to come back to the store. The value given by the card and flexibility in using it has made the Advantage card popular among customers. It is found through the research that the Boots Advantage card is an effective tool to improve relationships with customers. The second major finding of this assignment is that through the influence of loyalty cards customers recommend and advocate the Boots brand which helps the company to grow with no extra cost. Furthermore Boots has successfully used its card as an effective tool to gather information and communicate with potential target customers. 6.1 Recommendations The results from this study suggest that the Boots Advantage card should increase the circulation of supportive coupons and vouchers. It should also seek possible ways to implement the process where customer can pay with points as well as money in same transactions. Additionally Boots should make it easier for people to buy online. Furthermore if the company can combine Boots Advantage card points with money that could bring lasting impact in the business. This research has created more opportunity to investigate further into Boots Advantage card and customer perception about the card. This research shows that if used effectively this loyalty scheme brings huge benefit to the company. 6.2 Limitations Firstly, only a limited time was allowed to carry out the survey within the store. However, more time was needed to improve the validity by involving more people. Secondly, if the questionnaire were more segmented according to different demographic segments it would have given clearer picture of customers‟ thoughts on Advantage card. Considering the difference in the needs and wants of different age groups might reveal differences in their perception. Additionally, the research was 15 only carried out in one store therefore the findings might not represent the impact of the card on different group of customers. Furthermore, According to its website Boots has 17.8 million active cardholders however in this research the number of people interviewed was only 40. Therefore the gap between the actual customer-based population and the sample of this research might have impacted the reliability of the findings. However, the size of 30 is seen as a reasonable sample size (Saunders, Lewis and Thornhill, 2003). Furthermore, the author has worked for Boots in the past which may have caused the bias towards the company. This might have also affected the design of the questionnaire as well as the interpretation of the findings. 16 7. References JOURNALS Bennett, R. and Bove, L., 2002. Identifying the key issues for measuring loyalty. Australasian Journal of Market Research, 9(2). pp. 27-44. Dick, A. and Basu, K., 1994. 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Available at: http://www.process direct.com/documents/Gift_and_Loyalty_Card_infosheet.pdf [Accessed 15 March 2013] 20 Appendices A. Sample Customer Loyalty Questionnaire Good afternoon Sir/Madam, My name is Ganesh Adhikari. I am studying for the ABE post graduate diploma and as part of my assignment I am trying to find out what customers think about the Boots Advantage card. Please answer the following questions: 1. How often do you shop at Boots? Frequently Occasionally Never 2. Do you have Boots Advantage card? (If No, thank you very much) Yes No 3. How often you use the Boots Advantage card? Frequently Occasionally Never 4. How often do you use your points? Frequently Occasionally Never 5. Are you satisfied with the current Advantage card scheme? Yes No 6. Does any other member of your family use the Boots Advantage card? Yes No 7. Do you use Advantage card for online purchases? Yes No 8. Do you think it gives the value for money? 21 Yes No Maybe/Not sure 9. What is best about this card compared with similar other scheme? Flexible Value for money Other ………………………………………………………………………………………………….. 10. Does it influence to come back again? Yes No 11. Would you recommend the card to your family members and friends? Yes Comments: 1………………………………………………………………………………………………… 2………………………………………………………………………………………………… 3………………………………………………………………………………………………… No 22 B. Loyalty report Source: Weekly sales report, Boots White City store. Westfield London C. Tables of findings Total number of customers‟ participated in the survey was: 40 Number of respondents with Advantage card was: 36 1. Data related to the uses of the card among customers. Frequently Buying Boots products Usage of the card 24 15 Occasionally 25 Never o 10 2 23 Spending of the points 28 6 2 2. Value for money Yes No Maybe/Not sure 30 2 4 3. Customers‟ view Flexible Value for money Other 6 25 5 3. Customers response on Impact and popularity of the card Yes Influence 32 No 4 24 Usage in family Online uses 21 12 15 24 4. Responds on questions related to satisfaction and recommendation Yes Recommendation 28 Satisfaction 32 No 8 4 25