(Kumar & Shah 2004) Building and Sustaining Profitable Customer Loyalty for 21st Century

Journal of Retailing 80 (2004) 317330

Building and sustaining protable customer loyalty for the 21st century

Abstract

The conby researcimportantto profitaband sustainfor marketlogic of lo 2004 Ne

Keywords:

Contents

Introducti

Review of

Building aBuildinCultivaLinkingOperat

TierTierDesi

Strategic i

Evolution

General d

Acknowle

Reference

CorresE-mail

0022-4359/doi:10.1016V. Kumara,, Denish Shahba ING Center for Financial Services, School of Business, University of Connecticut, Storrs, CT 06269-1041, USA

b School of Business, University of Connecticut, Storrs, CT 06269-1041, USA

cept of customer loyalty is conspicuous by its ubiquity. Therefore, there is no surprise that it is one of the most widely studied areashers and one of the most widely implemented marketing initiatives by practitioners. This article draws upon past research to reviewfindings related to customer behavior and attitude in the context of customer loyalty. Further, research related to linking loyaltyility and forward looking metric such as the customer lifetime value is reviewed to propose a conceptual framework for buildinging loyalty and profitability simultaneously at individual customer level. A two-tiered rewards structure is presented as a means

ers to operationalize the framework. The conceptual framework hopes to serve as a platform to understand the evolving dominantyalty programs for building and sustaining loyalty in the twenty first century as well as induce further research in that direction.w York University. Published by Elsevier. All rights reserved.

Customer loyalty; Investment; CRM

on . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 318

customer loyalty concept . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 318

nd sustaining loyalty: a conceptual framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319g (and enhancing) behavioral loyalty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320ting attitudinal loyalty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321

loyalty to profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 322ionalizing the framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3221 rewards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3222 rewards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323gning Tier 2 rewards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 324

mplications of our framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 325

of Loyalty Programstowards a new dominant logic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 325

iscussion and future research directions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327

dgement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 328

s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329

ponding author. Tel.: +1 860 486 1086; fax: +1 860 486 8396.addresses:[email protected] (V. Kumar), [email protected] (D. Shah).

$ see front matter 2004 New York University. Published by Elsevier. All rights reserved./j.jretai.2004.10.007

318 V. Kumar, D. Shah / Journal of Retailing 80 (2004) 317330

Introduction

The concept of loyalty has been around for centuries. Inthe olden tcontrol. Stroften usedor to overthfeared Frenachieved exof the soldi

Comingerals in themarket shaloyalty hascompetitiveInvestmentif consumelocked in b

The condustries incustomer loand additio(Liebermanpetitive lanretailing inof customealty progra(Passinghapect consugrocery stofirms to laing strategythought outis a glut ofany clear dnies often sto build looutcome (R

Then, thbuild and sresearch eftivate attituously? Thelevel problmanaged a

(a) Customlevel wcustomences (dinal a

(b) There(behav2002).

(c) Most loprofita

rolling in the loyalty program (example: Safeway andLatin Pass Program discussed later in the article). This isbecause loyalty programs of most companies are linkedo spen

e objeptualty andw of that thrstandmer lois ar

rch lieptualmer loach a. Nextuch anant lss pos

aditioral me(Cun

; Massoductfrequbeha

ani, &beha

e retair are c(SOPase aof visas com

r commallet (Sion ofh is ar Value cust) mnt of s

ll of thty. Thmersprograty. Threwa

timesbehaimes, loyalty was used to maximize power andong Generals of the great ancient Roman Empirethe loyalty of their army to gain political leveragerow the emperor. Napoleon Bonaparte, the mostch commander of the early nineteenth century,traordinary results through the unrelenting loyaltyers under his command.to the civilized world of 21st century, we see Gen-form of marketers striving to defend or capture

re with the help of a loyal customer base. Customerbeen universally recognized as a valuable asset inmarkets (Srivastava, Shervani, & Fahey, 2000).

s in loyalty management is especially importantrs face low switching costs, because they are noty a contract (Shapiro & Vivian, 2000).cept of customer loyalty has pervaded several in-the past decade (Lewis, 1997). Membership toyalty initiatives provides members with rewardsnal value, making it popular among consumersn, 1999). This has led to an increasingly com-dscape with different companies within the samedustry vying with one another to woo the same setrs. Consequently, consumers often enroll in loy-ms of multiple companies within the same industrym, 1998). For example, it is commonplace to ex-mers to carry loyalty club cards from multipleres. There is also a growing tendency amongstunch a loyalty program as a defensive market-

(Dawkins & Reichheld, 1990) rather than a wellCRM initiative. This may be the reason why theresimilar sounding loyalty programs. In absence ofifferentiation or special value proposition, compa-quander valuable marketing resources attemptingyalty that may or may not result in a profitableeinartz & Kumar, 2002).e imperative question iswhat does it take toustain true loyalty? Specifically, where should

fort be invested to enhance behavioral loyalty, cul-dinal loyalty and generate profitability simultane-answers may lie in rectifying some fundamental

ems prevalent with the way customer loyalty isnd interpreted by companies. For instance:

er loyalty is managed at the aggregate customerith minimal or no differentiation across the entireer base. Thus, individual customer level differ-psychographic, demographic, behavioral, attitu-nd so on) may get ignored.is a weak correlation between customer loyaltyioral loyalty) and profitability (Reinartz & Kumar,

yalty programs are not scalable and become un-ble with increase in membership of customers en-

t

Thconc

loyalreviefeel tundecusto

Thresea

conc

custoapproworking sdomidiscu

Trhaviochase1964of prchasechaseKalwchaseIn thhaviochasepurchsharestoreOtheof Wfractwhictomeof th(RFMamou

Aloyalcustoaltyloyalmore

some

chaseding or frequency of usage and not profitability.

ective of this article is to develop an integrativeframework for building and sustaining customerprofitability simultaneously based on an extensivehe relevant literature and marketplace reality. Weis conceptual framework may serve as a basis tothe new evolving dominant logic of managingyalty in the 21st century.

ticle is organized as follows: We first reviewterature on customer loyalty. We then present aframework for building and sustaining profitableyalty. We then discuss a two-tiered reward-baseds a possible means to operationalize the frame-, we discuss strategic implications on implement-framework. Finally, we compare the emerging

ogic of customer loyalty with our framework andsible future directions for research.

Review of customer loyalty concept

nally, customer loyalty has been defined as a be-asure. These measures include proportion of pur-ningham, 1966), probability of purchase (Farley,ey, Montgomery, & Morrison, 1970), probabilityrepurchase (Lipstein, 1959; Kuehn, 1962), pur-ency (Brody & Cunningham, 1968), repeat pur-vior (Brown, 1952), purchase sequence (Kahn,

Morrison, 1986), and multiple aspects of pur-vior (Ehrenberg, 1988; DuWors & Haines, 1990).ling context, following measures of customer be-ommonly applied by practitioners share of pur-) that measure the relative share of a customers

s compared to the total number of purchases andits (SOV) that measure the number of visits to thepared to the total number of visits (Magi, 2003).only used measures in the industry include ShareOW) that is expenditure at a specific store as atotal category expenditures (Berger et al., 1998)

nalogous to share of purchase (SOP); Past Cus-e (PCV) based on the past profit contributionomer; Recency, Frequency and Monetary Valueeasure of how recently, how frequently and thepending exhibited by a customer (Hughes, 1996).ese measures help Marketers evaluate behavioralat is, loyalty of a customer as observed from thepurchase behavior. A majority of existing loy-ms follow these measures to reward behavioralat is, the more you spend with the company, therds you earn. The problem is that customers mayend up associating their loyalty (as defined by pur-vior) towards a particular rewards program (e.g.

V. Kumar, D. Shah / Journal of Retailing 80 (2004) 317330 319

AAdvantage Program) rather than the brand (e.g. AmericanAirlines) (Dowling & Uncles, 1997). A more serious prob-lem with the current loyalty programs is the presence of aweak relatiity (Reinarprofiled fotechnologyprove that tsured by th0.5 for all foempirical erefuting thloyalty (Re The cost Loyal cu Loyal cu Loyal cu

their fav

Therefo

Behaviocustome

Behaviotomer pr

Loyaltyas purchaserun the riskple. Most fcustomersthe fare pwho couldweb-site likvalue rewarlished farebe a factorairline comlines reportLufthansaalign theirtion of profiafter learniother retailing their locard compHowever, ttal inadequcustomer-sforward loocustomers(instant rewfrom accumapproachesResearch inin the pastthe firm) n

Kumar, 2000, 2003). The question is, would it be possibleto develop a customer loyalty program that can pro-activelyreward customers today for their future spending?

notherof trurdingrs are) cananyson set;compaed thain wite custottituds expre of fentaildefineognite andmpe, &ty repcustomerelykar, S

portanviors,) or hoany toveralof con

ty (e.gutz aon co

y andeanin

loyanse tossed opproas wastimesompan; HagecountDick &shoulttitudi

Build

e proptable conship between behavioral loyalty and profitabil-tz & Kumar, 2002). Reinartz and Kumar (2002)ur companies across different industrieshigh, catalog, grocery and retail finance to empiricallyhe correlation between behavioral loyalty (as mea-e respective firms) and profitability was less thanur companies. Further, Reinartz and Kumar found

vidence in support of Dowling and Uncles (1997)e four commonly believed benefits of customerichheld, 1996):s of serving loyal customers are less;stomers are less price sensitive;stomers spend more time with the company;stomers pass on positive recommendations aboutorite brands or suppliers.

re, it was clear that:

ral loyalty by itself cannot be a measure of truer loyalty.ral loyalty can be an unreliable predictor of cus-ofitability.

programs that reward customer behavior (such/visit frequency) without considering profitabilityof imminent failure. Take Airlines as an exam-

requent flyer programs (until recently) rewardedon the basis of the distance traveled and not onaid by the customer. As a result, the customer

get a cheap ticket at a fraction of the price from ae http://www.priceline.com/ would get the samed as a customer who would have paid the full pub-

. The result of this inconsistency could certainlyin the financial results of the airlines with majorpanies such as United, Delta and American Air-ing losses. It is only recently that airlines (such asairlines, effective August 1, 2004) have begun toloyalty programs on the basis of ticket fare (func-tability) and not distance (function of frequency)

ng a lesson the hard way. This trend is observed ining industries as well where marketers are focus-yalty programs on customer spending (e.g. creditanies, grocery stores, and departmental stores).his approach too suffers from some fundamen-acies. For instance, the measure of profitability orpend employed by current loyalty programs is notking (Reinartz & Kumar, 2003). In other words,

are rewarded for their actions committed todayards) or in the past (delayed rewards) accruingulated miles or points (Yi & Jeon, 2003). Thesefail to consider the future potential of a customer.dicates that customers who have performed well(in terms of their spending and profitability to

eed not perform similarly in future (Reinartz &

AtionAccotomepanycomperati(theimplisustaof th

Athat idegrewhatoftenand cerenc

Dekiloyalof aby m(Shanis imbeha2000comp

Setanceloyaland LbasedJacobcal mtruerespoexpreical amentsome

the c1994to acalty (firmsand a

Wprofiimportant consideration is regarding the defini-e loyalty. What do we mean by true loyalty?to Shoemaker and Lewis (1999), truly loyal cus-customers who feel so strongly that you (the com-best meet his or her relevant needs that your (the) competition is virtually excluded from the consid-these customers buy almost exclusively from youny). This observation by Shoemaker and Lewist true customer loyalty is difficult to build andhout including the underlying attitudinal aspectsmer that drive customer behavior.

e has been defined as a psychological tendencyessed by evaluating a particular entity with someavor or disfavor (Eagly & Chaiken, 1993). Then,s attitudinal loyalty? Attitudinal loyalty has beend in the context of brand as it captures the affective

ive aspects of brand loyalty, such as brand pref-commitment (Gremler & Brown, 1998; Mellens,

Steenkampe, 1996; Traylor, 1981). Attitudinalresents a higher-order, or long-term, commitment

er to the organization that cannot be inferredobserving customer repeat purchase behaviormith, & Rangaswamy, 2000). Attitudinal loyaltyt because it indicates propensity to display certainsuch as the likelihood of future usage (Liddy,w likely is it that customers would recommend thetheir friends or a colleagues (Reichheld, 2003).

researchers in the past have emphasized the impor-sidering both behavioral and attitudinal aspects of. Pritchard, Howard, & Havitz, 1992). Day (1969)nd Winn (1974) have proposed loyalty indexesmposites of attitudinal and behavioral measures.Chestnut (1978) have explored the psychologi-

g of loyalty. Engel and Blackwell (1982) definedlty as the preferential attitudinal and behavioralward one or more brands in a product categoryver a period of time by a consumer. A psycholog-

ch including cognitive, affective, and conative ele-analyzed by Oliver (1999). Attitudinal loyalty canlead customers to provide unprecedented value toy through positive word of mouth (Dick & Basu,l & Armstrong, 1997; Reichheld, 2003). Failurefor attitudinal loyalty could lead to spurious loy-

Basu, 1994). Therefore, to achieve true loyalty,d concurrently focus on building both behavioralnal loyalty.

ing and sustaining loyalty: a conceptualframework

ose a conceptual framework to build and sustainustomer loyalty as shown in Fig. 1. The figure


shows howcompany (opurchase bcaptured inand transathe centralconsolidateof the shopwebsite andin additiontured in thethe framew

The diffFig. 1 mayfundament

1. Buildin2. Cultivat3. LinkingFig. 1. Conceptual framework for building and sustaining pr

a customer possessing an attitude towards ther store) brand transacts with the company throughehavior. The customers attitude and behavior isthe companys central database through surveysction data, respectively. We call the database asdatabase as we assume that the database wouldany transaction data of the customer irrespective

ping channel (for example, the company may havecatalogs through which customers can purchase

to physical stores). The extent of information cap-central database would determine the efficacy of

ork (Berger, 1998).erent components of the framework as shown inbe explained through the discussion of the three

al objectives fulfilled by the framework:

g (and enhancing) behavioral loyalty;ing attitudinal loyalty;loyalty to profitability.

Building (aIn the

loyaltybioral loyaltbrand (Schalty becompurchase btangible retattitudinalneed not trit is imperattitudinalmay provid

Most loioral loyaltoperationalThat is, if ahe/she wouotable customer loyalty.

nd enhancing) behavioral loyaltyearlier section, we reviewed two forms of

ehavioral loyalty and attitudinal loyalty. Behav-y focuses on the value of the customer to theultz & Bailey, 2000). For any firm, customer loy-es more meaningful only when it translates intoehavior. Purchase behavior generates direct andurns to the firm as compared to the effects of pureloyalty (which may be commitment or trust thatanslate into actual purchase behavior). Therefore,ative for a firm to build behavioral loyalty. Pureloyalty of a customer without behavioral loyaltye only limited or no tangible returns to the firm.

yalty programs in existence today reward behav-y. However, a good majority of these programs areized at the aggregate level of customer behavior.customer spends US$ 100 in a departmental store,ld earn the same reward or points as compared to


another customer spending the same amount. There is no dif-ferentiation on the basis of purchase pattern underlying theUS$ 100 spend. For instance, did the customer spend the US$100 across different departments or product categories or didhe/she spend it all on one department or product category?Did the customer spend US$ 100 on sale items or on fullprice items or on both? Does the customer frequently buyhigh-margin products or low margin products? Answers tothe former two questions would give insight about customerspurchase behavior. Answers to the latter two questions wouldgive insight about customers profitability.

Therefore, different customers exhibiting same amount ofspending may differ substantively on the following purchasebehavior related dimensions:

Purchase behavior; Profitability to the firm (as a consequence of the purchase

behavior);Differen

programs oFig. 2 m

protabilityused for anthe specificmental storabout the dHowever, ahound Buschase (travpurchase bthe underlythe customas a decisioan exceptioCell 1) or abehavior (fin Cell 2 or4. Cell 3 recustomers.they should

such as adopting low cost marketing channels (e.g. onlinecustomer service, e-newsletter) and so on. In case they arenew customers, they may be offered an upfront incentive tospend more with the company and thereafter their perfor-mance should be closely tracked before investing further.

Cultivating attitudinal loyalty

The importance of attitudinal loyalty was discussed in theearlier section. Customer attitudes have been known to influ-ence customer behavior (Ajzen & Fishbein, 1980). However,customers exhibiting a positive attitude may not translate thatinto purchase behavior due to a relatively more favorable atti-tude toward another brand (Dick & Basu, 1994). The positiveattitude strength of a customer needs to be complemented byhigh attitude differentiation (compared to other brands) in or-der for the firm to expect sustained purchase behavior fromthe customer in the long run.

the 2su, 19

to invers in Crds the

attitumultiral loof w

etingttitudigh suods inuringr baserent says mees canmerse use

titudinthandinalces like these cannot be recognized by loyaltyperating at aggregate level of purchase behavior.aps customers varying in purchase behavior and

dimensions. The purchase behavior measurealyses in Fig. 2 may vary by industry based onproduct/service offerings. For example, a depart-e stocking multiple products may be concernedegree of cross-buying exhibited by a customer.single-product, single-price vendor such as Grey-Service would be concerned more about the pur-el) frequency of its customers. Irrespective of theehavior measure used, it is imperative to analyzeing purchase behavior against the profitability ofer. The outcome of such an analyses would serven support for marketing intervention to recognizenally strong purchase behavior (represented bycorrective action in terms of increasing purchaseor example increasing cross-buy) for customersincreasing profitability for the customers in Cell

presents low revenue potential customers or newIn case they are low revenue potential customers,be managed with minimal marketing investments

Fig. 2. Behavior analyses.

In& Babetstometowa(highhavehaviosharemark

Athroumethmeas

tomediffesurve

framcusto

Wfor atmore

Attitu 2 matrix shown in Fig. 3 (adapted from Dick94), customers in Cell 1 and Cell 2 are the bestst in cultivating attitudinal loyalty whereas cus-ell 3 represent the weakest attitude orientationbrand of a company/store. Customers in Cell 4

de strength, low attitudinal differentiation) may-brand loyalty. Companies need to augment be-yalty for these customers and try to increase theirallet (or share of purchase) through appropriateinitiatives.nal aspects of the customer are typically measuredrveys to obtain data at the customer level. Otherclude focus groups and customer feedback. Whileattitudes through survey, only a sample of cus-may be selected for a particular timeframe, and ample for another timeframe. The outcome of suchasured from different samples over different time-be used to impute values for the entire database ofby applying sophisticated statistical techniques.the word cultivating (as opposed to building)al loyalty as cultivating attitudinal loyalty takes

simple rule-of-the-thumb marketing intervention.loyalty may often result as an outcome of a long

Fig. 3. Attitude analyses.


fruitful relationship between the company and the customerover time.

Just as behavioral loyalty is important to companies forgeneratingto build ancially in nolow (Shapicultivatingcustomers wtomer profiin terms ofimportant t& Kumar, 2& Parvatiyinformationframework

Linking loy

The ultiity. Customobjective (Rin buildingtamount toforce our coNewswire,innovativeever, the pra result, asand operatgram benefiby SafewaNewswire,Americanmillion milican countrcertain timing Latin Pand generatomer.

We disction with bof profitabcustomer pcompute thconcept of2000).

Custommeasure o

from custofuture poinmost businhave receivMulhern, 1& Zeithamfact that it i

into one, all the elements of revenue, expense and customerbehavior that drive profitability. Also, it is consistent with thecustomer-centric paradigm of marketing.

LV is a more superior metric as compared to other tradi-l measures discussed earlier such as RFM, Share of Pur-(or Wallet), and Past Customer Value (PCV) (Reinartzmar, 2000). None of these measures is forward lookingo nottion o

ramewool totmentspend200 wustain

incencouldd custut coetric,

g inteventio

e latermean

lassifieffereninate base but run

enge iadingfollow

1 rewa

er 1 regic ob

rovidnismurchaern. The rewave nerovidctionustomoyalty

he tiereused bssified

um, Goprofitability, attitudinal loyalty helps companiesinvisible exit barrier for their customers, espe-

n-contractual situations where switching costs arero & Vivian, 2000). To be effective and selective inattitudinal loyalty, companies need to know theirell, beyond the customers purchase history. Cus-

le information comprising customer heterogeneitypsychographic and demographic descriptives is

o predict future customer profitability (Reinartz003) as well as for relationship marketing (Sheth

ar, 1995). Therefore, we include customer proleas an important and integral component of our

(See Fig. 1).

alty to protability

mate goal of any corporate initiative is profitabil-er loyalty is one of the means to achieve thateinartz & Kumar, 2002). Any resources invested

loyalty without focusing on profitability may tan-failure over time. Lessons from the past rein-nviction. For example, Safeways ABC Card (PR2001), introduced in 1995, was touted as the mostloyalty scheme in the U.K. grocery industry. How-ogram was not linked to customer profitability. Asmore members were added, the communication

ion cost to run the program outweighed the pro-ts. Consequently, the ABC Card was abandoned

y, UK in April, 2000. Similarly, Latin Pass (PR2001), a frequent flyer consortium of 10 Latin

airlines, ran a promotion in 1994 promising onees to any customer who could visit 10 Latin Amer-ies and utilize hotel and rental car partners within aeframe. 50 people qualified in three months, forc-ass to terminate the promotion earlier than plannedting negative costs of up to US$ 10,000 per cus-

ussed the importance of profitability in conjunc-ehavioral loyalty earlier. However, our definitionility for that discussion implied past or presentrofitability. A more sophisticated approach is toe future customer profitability by applying thecustomer lifetime value (Reinartz & Kumar,

er Lifetime Value (CLV) may be defined as thef expected value of profit to a business derivedmer relationships from the current time to somet in time (usually three years in the case ofess). In recent years, CLV and its applicationsed increasing attention (e.g. Berger & Nasr, 1998;999; Reinartz & Kumar, 2000, 2003; Rust, Lemon,l, 2004). The popularity of CLV comes from thes the only forward looking metric that incorporates

Ctionachase& Kuand dexcepour fport tinvesover-

US$(or smum

200tainewithoing mketininter

Wsibleare c

of dicrimpurchwithochallout trtiers

Tier

Tistrate

(a) Pa

ptth

(b) Pa

c

l

1 Tgramsare claPlatinfocus on profitability of the customer (with thef PCV that focuses on past profits). Therefore, inork, we propose to use CLV as a decision sup-set the maximum dollar value limit for marketingon a loyal customer without running the risk of

ing. For example, if a customer exhibits a CLV ofith high risk of attrition, then in order to retain himhis loyalty), the company can offer him a maxi-tive of US$ 200 value. Any incentive over US$lead to unprofitable lifetime duration of the re-omer. In this manner, CLV can ensure profitabilitympromising loyalty. Also, being a forward look-marketers can use the metric for pro-active mar-rventions (versus traditional reactive marketingns).

Operationalizing the framework

propose a two-tiered1 rewards strategy as a pos-s to operationalize the framework. The two tiersd on the basis of their end-objectives and the level

tiation. A key challenge here is the ability to dis-etween customers based on differences in their

ehavior, attitude, profile and profitability potentialning the risk of alienating the customers. Another

s the ability to build and sustain true loyalty with-off profitability. A detailed explanation of the twos:

rds

wards are directed towards meeting the followingjectives:

e a simple, explicit and fair baseline reward mech-to reward all customers for their present and pastses irrespective of their attitude or purchase pat-his ensures that all customers are cognizant ofards program (including new customers who mayver transacted with the company before).

e a means for the firm to capture customer trans-data (Day, 2000). Most loyalty programs loger transactions data by issuing a magnetic stripcard to the customer. The customer usually needs

d approach differs significantly from multi-tiered loyalty pro-y Airlines and few Casino companies where loyal customersbased on their total amount spent with the company (Exampleld and Silver status).


to swipe the customer loyalty card or key in the cardnumber at every transaction to be able to earn points).The presence of Tier 1 rewards would serve as an incen-tive forcompa

(c) Ensurecustommore a

earns r

article,on custtomerfor a retomerat the sissuesor freqof invecal feaspendin

Hence, gstandard unare given ring, thereb1 rewardsbuilding loterms of ewould be titly stated iwould be ealty prograbehavioral

Tier 2 rewa

Contraraimed at ingiven the pthe attitudiwards wouto cultivateor both. Unally contrshould be tworth?

As showthat is direcpool, compCustomerSis essentialThe high athey represthen querieses, BehavCLV Meas

and Behavior Analyses of a customer can help determine thespecific objective to be fulfilled by Tier 2 reward for a givencustomer. For example, if a customer sores high on all atti-

related dimensions, high on profitability dimension, andn purchase behavior dimension such as cross-buy, thenrimarythe cuext stard. A

utcomCustotomerto theustomn wou

ar valmingdoes n, the qompann? Itncy (expecs, thevestmng mety anda doof a

and reding Tmer te ceilven tomay bent.summ

ed byrds, awthoseg loyly diviscretience,

f threeniquemers2

compand t

jet, timthe asoffersurcha

ource: 9, 2004all customers to record their transactions with theny at every purchase instance.scalability of the loyalty program by rewardingers in proportion to their spending. That is, thecustomer spends with the firm, the more he/she

ewards. (Ideally, going with the philosophy of thiswe would recommend Tier 1 reward to be basedomer profitability and not spending. That is, a cus-spending US$ 100 on a high margin luxury itemtailer should earn more points than another cus-

spending the same amount on a low margin itemame retailer. However, this may pose operationalespecially for retailers that practice hi-lo pricinguent clearance sales on different items to get ridntory. Thus, for the sake of simplicity and practi-sibility, we propose Tier 1 reward to be based ong alone and not profitability).iven these three objectives, Tier 1 will represent ai-dimensional rewards strategy where customers

ewards or points on the basis of their total spend-y serving as a means for instant gratification. Tierwould be administered at an aggregate level foryalty across all customers as shown in Fig. 1. Thearning and redeeming points for Tier 1 rewardshe same for all customers and would be explic-n form of a general policy. Hence, Tier 1 rewardsasy to replicate by competition. A majority of loy-ms in existence today operate at Tier 1 that rewardloyalty at an aggregate customer base level.

rds

y to Tier 1, Tier 2 rewards are forward looking anduencing customer behavior or attitude in futureast performance of the customer (as observed onnal and behavioral dimensions). Thus, Tier 2 re-ld be special rewards given to select customersattitudinal loyalty or enhance behavioral loyalty

nlike Tier 1 rewards, here companies can inter-ol who should receive the Tier 2 reward?; whathe type of reward?; and how much should it be

n in Fig. 1, all customers qualify for Tier 1 rewardted towards Building Loyalty. From this customeranies can cull out select customers through theelectionProcess. The Customer Selection Processly a process of measuring CLV for each customer.nd medium CLV customers are then extracted asent high value customers. These customers ared on four critical parametersAttitude Analy-ior Analyses, Customer Profile Information andure as shown in Fig. 1. The outcome of Attitude

tudelow othe pvatethe n2 rewthe osure.

a cus

vantto a csectiosimil(assuwhoThenthe csectioin Napanywordon inlookiloyalvidesworthcostinclucustoset thbe giwardjudgm

Tomentrewa

onlytaininplicitthe dsis. Hple oout ucustocardonlyvatewithCardthe p

2 SMay 1objective of the Tier 2 reward would be to moti-stomer to cross-buy. Once the objective is known,ep is to determine the type and value of Tier

s shown in Fig. 1, this may be determined frome of Customer Profile Information and CLV mea-mer Profile Information provides data specific tofor designing a customized reward that is rele-customer. For example, a steep discount offereder, say Nancy to cross-buy in the sporting goodsld have lesser impact as compared to offering her

ue discount to cross-buy in the cosmetics sectionthat we know that Nancy is a 25-year old womanot currently shop from either of these sections).uestion is, what value of steep-discount shouldy offer Nancy to cross-buy from the cosmetics

is important here that the company does not investthrough Tier 2 reward) more than what the com-ts from her in the form of future business. In othermarketing action should justify a positive returnent for every customer. This is where a forwardasure like Customer Lifetime Value helps manageprofitability simultaneously. CLV measure pro-

llar value for the net present value of the futurecustomer. In doing so, it takes into account all

venue components associated with the consumerier 1 rewards that may have been awarded to the

o date. Therefore, CLV measure in a way helpsing on the dollar value of Tier 2 reward that maythe customer. Otherwise, the value of Tier 2 re-

ecome highly subjective and susceptible to humanWorse, it may lead to unprofitable transaction.

arize our discussion, Tier 2 rewards (when imple-a company) would represent highly differentiatedarded selectively at individual customer level to

customers that the company is interested in sus-alty. Tier 2 rewards (unlike Tier 1) are not ex-

ulged to the customers as they are administered aton of the company on a customer-by-customer ba-they are invisible to competition. Take the exam-exclusive credit card companies that are dishingand innovative rewards for their high spending. Stratus Rewards Visa, a new U.S. bank creditany carefully selects its customers by invitationhen treats them to rewards such as use of pri-e with celebrities or shopping at an upscale store

sistance of a personal shopper. Audi Visa (Credit)its customers the option to earn points towards

se of a new Audi (analogous to what GM Credit

Hey, Big Spenders, Business Section The Hartford Courant,.


Card is offering as well). While, American Express selec-tively chooses from its existing customers to bestow specialprivileges such as 24-hour trip advisers, exclusive shopping,or complimentary stays at 5-star hotels. Clearly, these cardsare offering rewards that are over and beyond standard Tier1 type rewards.

In our framework, Tier 1 and Tier 2 rewards are de-signed to operate in tandem, often complementing one an-other. Tier 2 rewards are designed to be bonus rewardswith very specific objectives that are not met with Tier1 rewards. For instance, Tier 2 rewards could help stimu-late customers feelings of belonging and being treated spe-cial (OBrien & Jones, 1995). They could also stimulatewhat is kning obligatprovide va2001).

One oftomer withwas recentla chance tdespite mimiles. In aairline upgthree yearsthousand ming only thstrong behprivilegesalty. Anothseems to bture revenuother consspouse oweairline.

Tier 1 anflexibility thelp achievitability simpro-activeltheir futurtions. In aa customerses algorithhand.

Designing Tier 2 rewards

So, what can Tier 2 rewards look like? How do we designthe right reward for the right customer? The answer lies inresearch. Systematic data mining of the components of ourframework can enable researchers to develop an algorithm toconfigure the most optimal and relevant Tier 2 reward for acustomer.

In recent times, consumer researchers have argued thatconsumer behavior may be best understood as goal-directedbehavior (e.g. Bandura, 1989; Cantor, 1990; Carver &Scheier, 1996). Huffman, Ratneshwar, and Mick (2000) havedeveloped an integrative model drawn from different con-

r rese

ture coordereresentg. 4.asicallferente themgoalse, to vecognncludeup thet (like, compr leveship b

ower lmer aunicathis cthat cmer aeworkl bothsly. Ford marm whr exper) leveg. 4. Banies

h custoown as the reciprocity norm: customers evok-ion towards companies who treat them well orlue (Dewulf, Odekerken-Schroder, & Iacobucci,

the authors of this paper (who has been a cus-a major domestic airline for the last 17 years)

y contacted through a personalized letter offeringo upgrade to the highest elite (Platinum) statusssing the qualification criteria by few thousandseparate and unrelated communication, the sameraded the authors spouse (airline customer for) to elite status despite falling short by a fewiles. Clearly, the airlines was selectively choos-ose customers from its database that exhibitedavioral loyalty and bestowing to them special(Tier-2 like rewards) to cultivate attitudinal loy-er notable aspect is the fact that the airlines

e systematically targeting customers based on fu-e potential from the customer and not tenure or

iderations. As of today, both the author and hisstrong attitudinal and behavioral loyalty to this

d Tier 2 operating concurrently can give immenseo any loyalty program. Most importantly, they cane attitudinal loyalty, behavioral loyalty and prof-ultaneously and give the power to marketers to

y invest in their best customers today based one potential and not just past history of transac-way, Tier 2 adopts the operational philosophy ofloyalty program on one hand and the data analy-m of a sophisticated CRM program on the other

sume

strucrankWe pin Fi

Bat difas liflevelin lifcial rand ipickeven

wisehighelationand lcustocomm

Ingramcustoframfulfilneou

rewa

the fible olowein Ficomp

Fig. 4. Balancing corporate goals witarch paradigms to propose a hierarchical goalmprising of six discrete levels of consumer goalsd by level of abstraction and endurance over time.a simplified version of customer goals as shown

y, consumers are known to have goals that co-existlevels. Higher level goals are more abstract suches and values and life projects. Examples of higherinclude desires/aspirations such as to be successfulisit exotic places around the world, to achieve so-ition, and so on. Lower level goals are less abstractshort-term objectives such as to buy a new car, toweeks grocery, to save money for some annual

a birthday or an anniversary gift), and so on. Like-anies too have a hierarchy of marketing goals withl goals representing strategic objectives such as re-uilding, sustained growth, increased profitabilityevel goals representing marketing tactics such ascquisition programs, price promotions, marketingtion and so on.ontext, our definition of a successful loyalty pro-an sustain over time is the one that can meet bothnd corporate goals concurrently. Our two-tieredcan be applied to design rewards that can strive tolevels of consumer and corporate goals simulta-r example, Tier 1 reward comprising of a tangibley meet lower level goals for both consumer andile Tier 2 reward comprising of tangible, intangi-riential reward may help meet higher (as well asl goals for both the consumer and the firm as showny adopting a customer-centric rewards strategy,can offer their customers more value and options

mer goals.


to their customers, thereby fulfilling more needs and goals ofthe customers over and above what is met by the companysproducts and services. For example, a customer shopping in adepartmental store chain may get base level rewards in formof discounts on select products and say cash-back rewards forhis/her everthe customhigh customin the formticket to theing which cwhich custosomethingtion and ancapture muaspects oftegrated tocompany todoing so, thaspirationathrough evecustomersbefore as thstore as a mordinarily a

Howeveloyalty progoals. Anysumer goalfail due to sdue to the igram that mout to be untomers mayby competindustry totent that ouproposes to

St

Most coprograms thsteadily deble to imitaitive advanprograms atomers whmajority ofgenuinely aand would has evincednext.

3 Source:Database Ma

An analysis conducted by the grocery chainSafeway-USA revealed that its top decile of customers shopped almostentirely at Safeway by habit and/or strong liking for Safewayand therefore there was minimal scope for any incrementalsales from them. In such a scenario, the company ran the risk

nnibalizing its own business if it were to subsidize itsprofitable customers through tangible rewards aimeducing incremental purchase behavior. Instead, a betterach (adopting the two tiered framework) would be to

nister a moderate level of Tier 1 rewards and reallocaterplus

al loyvisibleonsidto be

notherility oes co

ed freTier

) andvel ofy backor Tierther,nd ups thatrds dirtegrattives.ll in aluld bee orga

volu

uildinge primiscussrtanceDick &oyaltyevelor lifetiutatioented

ccordinproblem

ated loye a hobthe busive retuto use cook, Syday purchases. However, if the company profileser to be an extremely loyal customer exhibiting

er lifetime value, it may issue a Tier 2 rewardof a free travel to an exotic destination or say aSuperbowl game. The challenge lies in determin-ustomer should get a ticket to the Superbowl andmer should get a ticket to an exotic destination or

else. The answer lies in sophisticated data collec-alytical techniques that may enable companies toltiple data points comprising of different relevantthe customer. These data points may then be in-create a 360 view of the customer, enabling theget a deeper understanding of the customer. By

e company may be in a position to fulfill implicitl needs of the customer that may never be fulfilledryday cash-back or price discounts. In return, theattitudinal loyalty may get reinforced like nevere customer may see his/her shopping in groceryeans to accomplish things that he/she may neverchieve elsewhere.r, it is important that the rewards associated with agram evenly balance off corporate and consumerloyalty program that may lean heavier on con-

s front may have scalability issues and possiblyerious erosion of companys bottom-line over timencrease in reward redemption. Likewise, any pro-ay lean heavier on corporate goals front may turnpopular with its members. In such a scenario, cus-leave for a better loyalty program being offered

ition. Very few loyalty programs in the retailingday have the resilience to balance goals to the ex-r framework with the two-tiered rewards approachaccomplish.

rategic implications of our framework

mpanies max out their resources through rewardsat resemble Tier 1. This often results in a poor or a

teriorating ROI as the loyalty program is suscepti-tion from competition which reduces the compet-tage of the loyalty program. Further, such loyaltyre designed to award the maximum reward to cus-o are the highest spenders. Chances are a goodthe top-spenders may comprise of customers thatppreciate the companys products and/or servicesave continued to spend irrespective of the rewardsby the research findings of Safeway3 discussed

Arthur Hughes M., How the Safeway Club Built Loyalty,rketing Institute, http://www.dbmarketing.com.

of camostat indapproadmithe sutudinan intive clikely

Aflexibsourc

be usSincetitionthe leof antrue f

Fusell awardrewa

be ininitia

Ait shoof th

E

Bbe thAs dimpo(e.g.ing land dtomecompplem

4 Amajorintegrbecomded inattracttunityCase Bresources towards Tier 2 rewards to cultivate atti-alty amongst the top spenders, thereby setting up

exit barrier (Klemperer, 1987). This is impera-ering the fact that the top-spending customers aretargeted the most aggressively by competition.major advantage of our framework is the immensen the resource allocation front. The surplus re-

nserved from moderation of Tier 1 rewards mayely at companys discretion for Tier 2 rewards.2 rewards are invisible to customers (and compe-not obligatory, companies have the liberty to varyTier 2 rewards any time without running the risklash from the customers. The same does not holdr 1 rewards.the two-tiered framework may be used to cross--sell to the customers by sending out Tier 2 re-influence the desired behavioral outcome. Tier 2ected towards cultivating attitudinal loyalty mayed with the companys relationship management

l, to derive the maximum benefit of the framework,well integrated within the overall CRM initiatives

nization.4

tion of Loyalty Programstowards a newdominant logic

and sustaining loyalty simultaneously seems toary focus of twenty first century loyalty programs.ed earlier, past researchers have emphasized theof both attitudinal loyalty and behavioral loyaltyBasu, 1994). We reviewed the criticality of link-

to profitability (Reinartz & Kumar, 2002, 2003)pment of forward looking metrics such as the cus-me value (e.g. Berger & Nasr, 1998) that enablen of net present value of a customer. This is com-with the fact that in the last few years, information

g to Margo Georgiadis, Partner-McKinsey & Company, Awith most loyalty programs is that they are not part of an

alty strategy. At many companies, the loyalty programs canby of the marketing department and, therefore, is not embed-iness overall. When this happens, programs often fail to deliverrns because they under-leverage key assets and miss the oppor-ustomer specific data. Source: Marketing Leadership Councileptember 2001.


Table 1Evolving dominant logic for loyalty programs

No. Dimension Earlier loyalty programs: program centric Evolving loyalty programs: customer centric

1 Operationalization level Aggregate level Customer level2 Pr d Customized, based on type of usage or type of spend3 R t

4 R

5 R6 R7 Pr s,

at

8 M9 Te

a RFM: rec re of W

technologyopened upphisticated2002).

Past andin databasetowards thecustomer loalization a

As summensions ocernible ev

1. OperatiThe moof loyalcustomeor bar con are m

vidual cfor loyalevel. Snies witnals of e

2. ProgramEarlierusage omiles hspent Uever, thof accouready stample, Cmiles flticket, 1publishehe/she wstatus d

5 Source:

e tickemer sual toe profi0. Wis metementier 1 remer loems iewardewardarlier (ards ag awawardeir proints tencintion. Fcustoaphict pers

his maecifice areaogram type Standardized, based on usage or spenewarding scheme Standard and uniform aimed at repea

purchaseeward options Minimal

eward mechanism Reactiveeward type Tangibleogram Objective Build market share, increase revenue

build behavioral loyalty through repepurchase or usage

etrics used RFM, PCV, SOWachnology and analytics usage Minimalency, frequency and monetary value; PCV: past customer value; SOW: Sha

especially database-management software hasa new era in loyalty marketing by enabling so-and individualized tracking of customers (Buss,

present research findings, coupled with advancesmanagement technologies have all contributedemergence of a new dominant-logic paradigm ofyalty programs that is characterized by person-nd customization at individual customer level.marized in Table 1, changes in the following di-f customer loyalty programs seem to evince a dis-olving dominant logic:

onalization levelst fundamental level change is the managementty programs from an aggregate level to individualr-level. Loyalty cards (bearing a magnetic strip

ode), frequent flyer numbers, customer ID, and soeans through which companies can capture indi-

ustomer level data and later use that informationlty program management at individual customerubsequent examples illustrate how some compa-h advanced database technology show strong sig-arly adoption of the evolving dominant logic.type

loyalty programs rewarded a customer based onr spend. For example, if a customer flew 1000

thtoeqth10thplTtose

3. RREw

inre

thpofluca

ofgrou

Tspthe/she earned 1000 bonus miles or if a customerS$ 100 in a store, he/she earned 100 points. How-is is transforming to a more sophisticated meansnting. Few airlines (as discussed earlier) have al-

arted rewarding miles based on fare paid. For ex-ontinental Airlines accounts for only 50% of the

own towards an elite status on a discounted fare00% for economy class ticket and 150% for a fulld fare ticket.5 So, if a customer flies 1000 miles,ould earn 500, 1000 or 1500 miles towards elite

epending on how much fare the customer paid for

Continental Airlines Website (http://www.continental.com).

and con4. Reward

Loyaltytions indifferensame re

differenthroughucts/serreward

6 Source:Rewards, GatPersonalized and relevant, aimed at influencingspecific behavioral change or attitudinal gratificationMultiple (usually made possible through partners andalliances)Reactive + proactiveTangible + experientialLink loyalty to profitability, Influence behavioralloyalty, cultivate attitudinal loyalty

CLVExtensive

allet.

t. Similarly, in the context of a retail store, a cus-pending US$ 100 would earn points that may be, less than, or greater than 100 points based ont margins associated with the expenditure of US$

e are not aware of any major retailer practicinghod to date. This may be due to complexity at im-ation stage (as discussed earlier while describingwards). However, migration to accounting of cus-yalty points that is linked to a profitability metric

nevitable.ing schemes will play a critical role in the new dominant logic.and even existing) programs provide standard re-cross all customers. For example, if a store is giv-y a free travel bag for purchases of US$ 100, thatwill be applicable to all customers irrespective offile or purchase pattern. The new dominant logic

owards personalized rewards that are aimed at in-g specific behavioral change or attitudinal gratifi-or example, CVS Pharmacy6 collects three types

mer information in its ExtraCare database: demo-s, personal interests and purchase behavior to sendonalized and relevant rewards to each customer.y range from a coupon or promotion (to influencepurchase behavior) or free newsletter relevant toof interest of the customer to demonstrate carecern (aimed at cultivating attitudinal loyalty).optionsprograms are steadily increasing the reward op-an effort to service customer heterogeneity. Sincet customers may perceive different value for theward, multiple reward options can help satisfyt customer needs. This is often being achievedcoalition with multiple partners whose prod-

vices are then included in the basket of possibleoptions. This way companies do not need to limit

CVS; Parks, Liz (2001), Shopper Cards Help Retailers Offerher Data, Drug Store News.


the reward options to their own products/services. For ex-ample, TESCO,7 a leading UK grocery retailer has tied upwith several companies to offer a huge range of reward op-tions where TESCOs customers may redeem their pointstowards hotel bookings, sports events, shopping, free air-line tickets, movie rentals, fitness club and so on.

5. Reward mechanismTraditiopast andward methe framtively offuture bWyndhatomer pquest (Wactive r(for a mgolf) orfor a bu

6. RewardCompanclude intomersMany cunique aexperienthe custQuintato earnper Lauoffers ittunity tMarcusmentaryment wiobjectivnal aspethrough

7. ProgramAs thejective osimultanity andobjectivhavior das explaRewardon buildor not retraditionhavioral

7 Source: T8 Marketin9 Source: C

8. Metrics usedOne of the hallmarks of the new dominant logic is theability of the customer loyalty program to be forwardlooking and hence empower the company to be proac-tive in its marketing actions. This necessitates the newdominant logic to adopt a forward looking metric suchas the CLV and apply it in a similar way as evinced in

r two-tiered conceptual framework. CLV measure notly enables marketers to take proactive marketing deci-

ons for a customer, but also serves to track the efficacythe marketing initiative (such as a proactive reward) by

easuring the change in CLV for that customer. Wynd-m Internationals ByRequest program (mentioned ear-r) useecialLV scchnolith thchnolotheirpressmblerSA anch ofbe tachnolay a vys togh techer wicusto

e sigs seemhallenieredents ong poer.

enera

ustoms and

ource: T

mart Cary chipll custoer to ine takencompucations (usuayalty mcard.nal loyalty programs reward customers based oncurrent spending or service usage. Thus, the re-chanism is reactive and similar to Tier 1 reward ofework. However, the evolving trend is to proac-fer rewards to high-value customers to influenceehavior and purchase motivation. For example,m International, a leading hotel chain, uses cus-rofile information to surprise high-value ByRe-yndhams loyalty program) members with pro-

ewards upon arrival such as a free round of golfember who had listed his/her leisure preference asa free wall street journal newspaper in the room

siness traveler and so on.8typeies are increasingly becoming creative to in-tangible and experiential rewards for their cus-in addition to the traditional tangible rewards.ompanies have or are in the process of designingnd compelling rewards such as once-in-a-lifetimeces or lifestyle-themed rewards that appeal to

omers dreams and aspirations. For example, LaHotel chain offers its members the opportunitya white water rafting expedition. American Su-ndrya Los Angeles-based chain of laundromatss modest-income frequent customers the oppor-o take the entire family to Disneyland. Neimans InCircle program rewards range from compli-drinks to a private six-day European golf tourna-

th 15 guests traveling in a private luxury jet.9 Thee is to touch upon higher level goals and attitudi-cts of the customer that may not be ordinarily mettangible rewards.objective

discipline of loyalty marketing matures, the ob-f customer loyalty programs is shifting towardseous goals such as linking loyalty to profitabil-

cultivating attitudinal loyalty. In terms of tacticales, companies are leveraging their customer be-ata to target specific aspects of customer behaviorined earlier in the context of Tier 2 rewards anding Scheme. In contrast, earlier programs focuseding market share and increasing revenues that maysult in proportional increase in profitability. Also,al loyalty programs tend to focus on building be-loyalty alone at aggregate customer level.

ESCO: http://www.tesco.com.g Leadership Council Case Book, September 2001.olloquy Talk, Paper 6.03, July 2003.

ou

on

siofm

haliespC

9. TeWteofimgaUea

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10 S2004.

11 Smemo

store acustomthe timof theidentifidevicetify loloyaltys CLV as a primary decision support tool to offersurprise rewards to guests that score high on theore.

ogy and analytics usagee advent in database technology and informationgy, companies have the means to gain a 360 view

customer. Harrahs, a leading casino chain has anive IT infrastructure that can profile 25 millions from any of Harrahs location scattered acrossd within minutes compute lifetime value scores forthe customers with an analyses of which customerrgeted through direct mail for future business.10ogy and sophisticated analytics will continue toital role in shaping future loyalty programs. Income, customers can expect companies to usehnology gizmos such as Smart Cards, RFID andreless methods to improve the speed and accuracymer related data.11

ns of an evolving dominant logic in loyalty pro-unmistakable and present a fresh set of exciting

ging research opportunities for researchers. Ourconceptual framework imbibes all the basic in-f this new evolving paradigm and strives to be aint for researchers to understand and develop it

l discussion and future research directions

er loyalty is an important construct for all mar-defines a means to develop relationship with

he Guardian Online (http://www.guardian.co.uk), January 15,

rds are like normal plastic loyalty cards but they have a smallmounted on them instead of a magnetic stripe. The chip canmer related transactions and hence offers the flexibility to thestantly earn and redeem points in real-time without waiting forfor the reward points to be registered in the central database

ter (which may take a few hours). RFID or radio-frequencydevices provide contact less communication with point of salelly within four feet distance). The device helps track and iden-embers without the need for them to explicitly swipe their


customers and hence increased business and customer re-tention. Customer loyalty programs provide a means to com-municate to the customers that we recognize and value yourpatronageprovide a mand the comobligatorybusiness wfrom the cothe gamutthat is profithis directioissues such

How tothe databaspanies candesign rewby the custaugmentingAlso, thereintangibleexperiencerewards. Suattitudes ofenduring aloyalty. Hovalue spenticance for abrings us toloyalty andthe CLV mto outperfosuch as RFapplying Cmeasure inthat drive c

Further,wards as acated loyaloperationalflexibility tloyalty pro

In essencentric malating the pframeworkitability simoperationaldominant loit as a startifurther.

Severalstance, theparticular ctomer loyawhether a

context of their business. Fortune 1 company and top retailerin the worldWal Mart Corporation, operates successfullywithout any customer loyalty program. In contrast there may

che-product companies having a relatively smaller cus-r base (e.g. Bose12) for whom it may suffice to operate amer loyalty initiative only at Tier 2 without Tier 1. Sim-, therevirtua

it costonlyspeci

notherer 2 referednce. F2 rewae fram

relatedine theasiblemer. Tiqueson th

rs. Reentifyscena

ier 2ratingLV me of tnally,nd baresea

ramewtail corm incontee con

le edganys

d for ly andpoten

eting

e authntribuing, R

ose selting edgte: http:. The rewards associated with loyalty programseans to establish reciprocity between the customerpany. That is, rewards may generate a feeling of

response from the customer in the form of morehich in turn may lead to more rewards offeredmpany and so on. The challenge lies in managingof these sequential and cyclical events in a waytable and effective in competitive marketplace. Inn, this article seeks to addresses critical researchas:

sustain loyalty? By leveraging the information ine and the power of sophisticated analytics, com-identify individual customer-level differences toards that are relevant and perceived as high valueomers. As discussed earlier, some companies arethe reward options by partnering with other firms.is a growing propensity to offer experiential and

rewards related to special recognition or specialas opposed to standard cash-back or gift type ofch rewards touch upon the higher level goals andthe consumers, thereby creating an effect that is

nd more effective towards engendering steadfastwever, care must be taken in terms of the dollaron the rewards. Customer loyalty holds no signif-company if it does not result in profitability. Thisthe second critical research issue: How to manageprofitability simultaneously? In Table 1, we see

etric as the superior metric of the future, knownrm and replace other traditionally used metricsM, PCV, and SOW (Reinartz & Kumar, 2000). ByLV, companies can incorporate a forward lookingto their system that can integrate all componentsustomer profitability.not much research in the past has explored re-dependent variable to operationalize a sophisti-

ty program. The two-tiered rewards approach toize the conceptual framework offers tremendouso marketers to implement a highly differentiatedgram at individual customer level.ce, this article contributes towards the customer-rketing paradigm (e.g. Winer, 2001) by extrapo-rinciples of CRM to a customer level theoreticalaimed at building and sustaining loyalty and prof-ultaneously. The two-tiered rewards approach to

ize the framework may serve as a basis for thegic of emerging loyalty programs. We hope to see

ng point for researchers to enhance this framework

questions emerge from the framework. For in-suitability of a customer loyalty program for a

ompany to start with. Prior to implementing a cus-lty related initiative, companies need to researchcustomer loyalty program is really needed in the

be nitomecustoilarlywithfindatingthese

Aof Tibe ofinstaTier

Thdatatermbe fecustotechnbasedtometo ididealize Tintegand Cby on

Fiture ainviteour fent reperfostore

Wdoubcompmisedentlmostmark

Thto coBohl

12 Bits cutWebsicould be a mass merchandiser selling a productlly no differentiation (e.g. milk, eggs) who mayeffective to have a simple loyalty program oper-

at Tier 1. Future research may focus on exploringal cases.area for future research is related to the timingward. As per the framework, Tier 2 reward may

pro-actively to the customer at virtually any timeurther research related to the optimal timing ofrd so as to maximize the impact is warranted.ework talks about integration of customer levelto behavioral and attitudinal dimensions to de-

objective of Tier 2 reward. In practice, it may notfor companies to have attitudinal data for eachhis may be circumvented by applying statisticalto impute the missing data for a set of customerse available attitudinal data for another set of cus-searchers need to explore this limitation furtheralternative ways to resolve the issue. This is therio. Alternatively, companies can still operational-rewards on the basis of behavioral data alone byit with profitability, customer profile informationeasure as practiced by a major airline experiencedhe authors).the framework proposed here is conceptual in na-sed on past research and anecdotal evidence. Werchers and practitioners to test the robustness ofork by subjecting it to empirical testing in differ-ntexts. It may be interesting to see the frameworka retail service provider as well as a retail productxt.clude on the note that customer loyalty can be aed sword. If mismanaged, it can seriously hurt thebottom-line. That is, profitability may be compro-oyalty. But, if customer loyalty is managed pru-in conjunction with profitability, it could be thet weapon against competition in the companysarsenal.

Acknowledgement

ors thank the editors, for giving us an opportunityte to the literature. Special thanks are due to Timobert Leone, and Eli Jones for their comments on

ls high quality audio equipments. The company is known fore research in acoustics and sound engineering. Source: Bose//www.bose.com.


the earlier versions of this manuscript. The authors also thankRenu for copy-editing the manuscript.

Ajzen, I., & Fsocial beh

Bandura, A.ternal stancepts in pLawrence

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Building and sustaining profitable customer loyalty for the 21st centuryIntroductionReview of customer loyalty conceptBuilding and sustaining loyalty: a conceptual frameworkBuilding (and enhancing) behavioral loyaltyCultivating attitudinal loyaltyLinking loyalty to profitability

Operationalizing the frameworkTier 1 rewardsTier 2 rewardsDesigning Tier 2 rewards

Strategic implications of our frameworkEvolution of Loyalty Programs-towards a new dominant logicGeneral discussion and future research directionsAcknowledgementReferences

(Kumar & Shah 2004) Building and Sustaining Profitable Customer Loyalty for 21st Century

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