Business Research Methodology Batch 2008 - 2010

Submitted by: Anoop Kumar

2009
3/20/2009

Impact of Loyalty programs on Consumer Purchase behavior and design for an effective End Term project report loyalty card Submitted in partial fulfillment for the
course requirement of Business Research Methodology, Term III

Submitted to: P. Bhardwaj

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CONTENTS

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Declaration Acknowledgement

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Assumption used and scope of the study Executive Summary

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Introduction I. Defining Loyalty II. Loyalty programs basics III. Benefits of Loyalty Programs IV. Loyalty Program costs Current Loyalty Program landscape Literature review Research Hypothesis Methodology Findings ,Analysis and Explication Designing a Loyalty program Suggested features of a contemporary loyalty Program Scope for further research Concluding Remarks

14 16 22 22 24 30 35 37 38

Appendices Sources

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Declaration
We, the undersigned, student managers (first year) at IMT Nagpur, hereby declare that the opinions, analysis and implications contained in this report have been predominantly drawn from our research on the subject: Impact of Loyalty Programs on Consumer Purchase Behavior and design for a contemporary Loyalty Program and the accuracy of this report is subject to the authenticity of the data provided by our respondents. Other secondary sources of data, opinions and projections include magazine articles, journals, Research papers and websites. The accuracy of this data could not be verified. There may be significant variations in opinions across countries and its people, consequently, readers discretion is advised.

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Place: IMT Nagpur Date: 30th March 2009 Anoop Kumar (08HR012)

Acknowledgement
We express our sincere gratitude to Smriti Y Verma maam, our BRM course instructor, for giving us the opportunity and freedom to work on a contemporary and relevant topic. We believe that the knowledge and experience gained during the preparation of this report would be beneficial to us as future managers. We are thankful to her for giving us periodic guidance and encouragement to excel in all that we do in our careers. We would also like to thank the IMTNs Library and IT staff for providing us with all the resources needed for successful completion of this report. We extend our heartfelt gratitude towards all our friends and family who took the time and effort to fill our questionnaire, not to forget all the
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strangers who accepted our request and gave us their views regarding loyalty cards. The acknowledgement would not be complete without a vote of thanks to our critique group- Saurabh Jain, Shekhar Parashar, Shreyaa R Ranjan, Vinay Chhajer and Saurabh Bharadwaj. Their genuine and insightful comments at the right times, guided and helped us improve upon the content and feel of our questionnaire and its analysis. Thank you all!!!!

Assumptions and scope of the research

The Limitations of our study are as follows: 1. The results could be skewed because of a small sample size of 121 only. 2. Only the apparel industry is studied under this survey. 3. The scope of the research is limited to the city of Nagpur only. 4. People who have loyalty cards are assumed to be active loyalty program members.

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We have undertaken this research project to find out the impact of loyalty cards on consumer purchase behavior. Demographic and geographic constraints have limited the findings and implications of this study. The data was collected from primary sources, mainly from the consumers of Nagpur city. Most of the other respondents were contacted through online questionnaires. Although efforts were made to collect data from respondents belonging to various age groups, large numbers of respondents were students in the age group of 22 to 25; hence the results could be largely applicable to this age group.

Executive Summary
In his thought provoking book, The Loyalty Effect, author Frederick F. Reichheld writes
Loyalty is one of the great engines of business success.

Loyalty programs are initiated by businesses with two main goals. The primary goal for most loyalty programs is the acquisition of information relating to their 7| Page

customers' spending habits, while the secondary goal is to actively cultivate loyalty amongst customers to ensure they continue patronizing the business. While some companies do reverse these priorities, the above hierarchy holds true for most. Loyalty programs may offer benefits in a number of different ways. Many loyalty programs offer a sustained discount (such as 10%) for a period of time - perhaps a year, perhaps for the life of the business. Others offer a discount once certain criteria have been met for example, a 20% discount on a single purchase once a customer has spent $200 at the business. Still others offer points which may then be redeemed for products which may or may not be directly related to the business. Loyalty cards are the most common form of loyalty programs found throughout the world today. In the United States, almost seventy-five percent of consumers own at least one loyalty card, with over a third of all shoppers owning two or more. Major supermarket chains, such as Safeway and Albertsons, nearly all have loyalty cards, also known as rewards cards or benefit cards. These supermarket loyalty programs usually operate by offering a discount on certain products, usually marked throughout the store, to those who have a loyalty card. In exchange for this discount, customers are giving the store access to itemized receipts of their buying habits in the store, allowing the business to better cater to their needs and build product purchasing and discounting to help retain their most profitable customers. Loyalty programs have gained in popularity immensely in the past fifteen years, in no small part due to the development of a culture of entitlement, in which consumers feel that they deserve special treatment. Businesses have capitalized on this when designing their loyalty programs, often offering benefits that cost little, but carry with them an assumed prestige, such as access to faster-moving lines or special parking spaces. So we did this research with the aim to find that Is there any impact on the customers loyalty by these loyalty programs. There were many other questions which were to be answered such as What are the factors affecting customers loyalty, Is loyalty greater than loyalty card or vice versa, Does loyalty programs

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really works etc. We did a survey to find relationship between loyalty programs and customer loyalty. The outcomes of the research showed that there are many factors of a loyalty program which has an impact on customer loyalty. These factors include discounts, special offers, preferential treatment etc. Since customer loyalty is highly dependent on each buyers individual perception, hence these are some factors which have greater influence on wider consumer base. Acceptability of a loyalty program by the consumer population has been a major issue. Hence these factors if included in the loyalty program may increase its degree of success. Ultimately, the success of loyalty programs depends on how well the business uses the data it gathers to further refine its policies and loyalty programs. Many businesses find little profit in the use of loyalty programs, while others, such as eBay, attribute much of their financial success to a well-executed use of such programs.

INTRODUCTION
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Loyalty programs are everywhere in business. Customers interact with them multiple times almost every daywhether shopping at a grocery store, buying a cup of coffee, flying on an airline, staying at a hotel, or paying a cell phone bill. In other words, companies have become convinced that it is possible to buy customers loyalty. Do loyalty programs really work, or are these companies just wasting their money? Can a loyalty program change how people behave and get them to spend more money with that company? Can loyalty programs reduce the likelihood that customers will move their business to a competitor? This report attempts to answer these questions and takes a detailed look at the current environment for loyalty programs and the strategies businesses are using in implementing these programs. In addition, the paper presents a series of best practices that can create meaningful competitive advantages for companies that offer loyalty programs (that is, host companies), their partners, and their customers.

DEFINING LOYALTY
Before examining how loyalty programs work, it is important to define exactly what is meant by loyalty in the context of business development and retention. Several broad definitions exist, including the following:

The commitment of customers to a particular brand or company The extent to which your customers continue with key loyalty behavior when Faithful to any person or thing conceived of as deserving fidelity... characterized For this report, loyalty is defined as follows: Loyalty is a positive belief,

competitors offer more attractive prices, products, and/or services

by or showing faithfulness generated over the course of multiple interactions, in the value that a company and

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its products and/or services provide, which leads to continued interactions and purchases over time. Loyalty should not be confused with customer satisfaction. Although loyalty is built on satisfaction, organizations can have satisfaction without loyalty. Customer satisfaction is an opinion measure about company performance and how customers feel their needs were met in past interactions or by past purchases, whereas customer loyalty is a results measure that includes expectations of future behavior. For example, 75 percent of consumer wireless customers are satisfied with their current service, but 72 percent would be willing to switch to a competing provider. Thus, when designing a rewards program to build loyalty, it is critical to think about how to encourage true long-term customer loyalty and not just fleeting customer satisfaction.

LOYALTY PROGRAM BASICS

Companies typically have several goals when launching loyalty programs, all of which are focused on generating greater profits from the programs members. These goals include Improving knowledge of the customer Leveraging that knowledge to increase the sales of undersold and/or highly profitable products/services Increasing customer retention and purchase frequency

The most common type of loyalty program begins when a customer enrolls. From that point forward, the organization accurately tracks information about that member, captures the members purchases, credits points to the member based on the rules stored in a loyalty engine, categorizes the member in tiers or groups based on the members value to the organization, and enables the member to redeem points for products or services when various point levels are attained. The specific types of behavior that are tracked and rewarded are unique to each industry/company and are typically linked to the organizations profitability drivers. 11 | P a g e

BENEFITS OF LOYALTY PROGRAMS

Greater Customer Knowledge A loyalty program enables a company to gain detailed knowledge about its customer base with the customers consent; customers actually want to provide transaction and detailed profile information to ensure that they receive the full benefits of being a member of the program. In some market segmentssuch as business-to-businesscompanies already possess significant knowledge about their customers. As a result, these firms will not see customer knowledge as an important component of a loyalty programs value. However, for most business-to-consumer companies, gaining this level of intimate customer knowledge is a critical benefit of a loyalty program. In such B2C industries, loyalty programs enable companies to match their faceless customer purchase data (what was bought, when, at what store) with specific customer profile information, which can then be used to create targeted marketing promotions or redesign services around high-value customers needs.

Increased Customer Retention

A well-honed loyalty program improves customer retention rates, by increasing a members switching costs, which are costs a member would bear in order to switch to a competing provider. These costs can include decreased service and the time and resources required to build a new relationship. The higher a members switching costs, the more likely that member is to remain loyal. Most loyalty programs today do not create high enough switching costs for members. For example, airline industry frequent-flier programs all provide virtually the same product (a seat, perhaps with a few extra inches of legroom) and the same membership benefits (separate customer service number, priority boarding, priority upgrades, and bonus miles). If gold-tier members on one airline want to switch to a competitor because the competitor just added nonstop service on their favorite routes, all they have to do is fax the competitor their last frequent-flier 12 | P a g e

statement, and they will immediately be made gold members of the competitors frequent-flier program. Because the products and services these two airlines and their loyalty programs provide are virtually identical, the members can switch to a competing carrier at virtually no cost to themselves. However, if the first loyalty program offered a unique set of benefits that the competing carrier could not easily duplicate, it would be much less tempting for members to switch. Companies use their loyalty programs to create these switching costs, by Leveraging in-depth member profile and transaction data to create unique offers and product/services that a competitor, which does not know as much about the member, cannot match Providing targeted service consistently across all channels By using the personalized data provided by their loyalty program, companies can create a win-win relationship with their members that cannot easily be replicated by their competitors.

Differentiated Service and Brand Equity Most companies do not want to compete on price. Even those whose business models are initially predicated upon providing the lowest-cost service (for example, low-cost carriers such as Southwest Airlines and JetBlue Airways) often find that they must focus on providing value beyond price as they mature, their costs rise, and new upstarts beat them on price. In addition, for companies that have not traditionally competed on price but suddenly find that their products are becoming commodities, brand equity is often determined by the additional value these companies can provide beyond products 13 | P a g e

alone. Today, companies in a number of industries are in this position. Examples include airlines that have reduced their offering to basically a seat with no food or frills, big box retail stores that have depersonalized the shopping experience, and wireless firms whose networks have now reached parity.

Companies can create this additional value by moving away from generic, one product-meets-all-requirement products to targeted products and services that address their customers unique needs. A loyalty program provides this detailed information on transactions, demographics, and personal preferences required to successfully identify the unique groups among a companys customer base and then design products or services that meet those segmented members needs. For example, retailers can use their loyalty data to ensure that the products desired by high-value customers are always in stock, are easy to find and reach, and are prominently displayed. It is critical to note that customers are typically willing to pay for those products and services that do a better job of meeting their underserved needs. For example, 83 percent of hotel guests say that personalized service and attention to their needs 14 | P a g e

provides value. It is value, rather than price, that defines a good deal for these customers. Brand equity, which is achieved by providing highly valued, well differentiated products and services, is the cornerstone of loyalty. It is the additional value that customers believe a company provides relative to its competitors that encourages loyalty to the host company and makes customers potentially willing to pay more for its products and services.

Improved Profitability
All of the benefits discussed to this point lead to a loyalty programs key goal and most important metric of success: improved profitability. Greater profits are a result of Profitable customer retention Higher prices paid for unique products/services Increased average purchase size Decreased marketing and systems costs Decreased unsold expired inventory Increasing retention improves a customer significantly companys

profitability. According to Frederick Reichheld of Bain & Company, a 5 percent increase percent increase to in in 100 customer percent retention results in a 25 profitability.

There are several sources of these additional profits, which Reichheld breaks

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down into price premium, referrals, cost savings, revenue growth, and acquisition cost.

LOYALTY PROGRAM COSTS

Despite their many benefits, loyalty programs can be expensive to develop and maintain. The costs associated with loyalty programs generally fall into two categories: program costs and system costs. Program costs are nontechnical expenses related to administering the programs points, rewards, and services. System costs are those invested in the technical infrastructure to support the loyalty program. Although some costs are directly attributable to the programfor example, loyalty program management softwarethere are other costs a company would likely incur even without a loyalty program, such as marketing software and hosting a Web site. However, even these costs can be increased due to factors such as integrating the marketing software with loyalty software or providing additional loyalty-related functionality on the company Web site. A companys program costs will vary significantly, depending on the rewards that are provided. For example, airlines and hotels, which are high-fixed-cost, low variable-cost businesses, will have lower program costs. This is because airlines can allow members to use points to redeem only those seats that would otherwise go unsold. The cost to fly additional people who purchased their tickets with points is trivial. Further, although members can use airline points to purchase products with any of the airlines partners (hotels, car rental agencies, and selected retailers), people place such a high value on airline seats that nonairline flight redemptions account for only approximately 3 percent of all airline loyalty program redemptions.

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Other companies, such as retailers, in which every product redeemed for points must be paid for by the company with cash, will have higher program costs. For example, depending upon the programs rewards and generosity, a retailers loyalty program can cost between 2 percent and 10 percent of a customers total expenditures.

CURRENT LOYALTY PROGRAM LANDSCAPE

The first mileage-based loyalty program was launched by American Airlines more than 23 years ago (May 1981). Today, loyalty programs are ubiquitous. There are more than one billion people worldwide enrolled in loyalty programs, and in some industries such as airlines and hotels, loyalty programs have become one of the most critical means by which companies manage their customer relationships.

More than 125 million people worldwide are enrolled in airline loyalty programs.

About 76 percent of all U.S. grocery retailers with 50 or more stores have a loyalty program.

Almost 50 percent of the top U.K. retailers have loyalty programs. About 75 percent of Americans belong to at least one loyalty program. Shoppers stop claims more than 60% of sales from loyalty members. Subhiksha claims 80% of sales comes from loyalty members.

Loyalty programs are considered to be one of the most effective relationship marketing tool across the industry. Loyalty programs are offered not only by the MBOs but it is also offered by saloons, casinos, hypermarkets etc. MBOs (multi brand outlets) like Shoppers Stop, Westside, Pantaloons, Lifestyle, Globus, Indiabulls megastore (pyramids) in India have active loyalty programs in our research 17 | P a g e

category (apparel industry). Let us look at the benefits given by current loyalty programs:

Shoppers Stop
Benefits First citizenship First citizen reward points (on net purchase) Classic moments N 1 reward point for every purchase of Rs. 100 Silver edge 1 reward point for every purchase of Rs. 50 Golden glow 1 reward point for every purchase of Rs. 34

Extra reward points on preferred brands Associate card Regular updates Exclusive counters* Free Parking* Valet parking* Free first update Home delivery alterations Out-store offers Exclusive previewsmerchandise &sale cash

1% yes (up to 2: Rs 100) Yes Yes

2% Yes 2 free (3rd:Rs 100) Yes Exclusive golden glow cash counter Yes* -Reserved parking on a first come first serve basis Yes^ Yes Yes Yes Yes

yes (Rs. 100) Yes Yes

Yes# Yes^ of Yes Yes

Yes# Yes^ yes Yes

Validity 1 Year 1 Year 1 Year Upgradation >= Rs.10000 >= Rs.40000 >= Rs.40000 * conditions apply #Parking charges reimbursable against purchase at shoppers stop only ^ Available at select stores

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Consolidated list of the benefits offer:

Particulars Redeemable reward points Updates Exclusive cash counter Free parking Valet parking Home delivery of altered goods Shoppe rs stop Y Y Y Y Y Y Pantalo ons Y N N N N N Westsi de Y Y N N N Y Glob us Y Y Y N N Y

Exclusive sale Y Y Y Y Special occasion discounts(birthday\anniversary N N Y Y ) Exclusive billing counter during N Y N N sale N N N Y Reserved parking *Note: The benefits are offered by different retailers at different levels (i.e. silver, gold, platinum card). The main benefits that retailers are focusing today are discounts on the basis of accumulated points, the points are offered on the basis of the net shopping credited in their card at the end of a pre decided period. The discounts are not offered directly except for few occasions. This implies that they are offering deferred benefits.

LITERATURE REVIEW
Diverse Performances of Loyalty Programs Prior research has documented mixed outcomes of loyalty programs operating in the same markets. For example, Meyer-Waarden and Benavent (2006) compare a consumer panels observed purchases at seven grocery stores with Dirichlet predictions and find excessive loyalty attributable to loyalty programs for only three stores. The loyalty programs that Leenheer and colleagues (2007) study also varied on their share-of-wallet impact and profitability. A natural question from these 19 | P a g e

mixed findings is why loyalty programs exhibit diverse performance. Although this phenomenon may not be surprising, a systematic understanding of the factors contributing to diverse loyalty program performances is important because it can aid in managers assessment of whether a loyalty program is appropriate in a certain context and can help identify ways of improving the effectiveness of such programs (Bolton, Kannan, and Bramlett 2000). In studying loyalty program performance, it is important to recognize that loyalty programs do not operate as separate entities in an isolated environment. Their success depends not only on the programs themselves but also on other facilitating or inhibiting factors present in the environment. Specifically, we propose three sets of factors that represent the main market entities involved: the focal loyalty program, the consumers (i.e., target market), and rival programs and firms (i.e., competition). Figure 1 lists the factors and sample studies within each set. Of these, programrelated factors explain a firms internal strategies that can contribute to the success of a loyalty program, whereas consumer and competition factors represent things in the external environment that are equally important to loyalty program performance. We argue that it is the joint force of all these factors that determines the eventual outcome of a loyalty program. This line of thinking resembles other studies of marketing strategy, in which the initiation and outcomes of marketing strategies are affected by both the internal environment of the firm and external market and industry environments (Varadarajan and Jayachandran 1999).

Figure 1

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Competing Loyalty Programs: Impact of Market Saturation, Market Share and Category Expandability: Journal of Marketing Vol. 73 (January 2009), 93108

Before we turn to the literature, however, it is important to note that loyalty program performance can be measured in multiple ways. Nunes and Drze (2006) suggest that loyalty programs can serve different goals, such as retaining customers, increasing spending, and gaining customer insights. Therefore, each program should have its own unique set of success measures depending on its intended goals. For cross-comparison purposes, however, it is also useful to 21 | P a g e

examine some standard measures. Prior research has used consumer level outcomes, such as purchase frequency, transaction size, and share of wallet, as well as firm-level factors, such as store sales and traffic. Although all these measures are useful, because each measure may be driven by different underlying mechanisms, caution should be taken before directly comparing some of the existing studies.

Existing Research on Loyalty Program Performance

Program-related factors: Program-related factors include both program design and management. From the design perspective, a loyalty program needs three key specifications: (1) participation requirements, (2) point structure, and (3) rewards. The first element pertains to the convenience and cost of participation. Participation modes can be differentiated by voluntary versus automatic enrollment and free versus fee-based membership. Programs also differ in terms of how convenient it is for consumers to participate (OBrien and Jones 1995). For example, some programs automatically accumulate points, whereas others require more effort from consumers, such as manual code entry required by My Coke Rewards. OBrien and Jones (1995) suggest that the convenience of participation can affect the appeal of a loyalty program. So far, however, the effects of participation requirements have not received much empirical examination.

The second aspect of a loyalty program, point structure, involves how reward points are issued, what the point thresholds are for redeeming rewards, and whether a tiered structure is used. Regarding the issuing of reward points, Van Osselaer, Alba, and Manchanda (2004) find that though point threshold stays the same, the way points are issued over each purchase (ascending points versus same points per purchase) affects consumerschoices. This suggests that point issuance is not a nuisance to consumers and shouldnot be determined arbitrarily. Point threshold is another important aspect of point structure, and it has been tied in to program relevance (OBrien and Jones 1995). If the point threshold for a free reward is too high, it will be considered unobtainable for the average consumers and thus will be 22 | P a g e

dismissed as irrelevant. The final aspect of point structure involves tiered structures (e.g., gold and platinum memberships based on spending levels). Taking this tiered structure into account, Kopalle and colleagues (2007) find that program tiers create a point pressure effect on purchases by both price-conscious and service-oriented consumers, whereas the frequency reward itself creates such an effect only for price-conscious consumers. The third design element, choice and availability of rewards, has received the most extensive attention in existing studies. This design element includes reward value and cost, actual rewards offered, and their compatibility with the focal brand. For example, OBrien and Jones (1995) suggest reward ratio, variety of reward redemption options, and aspirational value of rewards as important considerations. Kivetz and Simonson (2002) test the aspirational value aspect in an experimental setting and find its effects to be moderated by effort requirement. A luxury reward is preferred when effort requirement is high, whereas a less aspirational necessity reward is preferred when effort requirement is low. A few studies have considered the congruence between rewards offered and the focal brand and find that, in general, brand-congruent rewards are more effective than incongruent rewards, though this effect is moderated by factors such as consumer involvement and promotional reactance (Kivetz 2005; Roehm, Pullins, and Roehm 2002; Yi and Jeon 2003). Focusing more from a firm strategy perspective, Kim, Shi, and Srinivasan (2001) use game theory to identify the optimal conditions for offering cash versus free products as rewards. They find that the former is better if there are few pricesensitive heavy buyers, whereas the latter is more effective when the heavy buyer group is large or not very price sensitive.

In addition to program design factors, research has shown the impact of program management on the success of a loyalty program. For example, from a survey of 180 retailers, Leenheer and Bijmolt (2008) conclude that the success of a loyalty program is affected by the effort spent on capturing and analyzing consumer intelligence derived from the program. It may be surmised that the success of a 23 | P a g e

loyalty program also depends on organizational support of the program and the amount of resources dedicated to program management, but these organizational factors have not been subject to empirical testing. Consumer characteristics: Although proper program design and management are critical, it is consumers reactions to a loyalty program that ultimately determine program success. Fewer studies have examined the impact of consumer characteristics on loyalty program effects. Consumer characteristics can be crudely classified into firm specific attitudinal and behavioral factors versus traits and characteristics that carry across firms. In the former category, Lal and Bell (2003) and Liu (2007) examine the moderating effect of consumers usage levels. Contrary to traditional wisdom of loyalty programs as a defense mechanism mainly for heavy buyers, these studies find the biggest increase in spending and purchase frequency among light buyers. This is attributed to loyalty programs ability to eliminate cherry-picking (Lal and Bell 2003) and to encourage cross-selling (Liu 2007). Within this category of studies, Kivetz and Simonson (2003) also examine the effect of perceived effort advantage. Rather than treating point threshold as a program design factor, as we discussed previously, Kivetz and Simonson find that it is not the effort required per se but the perceived effort advantage a consumer has over other consumers that affects his or her likelihood of joining a program. This perceived effort advantage again can be driven by consumers usage levels. However, note that this effort advantage effect may drive program joining decisions but may not carry over to what consumers do after they have joined a program. Additional studies have segmented consumers according to their generic traits or characteristics, such as socio-demographics (Leenheer et al. 2007), shopping orientation (Mgi 2003), future orientation (Kopalle and Neslin 2003), variety seeking (Zhang, Krishna, and Dhar 2000), and price sensitivity (Kim, Shi, and Srinivasan 2001; Kopalle et al. 2007). However, few of these factors have received empirical support. This may be attributed to the over generalized nature of these 24 | P a g e

variables. So far, two factors, future orientation and price sensitivity, have received some support. Because loyalty programs reward consumers current behavior at some point in the future, it is not surprising that such programs are found to be more appealing to consumers who do not heavily discount future benefits (Kopalle and Neslin 2003). Corroborating this view, Lewis (2004) finds that treating consumers as dynamically oriented better explains their purchase decisions in the presence of a loyalty program. The second factor, price sensitivity, has been found to moderate consumers reactions to program design elements (Kopalle et al. 2007). Overall, existing studies of consumer-related factors appear to suggest that firmspecific behavior and attitudes are better predictors of consumer reaction to a loyalty program. However, further research is needed to identify and test other consumer traits before a final conclusion can be drawn. We also note that though consumer-related factors have been mainly used to explain differential responses to the same loyalty program, they can also contribute to the diverse performances across programs by considering the varying composition of program members. Examples of this approach can be found in two game-theoretic models related to loyalty programs (Kim, Shi, and Srinivasan 2001; Zhang, Krishna, and Dhar 2000), in which individual characteristics, such as variety seeking and price sensitivity, are translated into market characteristics. Competition-related factors. One problem with considering only program- and consumer-related factors is that it puts the program-offering firm and consumers in an isolated setting. In reality, however, most loyalty programs face competition from rival programs that offer similar benefits, and enrollment in multiple programs is common. In the retail industry, for example, consumers hold an average of three loyalty program cards (Meyer-Waarden 2007). This has led to the suggestion that firms need to take into account cardholders card portfolios when evaluating the effectiveness of loyalty programs (Mgi 2003, p. 104). However, research on this type of influence is the 25 | P a g e

scarcest, as is apparent in the shortest list of published studies in this set shown in Figure 1. A majority of existing studies have examined a single loyalty program in isolation. Among the few studies that have considered simultaneously the performances of multiple loyalty programs (e.g., Leenheer et al. 2007; MeyerWaarden and Benavent 2006), most treat the programs as parallel strategies and do not explain the inter- action among those programs.

Only four published studies have considered loyalty programs in a competitive setting. Two of these studies (Mgi 2003; Meyer-Waarden 2007) find that consumers holding loyalty program cards from competing chains reduces the share of wallet and customer lifetime for the focal chain. However, they do not consider the direct effect of competition on program performance, nor do they identify the reasons for competitive influence. Two earlier studies offer more specific examination of loyalty program competition and study the effect of firm-level factors. Nako (1992) analyzes travel records from three firms in the Philadelphia and Baltimore metropolitan areas. The results show that the value of a frequent-flier program increases with the airlines share in a travelers main airport, suggesting the influence of a firms market position on the success of its loyalty program. Along similar lines, Kopalle and Neslin (2003) model loyalty program competition and demonstrate that free rewards offered by firms charging higher prices are valued more by consumers. However, this proposition is not empirically tested and is likely to be constrained by model assumptions about market conditions and consumer behavior.

Summary With limited research on loyalty programs, it is still unclear to what extent loyalty programs are effective and, more important, what induces the success and failure of different programs. Although some studies have examined the moderating effects of program and consumer characteristics, existing research tends to put a loyalty program in a vacuum that is void of impact from rival firms and programs. 26 | P a g e

This omission of competitive influence is undesirable; prior research has shown that myopic profit maximization without considering competition can lead to suboptimal firm decisions (e.g., Carpenter et al. 1988). It also counters the marketplace reality of loyalty program proliferation within many industries. Questions still remain as to whether competitive loyalty programs in such industries really cancel one anothers effects out, creating a zero-sum game, or whether some firms may enjoy asymmetric advantages with their loyalty programs due to their competitive positioning. Answers to these questions are critical to a complete understanding of loyalty programs. Incorporating competition will also offer more useful decision support to loyalty program managers and to firms that are pondering the establishment of a new loyalty program in the presence of existing rival programs.

RESEARCH HYPOTHESIS
The main objective of this study was to study the impact of loyalty program on the consumer purchase behavior and thus also to bring out the ways consumers perceive a loyalty program to be. The study is also conducted to determine the factors which consumers appreciate in a loyalty program the most and which they dont. Thus according to the findings of the study the research aims to design a contemporary loyalty program. The following hypotheses are developed to test the study: 1. Store purchase frequency is higher for loyalty program members vis-a-vis nonloyalty program members. 2. Loyalty precedes loyalty cards. 3. Discount is significant features for a loyalty program 4. Significance of loyalty card on consumer purchase behavior

METHODOLOGY
A sample design is a definite plan for obtaining a sample from a given population. It refers to the technique or the procedure the researcher would adopt in selecting items from the sample. Since the population size is infinite sample size for the study 27 | P a g e

was taken as 121 respondents. The research includes data collection only from primary sources. All the respondents were 16 years or older. The respondents included both loyalty program members as well as non members. Non members were also included so as to design a contemporary loyalty card which would suit the needs of the potential customers. A mall intercept and web based approach was selected for the purpose of data collection. The sampling method thus used was convenient non probability sampling technique. A questionnaire method approach was adopted. THE QUESTIONNAIRE The questionnaire was divided into two parts. In the first section, demographic items were included to obtain information regarding respondents age, gender, education and income. These demographic variables helped to explain different consumption behaviors of different types of consumers. In the second section, items were asked regarding the concept of store loyalty cards and other factors that may have an effect on customers store loyalty. The respondents were chosen from a wide range of income groups and ages. The following parameters were kept in mind while formulating the questions: 1. Prepared with laymans level of understanding. 2. Short and crisp questions. 3. Respondent friendly layout. A copy of the questionnaire is attached in the appendix

STATISTICAL TOOLS
When all of the 121 surveys were compiled, the data was coded and entered in EXCEL. The coded data was sorted and analyzed by SPSS program. Chi-square analysis, Cross tabbing and descriptive analysis was used to examine the loyalty card use and store loyalty variables.

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FINDINGS, ANALYSIS AND IMPLICATIONS We test our different hypothesis with three different research designs

H1: Store purchase frequency was higher for loyalty program members than for non members. For testing of this hypothesis store purchase frequency was measured by two variables: the frequency of their visit to the shop and the amount of money they spent when they visit such shops. All the respondents whether a loyalty program member or non member were considered for this study. As per the findings of this research we saw that among 121 respondents 109 were valid data and among these distributions of respondents were as follows: All the respondents who had more than one loyalty card were classified as members and the ones who had zero cards were non members.

For the frequency of visit we could observe the following: 29 | P a g e

All the respondents who shopped for once in a week, once in a month or twice in a month were classified as high frequency shoppers while the ones who shopped for once every two months or once every 6 months were classified as low frequent shoppers. For the amount spent each visit the following data was collected:

The amount of less than 500 and within 500-2000 was classified under low frequency and above 2000 was high frequency. To test the relationship between these variables SPSS was used and cross tabbing was conducted on the variables. The cross tabbing results were further confirmed by Chi Square test. The contingency table which was generated with the help of SPSS showed that the most frequent visitors were the loyalty program members and there is a significant relationship between these two variables. The Pearson Chi Square coefficient value is 0.003 which was less than 0.05 which proves that the variables are significantly related. The similar test was conducted for amount spent each visit and membership. The Pearson Chi Square coefficient value is 0.146 which was more than 0.05 which proves that the variables are not significantly related. H2: Loyalty precedes loyalty cards. Through this hypothesis we wanted to test what is more important for a consumer the loyalty for a store or loyalty card of a store. If a consumer is loyal towards a particular store but if he is offered a loyalty card of a different store so will he change his shopping preference or continue being loyal to the same store. 30 | P a g e

Response for the question like Will you shop in your favorite store even if you dont have loyalty card of the same and Do you tend to increase your purchase from a particular store even if you dont have a loyalty card of the same were tabulated in excel. Cross tabbing was done on the two variables and no significant relationship was found between the two variables.

H3: Discounts are significant features for a loyalty program. One of the major aims of our study was to design an ideal loyalty card program. For this we tested various features like discounts, special offers, preferential treatment etc., in order to measure their relative impact on consumers. We did this mainly so that we could find out which feature was most important for the consumers and which feature would appeal to them most while purchasing a loyalty card. Accordingly, that feature could be included in our ideal loyalty card program which could be of use to retailers. For this we asked the consumers a question like You would want a loyalty card of a particular store because they offer: 1. Discounts 2. Special Offers 3. Updates (New arrivals etc.) 4. Preferential treatment 5. Status Symbol

We asked them to rate the above features on a Likert scale with strongly agree being coded as 5, agree being coded as 4, neutral being coded as 3, disagree being 2 and strongly disagree being 1. The results we obtained are shown in the following bar graph.

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Using the above codes, we also calculated the means of all the features, which were as follows:

Feature Mean

Discounts 4.1100

Special offer 4,0092

Updates 3.4771

Preferential Treatment 3.6422

Status Symbol 2.8807

From the above table it is clear that discounts have a highest mean which shows that it is the most preferred feature moreover that can also be pictorially seen in the bar chart. Thus we concluded that discounts are the most important features of a loyalty card program. H4: Significance of loyalty card on consumer purchase behavior Our last hypothesis was to find out if loyalty cards had any significant impact on consumer purchase behavior. For this we asked them their opinion on various questions, the responses to which are shown below:

Questions were as follows: 1. I would shop in any store that suits me regardless of whether they have a loyalty scheme 2. I shop wherever I get better discounts 3. I usually get better discounts from in-store promotions than loyalty schemes 4. I think a loyalty scheme is worthwhile 5. I have saved substantially due to loyalty program 6. I have loyalty cards which I don't use 7. It takes too long to get anything worthwhile 32 | P a g e

8. I am nervous about how the organization uses the personal information I give 9. I buy products if they earn me extra points 10.I spend less in stores where I dont have a card 11.I wouldnt change where I shop for the sake of a loyalty scheme 12.I buy products due to promotions surrounding them

From the above the implications drawn were as follows: Consumers do not tend to increase their purchase from a particular store just because they have loyalty card of the same. Consumers shop in stores which provide better discounts, regardless of whether they have loyalty card of the same

DESIGNING A LOYALTY PROGRAM

The popularity of loyalty programs has led numerous companies to offer loyalty programs that simply mimic the program offered by the leader in their industry. Rather than providing a competitive advantage, this strategy simply creates a competitive stalemate while driving up expenses due to the cost of maintaining the loyalty program. The key point is that a company must design its loyalty program to create competitive advantage today and in the future. In addition, when choosing a system to support a loyalty program it is important to select a system that provides the flexibility to cost-effectively make changes as required. What follows is a high-level, step-by-step process for designing a successful loyalty program. This ensures that an organizations technology investments will be made to support business goals, minimizing the chance that technology limitations will later dictate business strategy. Step 1: Identify desired business outcomes

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A loyalty programs goal is obvious to improve profitability. However, companies generally need to also establish additional, more specific goals for their loyalty program, such as the following: Increase sales revenue Increase the rate of inventory turnover Improve the service provided to the most valuable members Identify the least valuable members and then either improve their profitability or implement a strategy for removing them from the customer base Clearly articulating specific goals helps ensure that the actions and mind-sets of everyone who contributes ideas to the program are aligned.

Step 2: Identify Key Profitability Drivers At heart, loyalty programs reward changes in customer behaviour. The specific actions targeted should be the ones that are most likely to increase a customers profitability, which will vary by both industry and company. It is critical to identify not only the profitability drivers but also the underlying factors that drive peoples behaviour as it relates to each of these drivers. For example, what criteria do consumers use when deciding whether to purchase addon features? These are the actions that could be built in to the loyalty programs incentive structure to encourage more- profitable behaviour. Note that a change in strategy often requires re-examining profitability levers. For example, if a company decides to target a new customer segment, this group will likely have at least some profitability drivers that are different from those of the current customer base. The loyalty programs incentives would need to be adapted to meet these changing requirements.

Step 3: Design an Integrated Marketing Strategy 34 | P a g e

Developing and implementing an effective loyalty marketing strategy is critical to generating a positive return from a loyalty program, because marketing promotions will be the primary lever used to get members to change their behaviour and purchase undersold and/or more profitable products or to use more-cost-effective customer service and purchasing channels. Companies generally have two types of marketing programs: Proactivetargeted at improving customer profitability Reactiveproviding incentives for customers to purchase undersold products Proactive Campaigns The goal of a proactive marketing strategy is to increase members long-term profitability by executing a series of actions that shift a member from a less profitable to a more profitable customer segment. When creating the campaigns to implement this strategy, many companies use data mining capabilities to identify what types of promotions (specifically, which rewards) are most likely to cause the desired changes in customer behaviour. Cutting-edge companies not only define member segments and model how those segments are expected to respond to an individual promotion or series of promotions but they also manage the changes in Ensuring Customer Loyalty: Designing Next-Generation Loyalty Program. These campaigns are based on how customers respond to a series of promotions, where the goal of each promotion is to move members through a series of tiers so that they are eventually raised from a lower-profitability to a higher-profitability tier. The best-performing companies recognize that a members loyalty is based not on a single transaction but on a sequence of transactions with a company and that all of these interactions need to be managed as a cohesive whole. When creating a proactive marketing strategy, leading firms optimize their marketing spending by defining which promotions to offer to different groups, based on their companys budget, risk tolerance, and desired payoff. This optimization should be done across the entire loyalty marketing portfolio, not just for an individual promotion.

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A proactive loyalty marketing strategy should identify and target members whose value to the business appears to be dropping or who are likely to churn. Rather than waiting for a member to leave and then instituting a win-back campaign, the characteristics of customers who are likely to defect need to be identified. A series of customer retention marketing actions can then be done to keep valued customers from leaving. For example, marketing campaigns can be timed according to the most recent transactions made by customers rather than to the historical time between transactions (for instance, offers can be e-mailed to people who have not made a purchase in 1.5 times their average time lag). These actions are generally less costly and more effective than trying to win back customers once they have left. Reactive Campaigns Reactive campaigns are focused on improving short-term profitability by getting members to purchase undersold products. In general, a reactive campaign will involve several stages: 1. Determining the target (product/service/market segment) for a promotion 2. Identifying customers (individually via segmentation or by using predefined segments) that may be interested in a specific product 3. Identifying which promotion will most cost-effectively change the targeted customers behaviour and how this promotion should be presented to these members to maximize their response rate 4. Creating the loyalty promotion. (A loyalty promotion tells the loyalty engine how many points to credit or debit a member for purchasing or redeeming a specified item.) 5. Creating the overall marketing campaign. 6. Creating the marketing offers. 7. Executing the campaign

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8. Analyzing promotion, campaign, and offer effectiveness and identifying lessons learned for improving future promotions and campaigns.

Step 4: Design the Incentive Structure Loyalty programs are designed to change members behaviour by providing a web of overlapping incentive structures. A company must design and manage each structure, as well as the relationship between the different incentives, in order to ensure that members are motivated to behave in the desired manner. Popular incentive areas include Bonuses and rewards Purchase accrual rules Non-purchase accrual rules Redemption rules Promotions Product offering

Bonuses and rewards: Companies encourage changes in members behavior by offering customers rewards or bonuses for behaving in a desired manner. There are accrual rewards (where the member receives something for making a purchase or completing an action), redemption awards (where the member receives discounts or even free products or services, generally by redeeming points or using a voucher), and service awards (where the member receives specialized services). For a loyalty program to be successful, these rewards must be aligned to encourage members to take actions that make them increasingly valuable to the host company. When choosing rewards, companies should optimize the use of accrual,

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redemption, and prioritized service awards, based on what members value and the companys cost structure. Purchase Accrual Rules Members typically earn points by purchasing products from the host company. The rules that govern how many points a member earns are called purchase accrual rules. Loyalty systems need to meet two requirements to support purchase accrual rules: Point allocation rules should be flexible enough to map to profitability drivers. The system must allow a company to easily change the point accrual rules for purchases. Non-purchase Accrual Rules In addition to providing incentives for specific purchases, companies want to encourage members to take valuable non-purchase actions such as referring new members, updating their profiles online, or using the companys Web site rather than its call center to process redemptions. The loyalty system should allow the host company maximum flexibility in designing which non-purchase actions it wants to encourage. Redemption Rules Once members have earned their points or vouchers, the loyalty program must provide attractive ways for these rewards to be used. This is governed by redemption rules. The key to a successful redemption policy is that the offering must match the profitability of the actions that were taken to earn the points or vouchers. Most companies try to do this by giving away fewer points for less profitable purchases and more points for more profitable purchases. A well-designed loyalty program should include a method to ensure that the most-profitable members receive the appropriate level of service when redeeming rewards. The redemption and accrual rules should focus on key 38 | P a g e

profitability drivers and be flexible enough to allow for continual adjustments and refinements. Further, a balance must be struck between short- and long-term rewards. Promotions Companies use promotions to provide added incentives for members who perform a specific action within a specified time frame. A promotion generally has a set of requirements and one or more rewards for members meeting those requirements, such as bonus points or free vouchers. Loyalty programs of all types feature some combination of the following promotions: Selected members only selected members (for example, only silver-tier members, people in a specified customer segment, or members on a list that was created just for this promotion) will receive the bonus reward. Flat bonus the member receives a fixed reward (such as 1,000 bonus points or a free upgrade voucher). Percentage bonus the bonus is based on the base accrual points the member earned for purchasing the product. For example, if a hotel is offering Product Offering Rather than simply using a loyalty program to encourage members to buy what is already being produced, the most-successful loyalty programs also use the data collected to redesign the actual products and services the company provides. These firms identify which products and features are desired by different customer segments and then redesign the products to meet those needs or, if the products are already available, to ensure that they are always in stock. Redesigning a product/service offering can yield a significant competitive advantage, because competitors will not have access to the same data and, thus, will not be able to adapt their own products.

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Step 5: Final product The loyalty program based on this features should be designed considering the companies goal and long term strategy. The product should be designed in such a way that it is flexible enough to adapt the changing customer preferences. The current requirements for designing a loyalty loyalty program. program based on our research findings will be discussed in the next section suggested features of a contemporary

SUGGESTED FEATURES OF A CONTEMPERARY LOYALTY PROGRAM

As per the research conducted we listed the current offerings and tried to identify what customers actually want vis--vis current schemes. The following are the features or services that our respondents indicated as the most preferred ones. Preferred features for loyalty card Discounts Special offers Preferential treatment Updates (New arrival) Preferred features for shopping Product Ambience Discounts & Services Convenience Location & Price The above listed features clearly indicates that Indian consumer is growing more matured, they are demanding non-material benefits more compared to material benefits demanded previously. The consumer today is demanding higher level of service than products. Retailers need to focus on delivering (selling) experience along with products. They should make the card holders feel more important.

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The most important result that came out from our study was that customers do demand discounts but they want discounts that are redeemable easily and at their ease. Thus the program should be designed such that it gives customer benefits that are redeemable easily and quickly. Our study also indicated that customers find it difficult to carry different loyalty cards every time they go for shopping. Thus it is essential to offer more convenient way to use the loyalty card. We have indicated few options that can be adopted, such as: One card for all: I-mint is a very good example which is offering this solution in the light of one card for all. They partner with various organizations and use same card for all the transactions undertaken by all the partners. This strategy can be applied and a card for the apparel industry can be designed which would ease the burden of carrying many cards at the same time. Code based usage: The second option is to remove the card system and allot the customers special codes. This would just require the customers to remember the code every time they go for shopping. Integrate it with the credit card: The best possible option is to integrate the loyalty card with the credit card. Customers always carry their respective credit card for shopping this will ensure that customer is not required to make any additional effort to avail the benefits of a loyalty program and at the same time retailers can design a special credit card integrated with their marketing strategy. This is a win-win situation for customers, retailers and also bankers.

SCOPE FOR FUTURE RESEARCH:

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Todays successful businesses distinguish themselves from their competition by focusing on customer retention, incremental spending and extraordinary service. In an increasingly competitive business climate it is critical to understand who is buying your products and services so that CRM Programs can be tailored to keep your best and most profitable customers coming back for more.

The limitation of this research was that it was strictly limited to apparel industry. There have been visible findings in this research which can be extended to the other business sectors which pursue loyalty program technique to build and maintain their customer base. There are various sectors other than apparels which undertake loyalty schemes: Airlines Industry Petroleum industry Commercial Banks Electronic Industry IT industry

Also some aspects influencing customer loyalty like dependency of loyalty on the culture of the country, in-depth study of the demand for special treatments by the customers holding loyalty card etc. are left untouched in this research due to time constraints which can further be explored.

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CONCLUDING REMARKS:
Faced with intense price competition, retailers are challenged to ensure that their programs offer both value and other customer benefits. Some industry executives believe retailers should focus less on promoting high-volume products and more on understanding what their best customers want even if they want slow-moving products that the retailer might be tempted to stop carrying. The more targeted approach may result in less use of mass-market advertising. Retailers are exploring how to leverage technology such as predictive software to uncover subtle buying patterns and identify customers who may be likely to buy in categories they have never bought in before. Many are making greater use of the Internet to promote their loyalty program through accessible and informative Web sites and targeted e-mail. Even while harnessing technology, growing numbers of retailers are stepping up efforts to reconnect with consumers and to meet their changing needs on a more local level. In the past, store owners knew their shoppers well and could easily anticipate needs. Today, we use computers and data to help do the same. These include using loyalty programs to support community initiatives, encouraging staff to get to know customers personally, and otherwise making cardholders feel that the store values their business and respects their right to limit access to their personal information.

As customer loyalty being one of the most important factors for the business today, loyalty programs, if well designed and implemented, can help the business gain competitive edge and can hence increase profitability.

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Appendix 1 Questionnaire: Personal Information

Name: ..................................................................................................... ....................... 1. Gender Male Female

2. Age 16-22 23-29 30-36 More than 37

3. What is your profession? Stud ents Self employe d Salaried Profess ional Others (Please specify)

4. Familys monthly income? <Rs.8,000 Rs.800015,000 Rs.16,00025,000 >Rs.25,000

Loyalty card question:

1. Where do you shop frequently? Shoppers Stop

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Pantaloons Globus Lifestyle Westside India Bulls Mega Store (Pyramids) Others: .........................................................................................................

1.Prioritize those features that make you revisit the above selected store? Features Price Service Loyalty cards Ambience Convenienc e After sales service Discounts Product Location 1 2 3 4 5

Others (please mention):

3. How frequently do you shop from the above stores? Ones in a week Twice in month Once in a month Once every 2 months Once every 6 months Others (please specify) : ....................................................................................................

4. What is the average amount you spend each time you go for shopping? 45 | P a g e

< Rs.500 Rs.500-2000 Rs.2000-5000 >Rs.5000

5. Are you aware about the loyalty programmes? Yes No Interested in knowing

6. How many loyalty cards do you have? 1 2-4 >4 none

7. If you have chosen none above, could you share your opinion about loyalty cards? Never heard about it Waste of time Waste of money Excess of personal information sharing Others (Please Specify): ....................................................................................................

8. Will you shop in your favourite store even if you dont have loyalty card of the same? Yes No Cant say

9. Do you tend to increase your purchase from a particular store if you have loyalty card of the same? Yes No Cant say

10. What is your opinion about retailers loyalty programme? Beneficial in terms of offers, gifts etc. Quick/easy access to promotional information Waste of time

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Excess Sharing of personal information junk mails Inconvenience in carrying cards Others Please Specify: .............................................................................................

11. Do you think you share lot of personal information in order to get a stores loyalty cards? Yes No

12. At the billing counter, if you were told that shopping for additional (Rs.300-500) can get you loyalty card, would you avail that option? Yes No

h13. You would want a loyalty card of a particular store because they offer: 1 Discounts Special offers Updates(ne w arrivals) Preferential treatment Status Symbol 2 3 4 5

14. Your opinion

I have loyalty cards which I don't use It takes too long to get anything worthwhile I would shop in any store that suits me regardless of whether they have a loyalty scheme

Agree

Disagr ee

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I Save a lot of money by using my loyalty vouchers I shop wherever I get better discounts I usually get better discounts from in-store promotions than loyalty schemes I am nervous about how the organisation uses the personal information I give I buy products if they earn me extra points I am sceptical about the usage of personal information I think a loyalty scheme is worthwhile and I am willing to give my personal details I spend less in stores where I dont have a card I am member of loyalty scheme but have no intention of using my loyalty card I wouldnt change where I shop for the sake of a loyalty scheme I have saved substantially due to loyalty programmes I buy products due to promotions surrounding them

15. I have stopped using loyalty cards because...................................................................................................... ................. ..................................................................................................................................... ..................................................................................................................................... ..................................................................................................................................... ......................................................................................................................

16. What according to you is an ideal loyalty card/Program? ..................................................................................................................................... ..................................................................................................................................... ..................................................................................................................................... ..................................................................................................................................... ..................................................................................................................................... ..................................................................................................................................... ............

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Sources

Yuping Liu & Rong Yang Competing Loyalty Programs: Impact of Market Saturation, Market Share and Category Expandability, Journal of Marketing Vol. 73 (January 2009), 93108, Ensuring Customer Loyalty: Designing Next-Generation Loyalty Programs, an Oracle White Paper: February 2005, Loyalty Programs and their Impact on Repeat-Purchase Loyalty Patterns: a replication and extension, Byron Sharp and Anne Sharp; Marketing Science Centre, University of South Australia Yuping Liu (2007), The Long-Term Impact of Loyalty Programs on Consumer Purchase Behavior and Loyalty. Journal of Marketing- October 2007. Ergin, Parilti, Ozsacmac (2007), Impact of Loyalty Cards on Customers Store Loyalty. International Business & Economics Research Journal- Feb 2007. Waarden, Benavent, Loyalty Programs and their Impact on Repeat Purchase Behavior. Bolton, Ruth, Kannan, Bramlett (2000), Implication of Loyalty Program Membership and Service Experience for Customer Retention and Value, Journal of the Academy of Marketing Sciences, 28. www.google.com

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