Chapter 2 Literature Review
2.3 Loyalty Scheme
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2.3 Loyalty Scheme
Loyalty scheme has a long history. In 1896, the Sperry and Hutchinson (S& H) Company of the U.S., which began issuing S&H Green Stamps that year, was the first trading stamp company that operated as an independent business, providing stamps to different types of merchants in a community, along with booklets to paste them in, and opening their own stores where merchandise was purchased only in exchange for the company's stamps (Lonto 2004).
In this stamps program model, customers would receive stamps at the
checkout counters of supermarkets, department stores, and gasoline stations, which could be redeemed for products in the catalog (Appendices 3 Example S&H Green Stamps).
In the mid-1960's most gas stations and supermarkets were offering stamps to shoppers. At the peak of trading stamp popularity in the mid 1960's, S&H operated 800 free-standing redemption centers nationwide, and printed more stamps than the Postal Service did (Slatalla 2000).
In UK, Green Shield stamps were developed by Green Shield Trading Stamp Company founded by Richard Tompkins in 1958. A "Stamp War" broke out in 1963. Fine Fare, a British retailer, started giving away the American S&H Pink Stamps. Green Shield Stamps were being given away by Tesco and Priceright and other stamp companies competed aggressively for outlets (Appendices 2 Green Shield Stamps).
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In the 1970, Southwest Airlines ran a “Sweetheart Stamps” program that enabled travelers to collect proofs of purchase and surrender them for free flights for their partners. In 1981, loyalty scheme evolved into forms of Frequent Flyer Program (FFP) from Stamps program. American Airline’s Advantage Program is an example that airline made a strategic decision to use its spare capacity as resource to generate customer loyalty. Since then this basic model has migrated from airlines into many other B2C sectors such as hotels, restaurants, retail, car hire, gas stations and bookstores (Buttle 2009).
The use of loyalty cards was an extremely important development in the 1990s in most developed world markets. Loyalty cards are now used in a number of sectors: retail, leisure, business airlines, car rental and more recently
business-to-business markets (Tapp 2008).
Definition of loyalty scheme
This study reviews several different loyalty scheme literature (Rogers and Peppers 2011; Reinartz 2010; Buttle 2009; Liu and Yang 2009) and collective summary of loyalty definitions from Cao, Nsakanda, and Mann (2010). There is not one single definition of a loyalty scheme because of its considerable
overlap with promotional tools (Reinartz 2010); however, most scholars tend to view loyalty scheme as a reward program for repeated customers (Table 2-5 Definition of loyalty scheme in the literature).
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Table 2-5 Definition of loyalty scheme in the literature
Literature Definition of a loyalty scheme
Peppers and Rogers (2011) A loyalty program is a promotion that awards pint, mils or other benefits to a customer in exchange for the customer’s doing business with the program’s sponsoring company
Werner J. Reinartz (2010) An LP can be defined as a marketing process that generates rewards for customers on the basis of their repeat purchases.
Yuheng Cao, Aaron Luntala Nsakanda, and Inder Jit Singh Mann (2010)
The program targets a customer’s long-term profitability or a customer’
s lifetime value, requires customer enrollment, collects customer information, and records customer’s purchase history, has a clear rewards scheme for repeated customer purchase behavior on the basis of customer’s purchase history.
Buttle (2009) A loyalty program is a scheme that offers delayed or immediate incremental rewards to customers for their cumulative patronage.
Liu and Yang (2009) Loyalty programs is long-term-oriented programs that allow
consumers to accumulate some form of program currency, which can be redeemed later for free rewards.
Sayman and Hoch (2005)
A frequency (or loyalty) program is an intertemporal promotion which offers some reward or benefit to customers based on their history of purchases. Frequency programs are widely used and important promotional tools in many industries.
Bagdonienė and Jakštaitė (2006) Enterprises create loyalty reward program in order to develop loyalty and to reward. It is an effective marketing instrument helping to create such a situation where all interested sides win.
Berman (2006) Loyalty programs are offered by both retailers and manufacturers to stimulate continued patronage among consumers through discounts, cash, free goods, or special services (such as free magazines on specialized topics of interest to loyalty program members).
Banasiewicz (2005) Brand loyalty program is a broad category of rewardbased initiatives aimed at stemming customer attrition.
Taking advantage of rapidly advancing informational technologies, these marketing initiatives are emerging as the most effective means of finding and retaining brands’
most profitable buyers.
Lewis (2004) Loyalty programs that base rewards on cumulative purchasing are an explicit attempt to enhance retention.
Such programs encourage repeat buying and thereby improve retention rates by providing incentives for customers to purchase more frequently and in larger volumes.
Sharp and Sharp (1997) A loyalty rewards program is defined as a program that allows consumers to accumulate free rewards when they make repeated purchases with a firm. Such a program rarely benefits consumers in one purchase but is intended to foster customer loyalty over time.
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Type of loyalty scheme
There are many types of loyalty scheme existent in different forms on the markets. Based on earlier research from Cao, Nsakanda, and Mann (2010) who have reviewed three key literature on the classification of loyalty scheme, including Kadar and Kotanko (2009), Bagdonienė and Jakštaitė (2006) and Berman (2006), this study further reviews other related literature about this topic and includes Robinson (2011), Tapp (2009), Chang and Wu (2007) and in short list of classification of loyalty program (Table 2-6 Classification of loyalty scheme in the literature).
Some scholars such as Berman (2006), Bagdonienė and Jakštaitė (2006), Chang and Wu’s (2007), Tapps (2008), Kadar and Kotanko (2009) and Robinson (2011) have proposed different classifications of loyalty schemes respectively. Among them, Chang and Wu (2007) introduced a classification which is more specific for retailers in Taiwan (Table 2-6 Classification of loyalty scheme in the literature).
Tapp (2008) has classified loyalty schemes into three key categories based on the historical evolution of loyalty schemes:
(1) Proof-of purchase based loyalty scheme:
This is the traditional mechanism that is still used by some package goods manufacturers who have no way of easily using cards. In markets where margins are very tight, in particular packaged good sectors, the rewards are
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often self-liquidating; that is, customers are asked to pay a small fee in addition to the vouchers to receive their rewards. This fee covers the company cost of the gift.
(2) Card based schemes:
Cards are ideal for tracking transaction data and building the customer records.
There are two types of card which runs loyalty schemes: Smart cards and magnetic stripe.
Smart cards carry computer chips within and have greater off-line functionality and data capability than magnetic strip cars. Customer data is held within the card not on a database while magnetic stripe cards have been much cheaper than smart cards and are more likely to be compatible with existing store electronic point of sale (EPOS) technology.
(3) Cross-category promotion scheme (co-branded):
Most loyalty schemes are run by solo supplier which bears the cost of point reward and redemption. Cross-category promotion schemes have become popular. This type of schemes often involves a number of suppliers from different sectors. Consumers can earn points on purchases from all these suppliers, which are then redeemed for rewards in the normal way. It is hoped this would be an umbrella loyalty scheme involving non-competing companies from as many sectors as possible, in particular frequent-purchase markets.
Chang and Wu (2007) indicate that retailers use two types of loyally scheme in
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their CRM initiatives, loyalty shopper card and co-branded credit card, depending on whether retailers co-operate with banks:
(1) Loyalty shopper card
Loyalty shopper card is a type of member program operated by retailers that allows customers to migrate their status upward to member to enjoy better treatment, mainly on member price items. This type of program can be free of charge to join the membership such as membership of Best Denki appliance store or of TK 3C appliance in Taiwan.
(2) Co-branded credit card
Co-branded credit card is another type of loyalty scheme that supports member cross-sell marketing. For retailers, launching co-branded credit card with banks can leverage banks’ resource for marketing or receive additional sales promotion fee from bank. For banks, working with retailers allows them to expedite site expansion for card acquisition and remain card holders’ usage rate.
For example, co-branded credit card program was the most fast growing card type in the year of 2001 in Taiwan since retailers greatly adopted this type of loyalty scheme. In 2004, more than 50% of credit card growth came from co-branded credit cards (Chang and Wu 2007).
Some scholars looked at loyalty scheme typology from tactics points of view (Berman 2006; Robinson 2011).
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Robinson (2011) proposed a categorization of loyalty reward programs that include four types: (1) Simple percent off on all purchases; (2) Buy n get one free; (3) Tiered rewards (airline miles); and (4) Customer relationship with frequent special offers.
Berman (2006) classified loyalty schemes into four types: (1) Members receive additional discount at registers; (2) Members receive one free unit when they purchase n units; (3) Members receive rebates or points based on cumulative purchases; and (4) Member receive targeted offers and mailings.
Other scholars classified loyalty schemes by numbers of partners engaged or the target of program designed for (Bagdonienė and Jakštaitė 2006; Kadar and Koanko 2009).
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Bagdonienė and Jakštaitė (2006) proposed three types of loyal schemes: (1) Open or closed loyalty programs; (2) Direct or indirect reward loyalty
programs ; and (3) Loyalty program for end customers or for intermediate customers
Kadar and Koanko (2009) brought up the other classification of loyalty scheme:
(1) Exclusive one-company program; (2) Inclusive company-specific programs;
and (3) Cross company programs
Although there are many loyalty scheme classifications discussed in the literature, there is not any type of classifications mentioning the dimension of
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time and resource needed to implement a loyalty scheme so that retailers cannot have a full picture of available choices when they consider the use loyalty scheme as part of their business strategy (Table 2-6 Classification of loyalty scheme in the literature).
Consequently, this study proposes a new approach of classifying loyalty
scheme in the next section that fits in retail context in Taiwan and that could be applicable to retailers in other regions.
Table 2-6 Classification of loyalty scheme in the literature
Literature Classification of Loyalty Scheme
Robinson (2011)
1. Simple percent off on all purchases 2. Buy n get one free
3. Tiered rewards (airline miles)
4. Customer relationship with frequent special offers
Kadar and Kotanko (2009)
1. Exclusive one-company program 2. Inclusive company-specific programs 3. Cross company programs
Tapp (2008)
1. Proof-of purchase based loyalty scheme 2. Card based schemes
3. Cross-category promotion scheme (co-branded):
Chang and Wu (2007) 1. Loyalty shopper card 2. Co-branded credit card
Bagdonienė and Jakštaitė (2006)
1. Open or closed Loyalty programs
2. Direct or indirect reward Loyalty programs
3. Loyalty program for end customers or for intermediate customers
Berman (2006)
1. Members receive additional discount at register 2. Members receive 1 free when they purchase n units
3. Members receive rebates or points based on cumulative purchases 4. Member receive targeted offers and mailings
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A new typology of loyalty schemes proposal
Tapp (2008) has classified loyalty programs into three types: (1) Proof of purchase based scheme; (2) Card-based scheme; and (3) Cross-category promotion scheme (co-branded). However, Tapp (2008) missed including stamps program in his classification, the most original type of loyalty scheme that can be tracing back to nineteen centuries.
Conceptually, proof-of-purchase based type introduced by Tapp (2008), might imply to include stamp program but did not explicitly classify it in his typology.
Tapp’s (2008) definition on proof-of-purchase based program mainly refers to the practice used by brand suppliers or consumer product companies.
Stamps program is the much earlier version of loyalty scheme which is still used by retailers today. In terms of time and resourced needed, stamps program can be started quickly and may require less resource comparing to other types of loyalty scheme. For these rationales, this study includes stamps program as part of the new typology of loyalty scheme.
Buttle (2009) further separates card-based programs into anonymous and non-anonymous programs based on whether loyalty card is anonymous or not.
An anonymous program normally involves less on the technological resource, compared with non-anonymous program. The latter often includes more advanced system functions to manage customer data, consolidate all information under one account, one promotion or even individual promotion
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offer. In short, for anonymous and non-anonymous programs, their time and resources needed are much more than stamps program and proof-of-purchase based programs. Thus, this study takes Buttle’s (2009) views and includes two separated programs in the new typology of loyalty scheme.
In addition, Buttle (2009) also indicates another type ”linked scheme” in his classification, which is defined as allowing different of retailers to join as participants and customers are able to convert their existing credits to the currency of linked scheme.
This study believes that linked scheme concept is similar to cross-category promotion scheme (Tapp 2008) or cross company program (Kadar and Kotanko 2009) and therefore they should be treated as same type.
However, based on Chang and Wu’s (2007) classifications, co-branded credit card program is reasonable to be treated independently from Tapp’s (2008) cross-category promotion scheme as co-branded credit card program is relatively less complex than cross-category promotion scheme and often engages one partner only, which often is the bank. In terms of time and
resource commitment, co-branded credit card program is relatively simple than cross-category promotion scheme as well. Thus, this study believes they should be treated as two different types and thus this study includes both in the new typology.
It is worth noting that Robinson’s (2011) scheme type four: customer
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relationship with frequent special offers, as it is the only program type that addresses on integrating reward card into customer relationship management system. Robinson (2011) notes that the only downside of this type is that the expense of running a full customer relationship management (CRM) system (identifying customers by name and address, tracking all purchases, analyzing behavior and responding) requires a substantial initial investment and an on-going commitment to fund the operation. However, Robinson’s (2011) scheme type four only focuses on building customer relationship with frequent special offers, which may underestimates the potential of this scheme type.
Although Robinson’s (2011) categorization method is readily understandable, yet it tends to be categorizing loyalty schemes only based on tactics level except scheme type four, and therefore this method could not offer retailers the capabilities to identify the resource and time needed to launch a loyalty
scheme.
To make the categorization more practically useful in the future, this study proposes a new typology of loyalty program (Table 2-7 A new typology of loyalty scheme proposal (data source: summarized by this study)), based on research from Chang and Wu (2007), Tapp (2008), Braran, Galka, and Strunk (2008), Davenport and Harris (2007), Minami and Dawson (2008) ,Buttle (2009), and Robinson (2011) and earlier discussions on using dimension of time, resource commitment and program evolution in developing new typology of loyalty scheme.
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Table 2-7 A new typology of loyalty scheme proposal (data source:
summarized by this study)
New typology proposed in this study classifies loyalty schemes into seven types:
No. Loyalty Scheme Type Characteristic Resource
Commitment
Time to start a program
1 Stamps Scheme
The earliest form customer loyalty scheme in which customers collected stamps from retailers, then collected them into books, which were redeemable for merchandise from a catalog.
Lowest Lowest
2 Proof of Purchase Scheme
Often used by companies who have no way of easily using cards, in particular packaged good sectors, the voucher customers are asked to pay a small fee in additional to the vouchers to receive their rewards. This fee covers the company cost of the gift.
Low Low
3 Co-branded Credit Cards
Use commercial partner's brand and customer base to acquire or reward new customer
Medium-Low Medium-Low
4 Cross-Category Promotion Scheme
This type of schemes normally involves a number of suppliers from different sectors. Consumers can earn points from purchase from all these suppliers, which are then redeemed for rewards in the normal way
Medium Medium
5 Anonymous Card-Based Scheme
Carry no personal data, not even the
name of participant Medium-High Medium-High
6 Registered Card-Based Scheme
Includes magnetic strip cars or chip-embedded that carry a lot of personal and transactional data.
High High
7 CRM-Capable Loyalty Scheme
A loyalty scheme that integrates with CRM technologies along with information collected from loyalty scheme is used for relationship building
Highest Highest
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Stamps scheme (type one) and proof-of-purchase scheme (type two) are still seen among many small and medium retailers today, in particular those are still in their earlier stage of development. These two types consume much less resources from retailers and require relatively shorter time to operate (Table 2-7 A new typology of loyalty scheme proposal (data source: summarized by this study)).
Proof-of-purchase scheme (type two) is often used by fast-moving consumer goods company (Tapp 2008). In addition, Winner (2001) provides a reasonable explanation for this phenomenon:
Companies such as Procter & Gamble and Unilever selling
frequently-purchased consumer products have greater problems constructing a customer databases due to lack of systematic information about their millions of customers and the fact that they use intermediaries (i.e., supermarkets, drug stores) that prohibit direct contact. The challenge is to create opportunities for
customer interaction and, therefore, data collection (pp.89-105).
Some retailers that do not operate any card-based loyalty scheme but would like to quickly launch a loyalty scheme may consider a co-branded credit card scheme with bank (type three) or a cross-category promotion scheme (type four). It is quicker and easier for a retailer to set up the co-branded credit card scheme and starts to offer benefits to members if compared with operating it sorely on one’s own (Table 2-7 A new typology of loyalty scheme proposal (data source: summarized by this study)).
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Alternatively, cross-category promotion scheme (type four) is also an attractive option because it provides retailers with a cost-effective way to offer customers a variety of attractive benefits that they would not be able to provide without the support of other businesses.
Anonymous card-based scheme (type five) is mostly a stored-value card or pre-paid card scheme and often is operated by one retailer. It is often the first type of program when retailers would like to operate loyalty programs on their own efforts. Its investment is relatively low compared with registered
card-based scheme (type six) or CRM-capable loyalty scheme (type seven).
However, the main drawback is that the scheme is anonymous and thus there is no customer data being collect, which would further limits the potential for target communication, promotion or understand customer behavior.
Registered card-based scheme (type six) is defined as a solo loyally program operated by a retailer. It is more costly to set up one as a loyalty card system will need to be set up and tied up with Point of Sales (POS) system in order to manage point reward and redemption functionalities, such as double points reward on certain items, or real-time redemption at check-out counter. This system often consists of Bonus Point System and Customer Management System or other system supporting card member promotion. Obviously this type of scheme requires more resource commitment from one retailer and it takes longer time to design a scheme and set up loyalty card system at POS in all different retail stores (Table 2-7 A new typology of loyalty scheme proposal
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(data source: summarized by this study)).
The last category proposed in this new typology is the CRM-capable loyalty scheme (type seven), which is the advanced version of registration card-based scheme. Over the past few years, loyalty programs have become a key
component of customer relationship management (CRM), serving a critical role in developing relationships, stimulating product and service usage, and
retaining customers (Kivertz and Itamar 2003). However, only when
information collected from loyalty programs data used to customize offerings and communication vehicles for participants, the loyalty program become a CRM program (Braran, Galka, and Strunk (2008). This study believes that
information collected from loyalty programs data used to customize offerings and communication vehicles for participants, the loyalty program become a CRM program (Braran, Galka, and Strunk (2008). This study believes that