Reconceptualising the strategic role of loyalty schemes

Jennifer Rowley
Bangor Business School, University of Wales, Bangor, UK
Abstract Purpose The purpose of this paper is to report a case study analysis of the major retail loyalty scheme, Tesco Clubcard, with a view to exploring how loyalty schemes can be used to add brand value. Design/methodology/approach The paper provides a literature review that establishes the limitations of the present research on loyalty schemes and thereby establishes the rationale for this article. The methodology section explains the case study approach adopted and the reasons for focussing on the specic case, Tesco Clubcard. A content analysis of a recent book which tells the story of the development of Tesco Clubcard is used to surface and explore a number of key characteristics of the scheme and its development. Findings Key characteristics of Tesco Clubcard are summarised under the following headings: commitment and championing, being integral to business processes, innovation and evolution, multi-dimensional reward design, alignment with brand strategy and values, customer contract and value, and customer focus in information systems design and use. Research limitations/implications Further research is needed to explore the complexities associated with designing loyalty schemes that work for different organizations with a range of different types of interactions with their customers. Originality/value The article suggests that current research on loyalty schemes is too preoccupied with the relationship between loyalty and loyalty schemes and the design of rewards. Through a case study analysis of the reward scheme of a major UK retailer the article demonstrates the way in which loyalty schemes can be used to enhance and tailor an organisations offering, and thereby enhance customer value and loyalty. Keywords Loyalty schemes, Customer relations, Customer information, Brands, Retailing Paper type Case study

An executive summary for managers and executive readers can be found at the end of this article.
. . . the business benets of Clubcard are now written through the Tesco business like lettering through a stick of rock (Humby et al., 2003, p. 2).

Introduction
Loyalty schemes are an established feature of the retail and services landscape. They have become widespread and arguably ubiquitous (Capizzi and Ferguson, 2005). There are a number of major groups of loyalty schemes, including: retailer loyalty schemes, nancial service loyalty schemes, online reward schemes, frequent yer and other travel reward programmes, geographically based loyalty schemes, and coalition loyalty schemes (Rowley, 2004). Businesses have been keen to enhance customer retention, to nd approaches to increasing customer spend and encourage customers to act as advocates. Researchers have examined whether it is possible to detect and measure the impact of loyalty schemes on customer retention, spend and advocacy, and thereby to establish whether loyalty schemes work. Research is dominated by the pursuit of relationships between loyalty scheme membership and behavioural or attitudinal loyalty or customer retention (e.g. Bolton et al., 2000; Morais et al.,
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2004; Dowling and Uncles, 1997; Mattila, 2001; McIlroy and Barnett, 2000; Whyte, 2002; Yi and Jeon, 2003; Ross et al., 2005; Bellizzi and Bristol, 2004; Noordhoff et al., 2004) and on the design of rewards (e.g. OBrien and Jones, 1995; Parker and Worthington, 2000; Jang and Mattila, 2005; Yi and Jeon, 2003). Stone et al. (2004) take the position that loyalty schemes of themselves can not generate loyalty through their reward mechanisms, but that rather they generate information that can be used to enhance and tailor the organisations offering. This article conducts a case study analysis of a major UK-based retailers loyalty and clubcard scheme to lift research from the preoccupation with what makes customers loyal, and whether loyalty schemes promote customer retention, to the broader relationship and knowledge-based contribution that loyalty schemes make to marketing competence and performance. Taking a more strategic approach to the impact of loyalty schemes promotes investigation into the business processes that can be inuenced by loyalty schemes, and, in turn, an exploration of their impact on the value chain. Starting from the premise that businesses succeed by offering value to customers, while also developing and negotiating customers perceptions of that value, this article explores how loyalty schemes can add value. This journey involves an exploration of the means by which loyalty programmes are integrated into business and organisational processes, especially those associated with customer relationship management (CRM) (Cuthbertson and Laine, 2004; Stone et al., 2004). In summary, it shifts the research agenda from how can businesses make customers loyal to them? to how can businesses in partnership with, and with the consent of their customers be loyal to their customers, by continually enhancing the value that they offer to those customers? 366

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Journal of Consumer Marketing Volume 24 Number 6 2007 366 374

The article commences with a literature review that establishes the limitations of the present research on loyalty schemes and thereby establishes the rationale for the contribution that this article seeks to offer. The methodology section explains the case study approach adopted and the reasons for focussing on the specic case, Tesco Clubcard. A content analysis of a recent book which tells the story of the development of Tesco Clubcard, and which is authored by two of the main advocates and creators of the scheme is used to surface and explore key characteristics of the way in which organisations can use loyalty schemes to create brand value, and to establish a refreshed agenda for loyalty scheme research.

Literature review
This article commences with a review that covers the following themes: . The relationship between loyalty and loyalty schemes. . The design of rewards. . Other aspects of research on loyalty schemes. Loyalty and loyalty schemes Research into loyalty schemes has focussed on the value of loyalty schemes, to both businesses and consumers. A central question has been: Do loyalty schemes work?. Indeed many have asserted that such schemes have failed (Divett et al., 2003; Worthington, 2000; Wright and Sparks, 1999; McIlroy and Barnett, 2000; Rowley, 2004). Nevertheless, over the last ve years or so, the voices of the sceptics have been mufed by increasing industry enthusiasm for and commitment to such schemes arguably driven by increasingly competitive markets, and accordingly research interest in this topic has been sustained. A signicant core of the research into loyalty programmes remains focussed on the question of whether loyalty schemes provoke loyalty, and if they do provoke loyalty the kind of loyalty that they provoke. The link between loyalty and loyalty scheme membership is viewed as important since it may affect customer initial and continuing engagement with the scheme, and in turn their willingness to continue to identify with a brand, organization or outlet. Many authors have found that loyalty schemes tend to provoke behavioural loyalty or calculative commitment, rather than affective loyalty (Bolton et al., 2000; Dowling and Uncles, 1997; Mattila, 2001; McIlroy and Barnett, 2000; Whyte, 2004). For example, Whyte (2004) suggests that loyalty programmes may only create spurious loyalty, and may not be very successful in translating such loyalty to commitment. Frequent yer programmes in Australia create spurious loyalty, and repeat purchase is not a proxy for customer satisfaction or commitment. OMalley (1998) also reects on the challenges associated with the conversion of convenience-based loyalty into commitment. Some authors however, have identied both behavioural and attitudinal loyalty. Ross et al. (2005), discuss the balance between affective and calculative commitment in the telecommunication industry and nd that while calculative commitment is dominant, there is also evidence of affective commitment. Noordhoff et al.s (2004) study of store loyalty among customers in The Netherlands and Singapore, also found that loyalty programmes can impact on attitudinal as well as behavioural store loyalty, provided that the number of 367

alternative programme to which members subscribe is limited, and customers do not take loyalty cards for granted. Polygamous loyalty has also provoked some debate (Ehrenberg, 1988; Davies, 1998; Passingham, 1998). Many customers are members of several loyalty schemes even in the same industry. Some researchers and businesses would regard the holding of multiple loyalty cards as a sign of disloyalty, others would suggest that like businesses, customers segment, because no one business, even within a specic sector meets all of their needs, or is always making them the best offer. Yim and Kannan (1999) argue that customers who have loyalty to more than one brand may exhibit loyalty to the notion of reward programme membership either alongside or instead of loyalty to specic brands. This issue of polygamous loyalty also has consequences for the value of loyalty scheme data, as discussed below. Another important perspective is the extent to which loyalty schemes contribute value as part of a coherent value proposition (OMalley, 1998). For example, Bellizzi and Bristol (2004) conclude that in supermarkets there are a number of other factors, such as quick moving checkout lines, and fresh produce variety that are more important to customers than the loyalty scheme. Reward design Rewards are the key mechanism for incentivising customers to participate in the scheme. There has been some debate as to the effectiveness of the typically relatively low value rewards that loyalty schemes offer their members. OBrien and Jones (1995) identify the following ve elements that contribute to the value of a loyalty scheme: cash value, choice of redemption options, aspirational value, relevance, and convenience. Parker and Worthington (2000) argue that customer loyalty to a reward scheme is likely to be affected by: the satisfaction that a customer feels towards the degree of return that they are receiving; what is available from other schemes; and, other consumers, the media, and social norms. OMalley (1998) discusses the extent to which too many schemes has created customers who have come to expect a reward as part of the normal shopping experience, and this has caused them to place a low value on rewards. Jang and Mattila (2005) examine the types of rewards that customers prefer in the context of restaurant loyalty programmes. Favoured benets are immediacy, necessary, and monetary gratications (such as savings). Quality and convenience are also important, and some categories of customers are also motivated by exploration and entertainment type benets. Strauss et al. (2005) also agree that process and convenience are important; their ndings suggest that schemes should only offer those benets that represent genuine additional value to customers, and that benets must be calculable at any time and without additional effort by the customer. This is supported by Bowman and Narayandas (2001) who suggest that empathy and sincerity are usually associated with the value perceptions of customers, and that in turn, value perceptions of the reward program may be affected by its administration processes (Yi and Jeon, 2003). Reward design may be dependent on the nature of the transaction between the customer and the business. Yi and Jeon (2003) dene direct and indirect rewards. Direct rewards are rewards that directly support the value proposition of a given product, whereas indirect rewards refer to incentives that are not relevant to a given product. They also

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differentiate between immediate (given for every visit), and delayed (give after a number of visits) rewards. Their research shows that involvement moderates the effects of loyalty programmes on customer loyalty, and that in highinvolvement situations, direct rewards are preferable to indirect rewards. In low-involvement situations, immediate rewards are more effective in building a programs value than delayed rewards. Kivetz and Simonson (2002) found that value perception can also be inuenced by type of reward; luxuries (often associated with hedonistic experiences) are more highly valued than necessities as reward. The reward scheme can permit people to spoil themselves. Rosenbaum et al. (2005) demonstrate that consumers are more loyal to programmes through which they perceive a sense of loyalty, than those that simply use nancial incentives. Other loyalty scheme design issues Morais et al. (2004) use a conceptual framework of the development of loyalty that is grounded in resource theory, reciprocity, and customer equity. In the context of participants in a white water rafting trip (experience), they found that if customers perceived that a provider was making an investment in them, they in turn made a similar investment in the provider, and those investments led to loyalty. Further, investments of love, status and information were more closely associated with loyalty than investments of money. Most signicantly this work demonstrates that the type of resources invested determines the nature of the relationship. Mason et al. (2006) also discovered that hotel guests understand loyalty as involving an unstated or implied contract between the guest and the hotel. Palmer et al. (2000) also open up the debate about loyalty scheme design in the hotel sector. They suggest that there is no single formula for the development of a successful loyalty programme. This statement alone has signicant implications for research into loyalty programmes, suggesting as it does that there might not only be differences in the effectiveness of loyalty programmes on the basis of geographical market (USA, Europe, Far East), and sector (travel, retail, nancial services), but also on the basis of other parameters. If this statement were to be supported by further research, this would account for variations in results in research on the responses to loyalty schemes, and suggest that research on loyalty schemes needs to focus on understanding the alignment between loyalty scheme design and sector and marketplace characteristics. For example, Palmer et al. (2000) suggest that the level of sophistication of loyalty schemes for hotels should depend on the scope for customization of the offer, which depends on the hotels positioning within its sector. In other words, the loyalty scheme design should be determined as much by the data that the business needs to optimise its offer to customers, as by the rewards offered to ensure customer participation. Some recent contributions have acknowledged that the loyalty scheme cannot generate loyalty through its reward mechanism alone, but is dependent on the use of customer data to enhance the value of the offering. Early applications of loyalty data were restricted to direct marketing and this remains an important application (Byrom, 2001; OMalley, 1998; Knox, 1998). Customer data can be converted into information and knowledge that can be used to tailor the organisations offering, in terms of price, product range, service quality, and convenience (Stone et al., 2004). This requires a development of understanding of the ways in which 368

the loyalty programme can be integrated into the business, and specically into processes associated with customer relationship management (Cuthbertson and Laine, 2004), and customer knowledge management. The quality of this data is however dependent on the extent to which loyalty scheme membership represents consumer behaviour of actual and potential customers and the extent of polygamy (Dowling and Uncles, 1997; Mauri, 2003). Summary of literature review In conclusion, this literature review demonstrates that successful management of a loyalty scheme is complex. Research has been preoccupied with the relationship between loyalty schemes and loyalty, and reward design, although there have been some studies that have taken wider perspectives on the process, value and contribution of loyalty schemes. By analysing and summarising previous research, this literature review has distilled the knowledge base associated with the design of loyalty schemes. Some key pointers are: 1 Financial rewards are likely to be associated with behavioural loyalty which may be all that some organizations are really interested in. 2 In order to impact on attitudinal loyalty or to deliver a psychological response it is necessary to understand the value creation process associated with customers interaction with the scheme. This is likely to involve attention to: . the processes associated with the scheme which need to be convenient, and to avoid undermining the value perceptions of the scheme; . types of reward indirect/direct; instant/delayed; luxury/necessity; . the development of social value through the creation of a sense of community; . customer perspectives of the contractual nature of the scheme, and associated expectations and responsibilities. 3 Other aspects of service delivery have a more signicant impact on loyalty than loyalty scheme rewards. Loyalty schemes need to be seen as part of a wider value proposition. 4 There may be no single model of best practice, and the best design may depend on the nature of the interaction, the prole of the customer base, and the objectives of the organization in operating the scheme. Since all of these may change, loyalty schemes need to evolve and develop over time.

Methodology
Case studies are a valuable way of looking at the world around us, and asking how or why questions (Yin, 1994). The case study design adopted in this article is a holistic single case design. Typically single case designs are appropriate when the case has something special to reveal that might act as a point of departure for challenging received wisdom, and prior theoretical perspectives and assumptions. This is the case here. The purpose of this pilot research is to analyse an innovative case in pursuit of the formulation of a refreshed statement of the objectives of loyalty schemes, leading to the articulation of an associated future research agenda. Deskbased research has been conducted to gain a thorough

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understanding of the nature and features of the scheme. These characteristics are then discussed and analysed from the perspective of their contribution to branding and brand building. Tesco Clubcard has been chosen as the basis for the case analysis in this article for a number of reasons: . Tesco has a reputation for being innovative in their use of information technology solutions. . Tesco is the UKs largest retailer, with a very signicant customer base. In addition many of those customers return at weekly or similar intervals. This means that Clubcard data and relationships are both deep and wide. Tesco collects consumption data on a signicant proportion of the UK population, on a regular basis. . Tesco Clubcard integrates customer interaction across both click and brick channels. . Tesco Clubcard engages with a large number of corporate partners in relation to the earning and delivery of rewards. . Tesco is the largest supermarket in the UK, with signicant growth in markets in other countries. It continues to expand its market dominance, recently reporting a 12.7 percent increase in half year sales. Competitors Sainsbury suggest that Tesco could have up to 43 percent of the grocery market in the UK within four years. A signicant proportion of customers will be Tesco Clubcard members. Accordingly, Tesco Clubcard has signicant potential to inuence consumer behaviour in the UK (Finch, 2006a, b). A content analysis of a recent book which tells the story of the development of Tesco Clubcard, and which is authored by two of the main advocates and creators of the scheme (Humby et al., 2003) is used to surface and explore key characteristics of the way in which organisations can use loyalty schemes to create brand value, and to establish a refreshed agenda for loyalty scheme research.

outlet portfolio; it is acknowledged that: retail loyalty is about achieving a little extra goodwill, a slight margin of preference, an incremental shift in buying behaviours (p. 9). Integral to business processes As far as possible, Clubcard is viewed as integral to the operations of Tesco: On that day in 1995 (the launch day for Clubcard), the company changed the way it did business so fundamentally that its effect is still seen in every part of the company . . . changed the way Tesco makes decisions, develops products, manages its stores, and, most important, the way it serves its customers (p. 1). Clubcard provides valuable data that underpins Tescos major business developments. Clubcard data enabled Tesco to target the right nancial services products to the right customers at the right price (p. 182). Coupled with a joint venture partnership with competitive products, and cost-effective instore promotion and recruitment, Clubcard, with its rewards and data have made Tesco Personal Finance (TPF) a fast growing and signicant nancial services company (p. 182). Brand recognition, loyalty and physical assets together enable Tesco to recruit nancial services customers at a fraction of the cost to a conventional nancial services provider (p. 182). In the development of online retailing: the Clubcard database gave us a fantastic list of people to go after and a sophisticated understanding of these customers (p. 232). This data supported appropriate targeting of online shoppers so effectively that Tesco succeeded in converting people who were not typical internet users into typical Tesco.com shoppers; Tesco.com is now the largest grocery e-tailer in the world. In addition, by stretching the Tesco brand into different business arenas, the loyalty contract is extended (p. 182), and customers are able to collect Clubcard points through their engagement in these other business arenas, ensuring that the relationship delivers an even more signicant proportion of the customers needs, points accumulate more rapidly leading to better rewards, and Tescos customer data is further enriched. Innovation and evolution Innovation and evolution, and a willingness to learn and experiment grounded in a culture of innovation and recognition of the value of rst mover advantage underpins Clubcards development. The book tells the story of the initial launch, the development of the rewards, the mailing, and the data analytics, and the role of Clubcard in the launch of banks, online retailing, clubs, alliances with Air miles, and on. The scheme does not stay the same:
Everything that happens to Clubcard is seen as an opportunity to learn, to rene, to improve and move on (p. 4).

Findings and discussion

The content analysis of Humby et al. (2003) led to the identication of a number of key themes which appear to be central to Tescos approach to Clubcard and which in turn contribute to the success and importance of Clubcard to its business. The story is told and owned by the creators and developers of Clubcard. These ndings therefore reect their perspective and rhetoric. Other voices, such as Tescos suppliers and customers, may tell a different story. Here the focus is on understanding and analysing Clubcard and its process from the business perspective. The key themes that are outlined below emerge from the researchers analysis of Tescos story. Page numbers indicate the sourcing of concepts or quotes in Humby et al. (2003). Commitment and championing Commitment at top board level was initially established by a persuasive and persistent marketing director, a well-managed launch, and demonstrations of quick win cost-cutting on other aspects of the marketing, which created the space to demonstrate the other potential benets of the scheme. Since then proven business worth has led to further investment and continuing commitment. Staff are briefed on the importance of Clubcard and their role, and the initial launch was preceded by a proactive internal marketing campaign. From the beginning Tesco recognised that customers have a retail 369

Early failures included: . points for pints (pp. 210-211); . a Student Clubcard (pp. 87-88); . keys (pp. 217-218); and . initial talks with Air miles (p.211). The learning culture also drives the benets derived from Clubcard: with the data, what we have to do becomes as plain as the nose on your face (p. 3). Multi-dimensional reward design Rewards are designed to reward the behaviour you seek (p. 52). The overall reward design is complex, and targets

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both behavioural and attitudinal loyalty. The scheme uses a combination of currencies including points-led, informationled, discount-led, and privilege-led. Rewards are delayed. A quarterly mail out (Four Christmases a year (p. 114)) is an opportunity to communicate with customers: Clubcard magazine is the highest circulation lifestyle magazine in Europe (p. 27). This mail-out includes points vouchers, product specic coupons, other offers and the Tesco Freetime Deals Catalogue, and is customised according to the customers prior purchasing behaviour. The mail-out is designed to create a positive event with impact. Accumulated points can be used for leisure, holiday and travel experiences (treats) or in-store (necessities), and extend the brand value as discussed below. Alignment with brand strategy and values Clubcard is not only closely integrated with business processes, but aligns with the brand and brand strategy: the programme is the active expression of the brands personality and its values (p. 50). Launch advertising built on the brand strap line: Join Clubcard and youll discover for yourself that Every Little Helps (p. 62). Customers are invited to become members of the brand and to be involved in shaping the brand (p. 212). The visual identity of Clubcard is consistent with the visual identity of the Tesco brand. Clubcard is the reminder of Tesco in your wallet or on your key fob. Co-branding is used in a number of different ways to build visibility, customer interaction, and image for both the Clubcard and Tesco brands: . Clubcard and Tesco are strongly co-branded and copromoted: Clubcard is an extremely valuable part of the Tesco brand, it is inherent to our offering to customers (p. 253). . Customers can collect points from a variety of other outlets; Tesco is with customers in other outlets, especially if they use Tesco credit card. Working with other brands creates more opportunities to increase the population of active customers, thereby improving the critical mass of the scheme (p. 207). There are a number of different models for co-branding, including solo, shared and outsourced schemes (e.g. Airmiles and Nectar). Tesco has chosen to retain control of Clubcard and their relationship with their customer: Clubcard is a loyalty scheme designed by Tesco, for Tesco customers for use within Tesco. Nevertheless, partner brands benet by participation through reduced operational costs, involvement in promotion and branding, and insights into the needs, preferences and behaviours of signicant segments of their customers (p. 222). . Rewards, available through Tesco Freetime, include experiences delivered by a range of other organisations/ brands. Experiences with these brands build both the Tesco brand and partner brands. Through these experiences, Tesco enhances its relationship with the brands highest spending, most committed customers (p. 204). High spending customers not only benet from pleasurable experiences, but can also quadruple the value of their vouchers when they use them to buy Deals (p. 217). Tesco Freetime has expanded Clubcards reach and relevance, such that it is one of the largest sales agents for theme park tickets in the UK. (p. 205). 370

Customer contract and value Tesco do not view Clubcard as a reward scheme, but rather as a way to regularly show its appreciation to customers; Clubcard is the worlds biggest Thank You card. Underlying the scheme is an explicit customer contract through which Tesco makes a promise to its customers (Figure 1). Join Tesco, become a member of our brand, a long term stakeholder (p. 72). Through the scheme, Tesco are able to redress the balance in retailing, and not only offer choice and value, the hallmarks of mass retailing, but also treat customers as individuals. In addition, the cycle in Figure 1 delivers continuing innovation in the pursuit of enhanced customer value. Customers, through their behaviour have a role in inuencing the value that Tesco deliver to them and Tesco has an obligation to listen and to use the data granted to it. Tesco have moved forward from the simple use of discounts to drive spend to the use of customer knowledge to service customers better (p. 50). When it came to the development of Tesco.com, Tesco identied the importance of convenience to online shoppers and designed the customer journey to deliver this (p. 238). A key element of the customer contract concerns the management of data privacy: Customers regard groceries as personal. They reveal a lot about you. (p. 233). Tesco are constrained in the use of the customer data that they collect not only by legal constraints associated with the Data Protection Act, but also by their contract with customers; personal data is not shared with third parties (p. 260). Tesco Clubs take the notion of the customer contract one step further forward. The development of clubs, like the Baby Club and Kids Club started with the identication of what the customer wants to support their life-stage. Reection on competition with Boots in the context of the Baby Club and sales of baby products led to an appreciation that Clubcard is a functional scheme that generates rational loyalty. To challenge the longstanding afnity of customers to Boots for baby care products, Tesco needed to create an arena in which young parents developed an emotional attachment with Tesco. This involved showing empathy with the aspirations of young mums (p. 189). The key benet sought by customers, and therefore delivered by Tesco was authorative, responsible advice on the babys health, diet and development (p. 192); promotions and discounts were a secondary consideration for this group. For Kids Club, it was important to understand what both kids and parents wanted from the club (pp.196-8). Clubs succeeded commercially; not only have they driven up spend on associated Figure 1 The Clubcard customer contract

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Journal of Consumer Marketing Volume 24 Number 6 2007 366 374

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products, but they have also impacted on spend across the board. But, to be successful clubs must meet a genuine customer need and have potential for commercial impact. In other words, they must be an extension of the customer contract, a contract that involves both the customer and Tesco. Emotional attachment forms from such a value-laden contract. . . . people have an emotional bond to Tesco in that they feel we are on their side. That we look out for their interests, dont patronise them or take them for granted . . . we deliver on our promises (p. 199). Customer focus in information system design and use The design and development of the technology platform associated with the systems is crucial. Tesco invested in the technology in a focussed and practical way to enhance the customer experience. There are three dimensions to their use of technology: 1 Data collection the magnetic strip card that could be scanned at the till is an important foundation; a later, but equally important development was EPOS tills that could collect every transaction (p. 142). 2 Customer interactions customers can collect points through the scheme through transactions with various partners, and through their online purchases; Tesco have managed a portfolio of interactions that the customer has with the brand, and seek to reward every interaction. Tesco Clubcard forges a strong link between the click and brick sides of the business (p. 244). By collecting data through both clicks and bricks channels, it is easy for Tesco to see the similarities and differences between online and ofine customers, in terms of what they buy, what they do not buy, how they respond to the service and how they mix channels. (p. 246). Furthermore, data collected through customer interactions with one channel, such as in store can offer valuable insights for potential new customers, and approaches to optimising the operations associated with the development of other channels or services. In addition, Tesco has variously capitalised on word-of-mouth. For example, positive experience of Tesco Freetime deals is likely to provoke word-of-mouth recommendations. Clubs, such as the Wine Club and the Baby Club also depend on recommendations and online interactions. With Kids Club Tesco tried to encourage and capitalise on the interactions between parent and child (p. 198). 3 Data analysis Tesco have paid careful attention to the design of data analysis, starting with the core questions for the business. They have then worked to ensure: an adequate database to answer these questions; data currency; data format and quality; and, tight control of data analysis costs. A key issue is segmentation. Tesco have made signicant investment is seeking innovative approaches to segmentation, and have gradually evolved their algorithms through the following stages: . Buckets buckets create customer segmentation based on the products that people purchase. A bucket was a signicant combination of products that appeared from the make-up of a customers regular shopping baskets. Each bucket was dened by a market, a high volume product that had an associated purchase attribute, such as thrift, bulk-buy, indulgence. Buckets were used to cluster people into segments. 371

Lifestyles On the basis of buckets, 267 lifestyle clusters were dened. This allowed Tesco to match offers to lifestyles. This allowed Tesco to discount products and make offers selectively on the basis of the match between lifestyles and products. In addition coupons in the quarterly mail-outs were targeted by lifestyle, which enhanced redemption rates and such coupons therefore became a much more effective driver of customer behaviour (p. 148). Shopping habits A further renement was to seek to understand why customers behaved in certain ways. Habits started with proling the attributes of products, and then created clusters on the basis of customers product purchase prole, using these product attributes to prole and cluster customers. This process created a more limited number of clusters, dened in terms of the contents of Tesco shopping baskets, each of which had an internal logic, and a size that made them worth addressing (p. 159).

Conclusions and recommendations

This article suggests that the predominant focus of research on loyalty schemes needs to be shifted from a pre-occupation with the concept of loyalty, and the design of reward schemes and to seek to undertaken further research into how loyalty schemes can add value to the business. The case analysis of Tesco Clubcard has identied the following features that appear to be pivotal to the success of this particular scheme: . commitment and championing; . integral to business processes; . innovation and evolution; . multi-dimensional reward design; . alignment with brand strategy and values; . customer contract and value; . customer focus in information system design and use. Further research is needed in order to assess whether similar themes are also important for other loyalty schemes. Case study analysis of the design of other loyalty schemes, for other businesses, customer groups, and sectors, might provide further insight into the use of loyalty scheme for customer knowledge management.

References
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Journal of Consumer Marketing Volume 24 Number 6 2007 366 374

Cuthbertson, R. and Laine, A. (2004), The role of CRM within retail loyalty marketing, Journal of Targeting, Measurement and Analysis for Marketing, Vol. 12 No. 3, pp. 290-304. Davies, G. (1998), Loyalty cards can erode loyalty; only customer relationship programmes can build it, European Retail Digest, Vol. 20, pp. 8-13. Divett, M., Crittenden, N. and Henderson, R. (2003), Actively inuencing consumer loyalty, Journal of Consumer Marketing, Vol. 20 No. 2, pp. 109-26. Dowling, G. and Uncles, M. (1997), Do customer loyalty programs really work?, Sloan Management Review, Vol. 38 No. 4, pp. 71-83. Ehrenberg, A.S.C. (1988), Repeat Buying: Facts, Theory, and Applications, 2nd ed., Charles Grifn, London. Finch, J. (2006a), Tesco shoppers spend, spend, spend pushing half-year prots to 1.15bn, The Guardian, 4 October. Finch, J. (2006b), Rivals warn over Tesco, The Guardian, 21 October. Humby, C., Hunt, T. and Phillips, T. (2003), Scoring Points: How Tesco is Winning Customer Loyalty, Kogan Page, London. Jang, D. and Mattila, A.S. (2005), An examination of restaurant loyalty programs: what kinds of rewards do customers prefer?, International Journal of Contemporary Hospitality Management, Vol. 17 No. 5, pp. 402-8. Kivetz, R. and Simonson, I. (2002), Earning the right to indulge: effort as determinant of customer preferences toward frequency program reward, Journal of Marketing Research, Vol. 39, May, pp. 155-70. Knox, S. (1998), Loyalty based segmentation and the customer development process, European Management Journal, Vol. 16 No. 6, pp. 729-37. McIlroy, A. and Barnett, S. (2000), Building customer relationships: do discount cards work?, Managing Service Quality, Vol. 10 No. 6, pp. 347-55. Mason, D.D.M., Tideswell, C. and Roberts, E. (2006), Guest perceptions of hotel loyalty, Journal of Hospitality & Tourism Research, Vol. 30 No. 2, pp. 191-206. Mattila, A.S. (2001), Emotional bonding and restaurant loyalty, Cornell Hotel and Restaurant Administration Quarterly, Vol. 42 No. 6, pp. 73-9. Mauri, C. (2003), Card loyalty: a new emerging issue in grocery retailing, Journal of Retailing and Consumer Services, Vol. 10, pp. 13-25. Morais, D.B., Dorsch, M.J. and Backman, S.J. (2004), Can tourism providers buy their customers loyalty? Examining the inuence of customer-provider investments on loyalty, Journal of Travel Research, Vol. 42, February, pp. 235-43. Noordhoff, C., Pauwells, P. and Odekerken-Schroder, G. (2004), The effect of customer card programs; a comparative study in Singapore and The Netherlands, International Journal of Service Industry Management, Vol. 15 No. 4, pp. 351-64. OBrien, L. and Jones, C. (1995), Do rewards really create loyalty?, Harvard Business Review, Vol. 73, May/June, pp. 75-82. OMalley, L. (1998), Can loyalty schemes really build loyalty?, Marketing Intelligence & Planning, Vol. 16 No. 1, pp. 47-55. Palmer, A., McMahon-Beattle, U. and Beggs, R. (2000), A structured analysis of hotel sector loyalty programmes, 372

International Journal of Contemporary Hospitality Management, Vol. 12 No. 1, pp. 54-60. Parker, C. and Worthington, S. (2000), When lemonade is better than whisky: investigating the equitableness of a supermarkets reward scheme, International Journal of Retail & Distribution Management, Vol. 28 No. 11, pp. 490-7. Passingham, J. (1998), Grocery retailing and the loyalty card, Journal of the Market Research Society, Vol. 40 No. 1, pp. 55-63. Rosenbaum, M.S., Ostrom, A.L. and Kuntze, R. (2005), Loyalty programs and a sense of community, Journal of Service Marketing, Vol. 19 No. 4, pp. 222-33. Ross, I., Gustafsson, A. and Edvardsson, B. (2005), The role of customer clubs in recent telecom relationships, International Journal of Service Industry Management, Vol. 16 No. 5, pp. 436-54. Rowley, J. (2004), Loyalty and reward schemes: how much is your loyalty worth?, The Marketing Review, Vol. 4, pp. 121-38. Strauss, B., Schmidt, M. and Schoeler, A. (2005), Customer frustration in loyalty programs, International Journal of Service industry Management, Vol. 16 No. 3, pp. 229-52. Stone, M., Bearman, D., Butscher, S., Gilbert, D., Crick, P. and Moffett, T. (2004), The effect of retail customer loyalty schemes detailed measurement or transforming marketing?, Journal of Targeting, Measurement and Analysis for Marketing, Vol. 12 No. 3, pp. 305-18. Whyte, R. (2002), Loyalty marketing and frequent yer programmes: attitudes and attribute of corporate travellers, Journal of Vacation Marketing, Vol. 9 No. 1, pp. 17-34. Whyte, R. (2004), Frequent yer programmes: is it a relationship, or do the schemes create spurious loyalty?, Journal of Targeting, Measurement and Analysis for Marketing, Vol. 12 No. 3, pp. 269-80. Worthington, S. (2000), A classic example of a misnomer: the loyalty card, Journal of Targeting, Measurement and Analysis for Marketing, Vol. 3, pp. 222-34. Wright, C. and Sparks, L. (1999), Loyalty saturation in retailing: exploring the end of retail loyalty cards?, International Journal of Retail & Distribution Management, Vol. 27 No. 10, pp. 429-40. Yi, Y. and Jeon, M. (2003), Effects of loyalty programs on value perceptions, program loyalty, and brand loyalty, Journal of the Academy of Marketing Science, Vol. 31 No. 3, pp. 229-40. Yim, C.K. and Kannan, P.J. (1999), Consumer behavioural loyalty: a segmentation model and analysis, Journal of Business Research, Vol. 44, pp. 75-92. Yin, R.K. (1994), Case Study Research, 2nd ed., Sage, Thousand Oaks, CA.

Further reading
Huddleston, P., Whipple, J. and van Auken, A. (2004), Food store loyalty: application of a consumer loyalty framework, Journal of Targeting, Measurement and Analysis for Marketing, Vol. 12 No. 3, pp. 213-30.

Corresponding author
Jennifer Rowley can be contacted at: j.e.rowley@bangor.ac.uk

Reconceptualising the strategic role of loyalty schemes Jennifer Rowley

Journal of Consumer Marketing Volume 24 Number 6 2007 366 374

Executive summary and implications for managers and executives

This summary has been provided to allow managers and executives a rapid appreciation of the content of this article. Those with a particular interest in the topic covered may then read the article in toto to take advantage of the more comprehensive description of the research undertaken and its results to get the full benets of the material present. Loyalty programs and customer loyalty Loyalty schemes have been widely introduced within the retail and service sectors and are used by businesses to aid customer retention, increase customer spend and to encourage customers to support the organization. To date, investigation into loyalty programs has largely focused on the relationship between loyalty schemes and loyalty, and the conguration of rewards. Some researchers, however, rmly believe that loyalty is not the product of reward systems alone. Instead, they argue that loyalty schemes generate valuable data that a company can use to improve its offering in terms of price, product range, service quality and convenience. Many studies have questioned the strength of the loyalty that emerges through loyalty programs. Some have doubted its genuineness, while others suggest that the attachment may be to the notion of loyalty programs rather than to a specic brand. But one study of customers in The Netherlands and Singapore concluded that loyalty programs can impact on behavior and attitude, providing that customers only subscribe to a limited number of schemes and do not take them for granted. This raises another issue since many customers tend to hold multiple loyalty cards. While such behavior invites accusations of unfaithfulness, it has been pointed out that no one business can satisfy a customers every requirement. Which reward? But there is some conviction that creating too many schemes only serves to devalue the idea of loyalty because many customers now consider rewards a routine part of their shopping experience. Rewards nevertheless remain integral to successfully attracting participants into any scheme, so businesses must ensure that proposed benets afford the customer real added value. Customer perception of value can be inuenced by the reward type. Rewards can be direct or indirect, immediate or delayed, and necessity or luxury. Luxuries are valued more highly than necessities. An investigation into restaurant customers found immediacy, necessity, nancial contentment, quality and convenience to be most preferred. There was also enthusiasm for benets that relate to exploration and entertainment. Research has indicated customer involvement as a factor in the type of rewards favored. When involvement is high, direct rewards are more preferable and immediate rather than delayed rewards are more effective in low involvement situations. It is, however, acknowledged that the reward type offered may depend on the nature of the transaction between business and customer. There is also evidence that loyalty is perceived as a mutual phenomenon and that there is greater inclination to be loyal to an organization when customers believe the organization has demonstrated loyalty towards them. Studies have discovered investments of love, status and information to be 373

more effective inducers of customer loyalty than investments of money. It is felt by many that no single recipe exists to guarantee successful loyalty programs. The appropriateness or not of any scheme may well be dependent on the sector, geographical market or other factors. Alignment between the program design and marketplace and sector characteristics may therefore be crucial. Rowley is among those who support a more strategic approach into the impact of loyalty schemes on the premise that it enables understanding of the business processes that can be inuenced by these schemes. Such an approach recognizes the need to develop the ability to merge loyalty programs with key business processes such as those linked to customer relationship management. Tesco Clubcard and how it works Within the present work, the author presents a case study of Tesco Clubcard in order to illustrate how loyalty schemes provide a knowledge-based contribution that helps improve marketing and performance and grow brand value. This particular loyalty program was selected because of Tescos position as the UKs largest retailer with a substantial customer base that includes many who make purchases at regular intervals. This provides depth and width to the data generated by the Clubcard, which integrates both in-store and online transactions. Tesco is now the worlds largest grocery e-tailer. Top level commitment and educating staff about the importance of Clubcard and the role expected of them have been constant features since the programs well executed launch in 1995. Tesco regards Clubcard as a way to regularly show its appreciation to its customers, who are treated as individuals within a mass retailing framework that offers choice and value. By using their Clubcard, customers provide data that is used by the company to provide subsequent value. In the companys words Clubcard database provides a list of people to target and a sophisticated understanding of these customers who help shape the brand when they become members of the program. Technology has a crucial role to play and data is collected for subsequent analysis via the magnetic strip card and at EPOS tills. Through this analysis, the company is able to create inventive approaches to customer segmentation. Careful scrutiny of regular shopping habits has led to identication of segments such as thrift, bulk buy and indulgence. These segments or buckets are then subdivided into different clusters dened by lifestyle. Focusing on the contents of the customers shopping basket enables Tesco to design its rewards accordingly. Rewards are delayed and are distributed through four quarterly mail outs that include points vouchers, product specic coupons and other offers. These selective discounts and offers are based on the match between product and lifestyle, all individualized according to previous purchase behavior. Accumulated points can be exchanged for in-store necessities or luxuries such as travel, holiday and leisure, purchased via Tescos Freetime Deals Catalogue. Boosting brand prole The Clubcard and Tesco brands are co-promoted and mutually support each other. Tesco also works closely with other businesses, and customers are able to earn reward

Reconceptualising the strategic role of loyalty schemes Jennifer Rowley

Journal of Consumer Marketing Volume 24 Number 6 2007 366 374

points for transactions made elsewhere. While the company retains control of Clubcard, partner organizations benet from lower operational costs, involvement in promotion and branding, and valuable insight into the habits and requirements of signicant sectors of their own customer portfolio. The importance of responding appropriately to information gathered is emphasized in the various clubs introduced to extend the company-customer bond even further. In the Baby Club, for instance, Tesco was able to learn that the main requirement of members was to receive authoritative, responsible advice on the babys health, diet and development and that offers and markdowns were of lesser importance. Acting on such information has enabled Tesco to make a success of this and other clubs to the extent that general sales have been boosted through the ventures as well as transactions involving relevant products. Tesco has also used Clubcard data to enhance other major business developments. One example is Tesco Personal

Finance (TPF), which has emerged as a fast growing and signicant nancial services company with the ability to attract customers through brand recognition and loyalty. Clubcard data, in-store promotions and a competitive product combine to make customer recruitment costeffective, thus giving competitive advantage over conventional providers of nancial products. Rowley suggests that further research is required into other loyalty programs in order to ascertain whether or not the factors identied here have widespread signicance. She also recommends case study analysis of loyalty schemes for other businesses, customer groups and sectors since this might help further develop awareness into the contribution of such programs towards effective customer knowledge management. cis of the article Reconceptualising the strategic role of (A pre loyalty schemes. Supplied by Marketing Consultants for Emerald.)

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