Loyalty Program in Ren Bank - Assignment Example

Loyalty Program in Ren Bank Letter of Transmittal To the Chief Executive Officer Ren Bank Dear Sir, Ref: Loyalty Program in Ren Bank This is to bring to your attention the indispensable need of an effective loyalty program for the bank. This is backed by the competitive nature of the market in which the bank operates in. there is need for the bank to come up with such kind of a program if it is to allocates itself a given share of the market. Research as well as market news indicate that customers become loyal to a given firm if some aspects of customer satisfactions are met by that firm. Hence, the bank should try and get the customers loyal to its services and the bank as a whole. In light of these views, the following is a report that outlines a loyalty program suitable for Ren Bank and it is based on sustaining the existing customers as well as attracting new ones. It is my hope that you will find the following report fundamental and effective for the bank to adopt and realize the projected growth both in customer base and profitability. Sincerely Name EXECUTIVE SUMMARY Business competition is stiffer as more people venture in already saturated businesses. Developing a strategy to keep customers visiting and loyal to the business is critical for any business today. Loyalty programmes are designed to keep customers visiting a business regardless of competition pressures. Loyalty programmes have been in existence, are widely known and used. They involve giving incentives in form of gifts, bonus points and personalized service to customers. Customers enjoy these incentives while in return the business is assured of a constant business client. Despite large profit made from loyal customers, there are disadvantages involved with loyalty. For example, banks have been shown to compromise privacy of clients’ information. There are benefits and expenses associated with loyalty programmes to both the business and customers. However, benefits outweigh liabilities and the programme is proved more beneficial to a business. From a small survey done to evaluate people on knowledge about loyalty, all the persons interviewed are aware of the programmes and are in one way subscribed to one or more of these programmes. When well planned and implemented, loyalty programmes increase business profitability and stability as reliance on new customers is reduced. This paper evaluates information about loyalty, to draw appropriate conclusions on its applicability in Ren bank. Table of Content Title Page 1 Letter of Transmittal 2 Executive Summary 3 1.0 Introduction 5 1.1 Background Information 6 1.2 Aims 7 1.3 Scope 7 2.0 Customer Loyalty and Relationship Marketing 8 2.1 Literature-based Evidence 8 2.1.1 Managing Value through Loyalty Programs 8 2.1.2 Customer Benefits and Sacrifices in the Value Equation 10 2.1.3 Benefit of Retaining Customers 11 2.2 Survey 11 2.2.1 Findings 11 2.3 Existing Loyalty and Relationship Marketing Programs 12 2.3.1 Examples of Existing Outlets 12 3.0 Conclusion 14 4.0 Recommendation 15 Appendix 17 References 19 1.0 Introduction Business competition is inevitable in any legal business today. Therefore, marketing strategies have shifted to relational from transactional relationships. Businesses are competing for the same customers and offering the same products (Gaurav, 2008, p. 8). Therefore, a business need to design itself in a way that it is a notch higher that its competitors. This is by introducing a unique product or incentive, which pleases the customer and makes them coming for more. Whatever method introduced should be economically viable, quantifiable and justifiable to not only increase sales but also influence frequency and basket size (Soman, 2009). What is of vital importance in creating customer loyalty is increasing the wallet share (Yuxing, Wagner and Mela, 2007, p. 94). Wallet share is the amount of money a customer invests in a business compared to the amount invested with competitor businesses. This share is usually higher for a loyal customer than a non- loyal one. In addition, it gives information on customers’ attitude towards a business hence a business is able to identify weak points that are making the customers opt for the competitors. Maintaining a customer comes along with several benefits. Loyal customers are not easily swept away by competitor winds, they are easy to serve, and they increase the shareholder and are more profitable (Curran, Varki and Rossen, 2010, p.180). However, introducing loyalty programmes in an expensive exercise and success is not guaranteed. Success of these programmes depends on design. The design of the progmamme should be appropriate for specific customers. It should be customer focused (Soman, 2009) and (Leonard, 2002, pp. 33). Maintaining a personal relationship with the customer is another vital role in customer relationship marketing. Language used to communicate should be understandable by the customer. The personal relationship individualizes customer needs (Buttle, 1996, p. 17). Therefore, the staff will need to be trained to handle clients on a personal basis, balancing between professionalism and personality. From a survey carried out about the same, most respondents were positive about customer relationship marketing. Therefore, it is a risk worth taking as probable returns are high. 1.1 Background Information Ren bank is a local bank with fifty branches throughout the county. It has been in operation for the last seventeen years. It was started in 1995, as a financing institution and has grown through the years to the bank it is now. A CEO who was the founder of Ren financing institution heads it. The bank offers various banking services to its clients. It has accounts affordable to middle and low class earners. It offers loans at fair interest rates, mortgages and serviceable credit cards. In addition to handling finances, the bank sponsors various community schemes. These include, “child’s sight” that sponsors children below five years with any sight problems and “women’s development programme” that supports single women. In addition to debt value, the bank holds assets for clients. Information about the customer status with the bank is completely confidential. The bank works independently, that is, it does not share customer information with other banks whosoever. The bank has about three thousand employees all who are competent for specific tasks. It offers on job training programs thus improving employees’ competence. The highest recorded employee turnover is 15% but in the last five years, this rate has reduced to 7%. The bank offers competitive remuneration to the employees as well as other incentives. Job offers are publicly advertised. Since it was launched as a banking institution, Ren bank has recorded significant annual profit margins. However, due to competition, the rate of increment of profits has reduced in the last couple of years. In addition, the bank has noted a slight increase in non-operational bank accounts as well as a decrease in borrowing customers. Most of the customers are average earners and investors, with the bank relying heavily on bulk of customers instead of customer value. The bank is sensitive about numbers joining the bank to save, borrow or invest. However due to competition, maintaining a number that will break even is being threatened. 1.2 Aim This paper aims at evaluating customer loyalty and relationship marketing programme as a marketing tool in Ren bank; its success, benefits and requirements. The paper will then give a recommendation depending on these findings. 1.3 Scope The paper evaluates how customer loyalty and marketing relationship programmes have succeeded in business marketing in the past, quality features of successful programmes, how customers and the business benefit from loyalty and the cost met in introducing relationship programmes. Further, the paper evaluates a small survey on the attitude people have towards relationship marketing. Finally, it will give a recommendation statement for the same strategy in Ren bank. 2.0 Customer Loyalty and Relationship Marketing Marketing in any business is inevitable. It is done to pull customers towards the product and to push a product through distribution channel (Buttle, 1996, p. 3). Due to competition, new marketing strategies are devised to ensure that a business maintains desired profit margins. 2.1 Literature Review 2.1.1 Managing Value through Loyalty Programs The intention of building customer relationship is to create loyalty to products or services offered. Loyal customers are more profitable, increase shareholder value, forgive easily in case of disappointments and are easy to serve. In addition, they are more resistant to competitive brands. On the other hand, pursuit for loyalty is expensive and may be partial of fruitless. However, intensive research needs to be done on customer loyalty (Curran et al, 2010, p. 180). From a research done by Curran et al, value plays a major role in influencing loyalty. Whether or not the customer is satisfied with the product or service in relation to the price paid affects his or her attitude (Curran et al, 2010, p. 183) and (Z Yang 2004, pp. 800). This attitude affects a future decision while purchasing the same product. Decision to purchase a product by a new customer is solely dependent on value. Thus, failure of such a client to perceive value in a product hinders future purchases and brand experience (Curran et al, 2010, p. 195). While developing loyalty, customer relationship is paramount. In Relationship marketing strategy, customers are regarded as individuals with individual needs. They are regarded as knowledgeable co-producers of the company. A mutual relationship between the company and individual clients is created (Gummesson, 2002, p. 54). The Relationship between a client and a customer influences the customer’s attitude towards the business. It affects the decision of current and future purchase of the product (Curran et al, 2010, p.180) and (Karadeniz, 2010, pp. 16) Another effective strategy in creating loyalty is construction of exit barriers. These strategies discourage the client form leaving the business. They are mostly in form of rewards. Rewards, coupled with establishing customer rapport results into true loyalty where brand performance is strong (Curran et al, 2010, p. 196). To understand customer value to a business, internal and external data is required. Internal data is the relationship the customers have with the business while external data is the relationship between the customer and competitors. With this data, gauging the potential of a customer is more realistic (Yuxing et al, 2007, p. 109). In addition, a business asses its value to a customer through the share of wallet (SOW) value it takes with a customer. That is, what portion of the client’s investment is allocated to that company is comparison with competitor companies (Bhatnagar, 2012, p. 50). The grater the SOW, the more the client is valued within the Customer Relationship Management Framework. This relationship is determines with an integration of certain variables. These include recency, frequency and monetary value. There is no fixed weight attached to any of the variables (Bhatnagar, 2012, p. 51). From a research done in a major bank in the United States, most of the debt value is taken up by customers within 20% of the banks’ debt clients. The same case applies to assets. The greatest portion of the assets belongs to the top 20% of the bank’s asset customers. These groups of customers have little relationship with competitor banks. This indicates that in addition to internal information, knowing the position of clients with competitor is necessary in creating loyalty pool (Yuxing et al, 2007, pp. 95-96) and (Leonard, 2002, p. 38). A good loyalty program should be able to treat customers individually and differently (Soman, 2009). This is the main concept of relationship marketing. In addition, it should enable one to match customers with particular marketing interventions. Thus, investment in these interventions is done only to the target customers. In addition, a good programme should be one that enables a business to identify and influence specific behaviors that influence sales (Soman, 2009). Though the intention of incentives and loyalty programs is to increase sales, that vague goal may lead to investing in inventive programmes that do not influence ales volume significantly. It may be an investment that the client may not necessarily need. With a loyalty program, the business should be able to identify specific needs for incentives and set specific measurable goals to determine whether or not the program is viable (Mustafa 2010, p. 20). For example, instead of increase in total sales of a product, factors such as frequency of a customer and increase of purchase per visit may give more light on the kind of incentive needed (Soman, 2009). Maximizing customer value involves generating the most from a customer while reducing advertisement costs. 2.1.2 Customer Benefits and Sacrifices in the Value Equation For a long time customers have enjoyed discounts, cash backs and bonus points with loyalty programmes. In addition, the customer enjoys individualized emotional and transactional relationships with the business. Focus is currently changing to hedonic and symbolic motivation of being loyal to a program (Soman, 2009). By participating in loyalty programme, customers sacrifice their private information, for a company to draw data. Retailers and service providers are selling customer data for the purpose of data mining and customer profiling. Such illegal businesses jeopardize customer’s privacy. For example, some United States banks sell customers’ information related to shopping to traders who use it to make certain deals. Protection of private details of customers is not guaranteed by such banks despite the claim that it is not revealed (Bhatnagar, 2012, p. 53). 2.1.3 Benefit of Retaining Customers Customer retention is crucial. A customer benefits a business by covering up for the initial cost of acquiring him and accruing benefits that outdo retention cost. The initial cost of acquiring a customer is higher that maintaining the same customer (Bhatnagar, 2012, p. 51). In addition, a loyal customer is less resistant to competitor companies, is more forgiving in case a business makes a mistake and in some cases assists in marketing by referring friends and relatives to the business (Curran et al, 2010, p. 180). There is need to strike an optimal blend of retaining clients and obtaining new ones so as to make optimal output from customer resources (Bhatnagar, 2012, p. 51). 2.2 Survey A survey is carried out to investigate people’s attitude towards loyalty programmers. A sample size of seven is randomly selected and a few questions administered. The survey has both closed and open ended questions. Raw data on the survey is attached in the appendix (appendix 1). 2.2.1 Findings From the survey, a group of seven randomly selected respondents was interviewed. Aspects of gender, age and social class were not considered when selecting the sample. A simple questionnaire was used to get information about the familiarity with loyalty programmes, whether or not the respondent uses them and their opinion towards these programmes. All the respondents were aware of existence of loyalty programmes. Of the seven, six of them use these programmes in different business sectors. Four out of the six, use them in banks, three of them in supermarkets, three in ice cream vendor shops, two of them in airlines and five in fueling stations. Benefits accrued by customers from these programmes range from reduced borrowing rates in banks, where 75% in bank loyalty programmes benefit. All the respondents who use the programme in banks enjoy personalized banking. From supermarkets, customers enjoy discounts and bonus points, which are redeemed free goods. Ice cream vendors offer free ice-cream for every count of 10 while in airline, 50% of the respondents enjoy free flights and 100% enjoy better class and lounge. 2.3 Existing Loyalty and Relationship Marketing Programs Relationship marketing is not a new concept. It has been used and proven successful in many sectors. Examples of these include credit cards given by banks and organizations such as American express offer a range of benefits. In addition, many businesses have “preferred customer” cards, for example, fueling stations, supermarkets, coffee shops, fast food outlets among others. This card comes along with incentives that keep the client loyal to the same outlet. It can be accumulation of points, which earn a free service or product after hitting a particular mark (Soman, 2009). 2.3.1 Examples of Existing Outlets A sandwich outlet with stamp card, which is stamped at every purchase, is another example. Once the stamps count to ten, they are redeemed with a free sandwich. Airlines allow members to earn miles with every flight. These miles are redeemed for a free flight, upgrading to higher classes on a flight, priority boarding or dedicated seating. With the Cathay pacific airline for example, these miles are redeemed at specified hotel or car rentals (Soman, 2009). The Canadian tire, a store in Canada has a programme called “Canadian tire money”. It is designed to resemble dollar bills, which are used to make a purchase after considerable accumulation (Soman, 2009). From the examples above, loyalty is either bought or rewarded. The sandwich maker and the Canadian store reward customers due to loyalty. However, there are some businesses where the customer will be required to fill out a form to apply for a card, with whichout, which no reward is given. In such a scenario, a customer is buying the reward (Soman, 2009). The major benefits with loyalty programmes is customer retention, increased purchases through cross-selling and up selling, increase in frequency of visits hence more sales, higher marginal products and services and referral of friends (Soman, 2009). In addition, the ability to generate relevant data from loyalty programmes in of vital importance. Therefore, a programme from which data cannot be obtained is regarded just as a discount. While a third party programme may give rich data in customer preferences, it may be restricted by the third party business, which holds and distributes data. For example, in the scenario of Cathay pacific airline, the third party (hotels), hold data about the loyalty programme. If hotel policies restrict distribution of this data, then this is a drawback to the airline. On the other hand, while, the Canadian store or sandwich vendor may have poor data, it is in their systems and can freely use it do a desired study (Soman, 2009). From the survey carried out, loyalty programmes are not only in existence but also widely known and used. All the interviewees were aware of loyalty programmes and six out of seven enrolled to them. A surprising figure of 67% uses them in banks while over 80% are enrolled to fueling station loyalty programmes. This is an indication that though customer relationship and loyalty programmes is not a discipline yet, it has been heavily embraced as a marketing strategy in most businesses regardless of services or products offered and size. Businesses would not do embrace them if there were not returns from loyalty programmes. 3.0 Conclusions Customer loyalty relationship marketing aims at maximizing the share of wallet of a customer to a business. Maximizing this share increases the value of a customer to the business. The business makes most profits from customers with more value than those without. This does not rule out the need for new customers. A business should maintain an optimum level of new and existing customers. In pursuit for loyalty, there are a number of requirements a business needs to fulfill before trying to maintain a loyalty base. First, the products and services offered should fit the customer. What a customer pays for is vital and should match the money value. Secondly, customer relationship with the business is vital. How employees handle clients, the language used, how the business adjusts itself to meet customer need and satisfaction level of the client determines whether he or she will visit the business again. The third requirement for maintain customers is to create an exit barrier. This barrier may be in form of discounts, bonus points or free product o services. Whatever barrier selected, should be one that the customer enjoys and needs the benefits. A barrier that a customer can comfortably do without may be fruitless. Considering the cost of a loyalty programme, intensive internal and external survey needs to be done before deciding on the type of barriers to use. Loyalty programmes is a mutual relationship between the customer and the business. The customer benefits in form of bonuses, discounts and free services and products. On the other hand the business makes bulk profits from the client. Additionally, the business is assured of a constant customer base regardless of competition storms. As discussed above, this base of loyal customers holds most of the business shares. From the survey findings, loyalty programmes are not new. They are widely known and used. A surprising figure of 67% of the interviewees is enrolled to loyalty programmes in banks. This means that these banks already have a reliable customer base. From the survey done on United States banks, the top 20% loyal customers hold most of the banks’ assets and liabilities. From these statistics, it is possible to draw a conclusion that, most businesses depend more on loyal customers than new ones. Loyalty programmes have their draw backs as marketing strategies. First, they are very expensive to implement yet the benefits expected are not guaranteed. Secondly, unless an intensive survey is done on where to use the programme, copying such a program from a competitor and implementing it on the business clients may not yield any benefits. In addition, it may be used as an incentive for a product or a service that a client could have anyway purchased without it. With this, loyalty programmes appear as a gamble. There is no assurance of positivity with it. 4.0 Recommendations From the study above, loyalty programmes have more benefits accruing to them than expenses. With the current trend of customer flow in Ren bank, introducing a loyalty programme will do the bank better than harm. Considering the customer base for the bank are the majority (medium and low income earners), introducing a loyalty program that is convenient to them is important. This group of clients relies heavily of borrowing; therefore, the bank may give a interest rate allowance to customers who have been consistent in borrowing and servicing their loans. To start with, this incentive should be given to customers who have banked with Ren bank for the last five years. Their records should be retrieved and scrutinized for defaults and consistency. Reducing interest rates for these customers by 2% does not affect the current profit margins. For clients who have been consistent in the bank for the last 2 to five years should get a decrease in interest rate by 1% from the current rate. With this decrease in borrowing rates, customers are more likely to top up their loans so as they repay the whole amount with the lower rate. This will actually raise profit margins to the bank. Customers are not aware of such arrangements as very few read through the terms and conditions given when taking a loan. Therefore, the bank is going to deploy relationship managers who will handle the customers individually. Introducing a personal relationship between the client and the bank will increase confidence in the bank and is most likely to recommend another person. Protecting customer information is a must at whatever level. This information will not be shared to any outsider. APPEDIX 1 Number of people interviewed was seven question yes No Are you aware of loyalty programmes 7 0 Do you use loyalty programmes 6 1 Where do you use the programmes Bank- 4 Supermarkets- 3 Ice cream vendors-3 Airline- 2 Fueling - 5 What benefits do you gain from loyalty programmes? From banks 1. Reduced interest rates for personal loans 3 2. Personalized banking 4 From Supermarkets 1. Discounts and bonus points 3 Ice cream vendors 1. Extra ice cream for every 10 bought 3 Airlines 1. Free flights 1 2. Better class and lounge 2 Fueling 1. Free fuel with 5 2. Free mechanic services 1 What are the limitations of loyalty programmes? 1. It is a trap, binding one to using a limited variety of business services 2 2. Private information is at risk 3 References Namita, Bhatnagar (2012). Customer Relationship Marketing: Customer-Centric Processes for Engendering Customer- Firm Bonds and Optimizing Long-Term Customer Value, Advances in Customer Relationship Management, Dr. Daniel Catalan-Matamoros (Ed.), ISBN: 978-953-51-0516-9, InTech, Available from: http://www.intechopen.com/books/advances-in-customer-relationship-management/an-overview-of-relationship-marketing-resource-allocation-decisions-loyalty-and-emotions-in-optimizi Buttle Francis. 1996. 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