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Today in this competitive business environment it has become essential for companies to remain competitive by not only attracting new customers but also to retain existing customers. Today the cost of attracting new customers is five times more than to retain existing customers (McIlroy and Barnett, 2000). And therefore marketing objectives of many companies has shifted from attracting new customers to retaining existing customers as stated by (Shoemaker & Lewis, 1998). Reichheld, (1990) in his research study stated that retention of existing customers helps companies to earn more profits as the cost of maintaining good relationship with existing customers is less than attracting new customers. Loyal customers help companies to increase their sales and ultimately its profits. Bowen and Shoemarker, (1998) stated that loyal customers also help companies to market their product among their relatives and friends with the help of word of mouth tool of marketing. Today majority of companies are using loyalty programs to build loyalty among their customers. The use of Loyalty program to attract customers was first introduced by American Airlines in the year 1981. And gradually today loyalty programs are used by many companies providing various services like retail, car, hotel, and so on (Palmer et al, 2000). In spite of growing use of loyalty programs by many companies many authors have argued about effectiveness of these loyalty programs. O’Brien and Jones, (2000) stated that introduction of loyalty program involved huge amount of money and in spite of this, many companies has stated that even after putting huge amount of money in loyalty programs they have failed to maintain loyalty among their customers. O’Brien and Jones on the other hand stated that the concept of loyalty program has misunderstood by many companies as many companies started using loyalty program for its short tem promotion. And therefore because of this, customers become loyal to loyalty program of companies rather than towards company itself.
Kumar and Shah, (2004) stated that the main objective of every company is to earn more and more profit and one of the most effective method to earn profits is developing loyalty among customers. Apart from this, if a company is interested to develop loyalty among customer without considering profitability then it would create difficulty for company to achieve success in the long run. The concept of customer loyalty is very difficult to define as many authors and companies relate the concept of customer loyalty with repeat purchase from customers. Kotler, Bowen & Makens, (1999) defined customer loyalty as customers willingness to return to company for satisfying their needs and wants and also helps organizations to perform their partnership activities like willingness of customers to spend most of their shopping times on premise of companies and provide positive feedback to companies and also helps companies to market their products and services with the help of word of mouth marketing. Shoemaker and Lewis, (1998) stated that there are two most important factors that leads to customers loyalty like customers emotional connection towards certain products and services and customer willingness to re-purchase from the same company. Kumar and Shah, (20004) has identified that there are two types of loyalty and that is behavioral and attitudinal loyalty. Whereas Backman & Crompton (1991) identified that there are two important factors affecting customer loyalty like degree of repurchase and the degree of attachment i.e. attitude of customers. Analysis of Backman and Crompton model is stated below.
From the above diagram we can see that there are four types of loyalty like Premium loyalty, Inertia loyalty, Latent loyalty and no loyalty. Premium loyalty toward company’s products and services can be developed when customer has high level of attachment as well as ready to visit to company premise repeatedly. Inertia loyalty occurs when customers are willingness to repurchase from company but does not have any emotional attachment towards company or its products and services. Latent loyalty is developed when customers has strong emotional attachment towards company but they are not willingness to repurchase from company. No loyalty is the fourth type of loyalty which occurs when customers are not willingly to repurchase from company neither they have any emotional attachment towards company or its products and services. Customers that are premium loyalty towards company help company to develop more loyal customers. Apart from this, premium loyal customers are most important tool of company as it is very difficult for competitors to attract such type of customers. Apart from this type of customers, inertia loyalty type of customers is more likely to get attracted towards competitor’s offerings and therefore it become important for company to use other means of marketing strategies to attract these customers and to make such type of customers more loyal towards company (Baloglu, 2002).