Literature Review

Over view

Literature review has been developed as a foundation for the report based on the research articles and reviews of authors and concentrates on the research questions developed previously based on the topic – Frequent flyer programme on customer retention and customer loyalty. The various concepts and theories which related to customer loyalty has been analysed in the initial segments of the report. Further the concept of the loyalty programs in the airline industry in terms of the frequent-flier program has been analysed along with the impact of these programs on customer retention. The several models of the frequent-flier program and the advantages and disadvantages have also been discussed in the sections of the report.

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Customer loyalty

When analysing from the fundamental viewpoint, customer loyalty is what is exhibited by the customers towards products and services and even organisations (Pegler, 2004). Many researchers had analysed the significance of loyalty in enhancing an organisation’s sustainability and has defined it as differently from brand loyalty (Ferguson and Hlavinka, 2007). One of the significant conclusions developed by Stauss, Schmidt and Schoeler, (2005) is the formation of an attitude, expression and character by the customer towards not the product or service but the organisation itself. This has been furthered by Uncles, Dowling and Hammond, (2003) who identified that loyalty is the repeated purchase behaviour exhibited by a customer moderated by the characteristics and situations (Allaway, Gooner, Berkowitz and Davis, 2006).

Figure 1 – Conceptualisations of customer loyalty

(Source – Uncles, Dowling and Hammond, 2003)

The above framework of customer loyalty identified by the Uncles, Dowling and Hammond, (2003) based on several research studies have indicated several types of loyalty to the brand which is considered to be different from the loyalty to the organisation (James, 2002). But some of the other researchers Pegler, (2004) have undertaken research studies by concurrently evaluating brand loyalty and organisational loyalty. Similarly Ferguson and Hlavinka, (2007) further promotes the view that since the brand is associated with a particular organisation and has high relativity with each other, brand loyalty and organisational loyalty can be concluded to be significant and similar.

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Even analysing brand loyalty and organisational loyalty from the same perspectives, it can be seen that based on the above three different models, customers develop attitudes and positive beliefs, habitual repeat purchases based on different purchase situations and occasions which leads to different types of loyalty towards different brands (Allaway, Gooner, Berkowitz and Davis, 2006). But several of the researchers have concluded that the attitudinal commitment is an important principle required to develop loyalty (Curasi and Kennedy, 2002). Consumers who are taking a consistent and favourable opinion towards a particular product or service measured by their perceptions towards the brands, commitment, recommendations and the competing attitudes towards other brands is an important source of evaluating customer loyalty (Hobbs and Rowley, 2008).

Many researchers have identified that the profitability increases with an increase in loyalty to a particular brand or an organisation (Lacey and Sneath, 2006) which constituted towards the development of customer relationship management. It is on this basis that several organisations have identified and created loyalty development tactics which delivers less susceptibility to negative information and switching to other brands. Considering the theoretical portions apart, many practitioners have identified that long term relationship with the customers can significantly increase the revenue by cross selling and up selling which further promotes higher profits (Wu and Wang, 2012). This influenced the concept of the development of customer life-cycle management which is the duration of a consumer with an organisation but considered by Schoenbachler, Gordon and Aurand, (2004) as not perpetual.

In identifying customer life-cycle management principles several researchers have undertaken the need to evaluate the dissatisfaction of the customer, the search and evaluation of customer for value addition etc. which can increase their levels of switching from one product or service or even organisation to another (Hansen, Deitz and Morgan, 2010). This has led to the enhancement of the influence of customer life-cycle management which further reinforces the customer relationship management concepts based on acquisition, development and retention (Morrisson and Huppertz, 2010). On this basis it can be concluded that the concepts underlying customer relationship management and life-cycle management have significant consonances. Further evaluating the practical aspects of developing loyalty either through customer relationship management or life-cycle management has benefited from the development of loyalty schemes which encourages repeat purchase behaviour (Tuzovic, 2010).

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Concept of loyalty programs

Loyalty programs offer the late accumulation of tangible and intangible advantages to the customers (Zeithaml, Bitner and Gremler, 2005). From a practical sense this develops and manifests into an accumulation of points which in the future can be converted to tangible and intangible rewards from the organisation (Blackwell, Miniard and Engel, 2001). Some of the researchers have identified a difference between customer relationship management and loyalty schemes based on the concept that relationship development is the creation of an emotional bond between the two parties (the customer and the organisation) or the customer and the brand (Trasorras, 2008). On the other hand Oliver, (2010) have evaluated customer relationship management as the development of a relationship based on communication.

Further taking a practical aspects of loyalty program Villaneuva and Hanssens, (2007) have identified the integral nature of the marketing actions developed to enhance the personal relationship. Since the underlying concept behind relationship management is to develop a focus on the customer, many organisations have come up with unique value adding propositions based on the needs and requirements of the customers (Rust, Zeithmal and Lemon, 2000). Furthermore Baran, Galka and Strunk, (2007), have evaluated the necessity for identifying, maintaining and developing the revenues from the most valuable customers through the loyalty schemes.

The advances in information technology have enhanced and organisation’s ability to access consumer behaviour which is used to develop loyalty schemes as instruments of discrimination (Bateson and Hoffman, 1999). Significantly the concept of discrimination and exclusivity (Barnes, 2006) has played an important part in the customer’s adoption of several loyalty schemes. Moreover information about customers is not only about purchase behaviour but also above the types and underlying factors behind switching to competitor’s which encourages organisations to develop delayed action (Thurau and Hansen, 2000) which is manifested by rewards schemes promised for the future.

One another consideration related to loyalty schemes and essentially the customer retention strategy is to create switching cost in order to enhance the length of the relationship and the possibilities for up selling and cross selling based on the rewards schemes provided through loyalty programs (Soman and Marandi, 2009). This is manifested by the development of loyalty schemes where the points earned by a customer are not transferable to another organisation which enhances the switching cost. Along with this Boone and Kurtz, (2011), have also identified the exclusivity and individualistic motivations manifested by preferential treatment. An important research conducted by Boone and Kurtz, (2011), have identified the strong likelihood of the customers identifying themselves more with the organisations based on the principles of exclusivity and preference.

Impact of loyalty programmes

On the basis of the above discussion, although different concepts and foundations are utilised to develop loyalty schemes, Blattberg, Getz and Thomas, (2001), have concluded the motivations of the loyalty programs based on their impact on consumers purchase behaviour. Based on the practical considerations Lowenstein and Griffin, (2001), have analysed the need for developing and differentiation in order to enhance customer loyalty and contribute to increase purchase behaviour. Hence the underlying marketing concepts related to service and product differentiation play a vital part in creating sensitivity of the customer to purchase their product or service contributed by the loyalty programs.

Moreover the loyalty programs generated by the organisations are designed and developed in such a way that consumers sensitivity towards prices are diminished (Cronley and Kardes, 2010) thereby motivating them to pay a premium in order to accrue the future benefits. But the concept of the willingness of the customer to pay a premium price has been refuted by Capon and Hulbert, (2007) based on the fact that price sensitivity is an important characteristic which formulate the customer purchase behaviour. But several other researchers have identified that the future reward programs indeed has an effect on the consumer’s purchase behaviour which obliterates the price sensitive perception and reduces the sensitivity towards competing products and services (Chapple, Moerman and Rudkin, 2010). This is further contributed by the research done by Bruning, (1997) who argues that the consumers lack of ability to compare, contrast and evaluate the different alternatives because of the repeated purchase of a particular product or service contributes to an inadvertent willingness to pay a premium price.

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Although customer loyalty programs are considered to be increasing the profits from a small segment of users, in practical sense the impact of loyalty schemes are assumed to be universal (Bejou and Palmer, 1998). Hence the exclusivity and preferences are diminished as the consumer’s ability to access the loyalty programs increases (O’Malley, 1998). Although this creates repeated purchase motivations and intentions from all type of customers, Ahmed and Farhat, (2010) have identified that the impact of such universal loyalty schemes will become negligible as the competition increases which can also of offer similar rewards schemes without hurting their revenue basis. One another practical aspect related to customer loyalty schemes is the retention strategy based on providing benefits and implementing switching costs. Loyalty schemes through their provision of rewards which can be converted to tangible and intangible benefits in the future enhance the repeat purchase behaviour along with the switching cost.