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Chapter 1


Introduction.6 Aims and Objectives...8 Scope ..10 Rationale .10 Methodology...1 0 Conclusions & Recommendations11

Chapter 2

Literature Review The Concept of Loyalty13

Customer Loyalty Programmes.23 Loyalty as Strategy33 Rhetoric Vs. Reality..36

Chapter 3


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Research Methodology.40 Summary of Results.46 Chapter 4 Analysis

Results48 Discussion of Results.56 Origin and Motives64 Tescos definition of Loyalty.63 Success Factors..66 Strategic implications of the Clubcard72 Competitive Pressures....77

Chapter 5

Conclusions and Recommendations




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List of Figures Fig 1 Categorization of The Loyalty Concept Fig 2 Conceptualizations of Loyalty Models Fig 3 Categories of Loyalty (O Malley model) Fig 4 Motivator, De-motivator (Diller model) Fig 5 The 5P Loyalty Strategy Fig 6 Characteristics of Loyalty programmes (Butscher model) Fig 7 Opportunities for using customer information Fig 8 Behaviour based CLP (Morgan et al model) Fig 9 Relationship-based CLP (Morgan et al model) Fig 10 The Ideal Customer experience (Fournier et al Model)

Figures 11-19 depict survey results

Fig 11 Customer Loyalty index sorted by female and male Clubcard members Fig 12 members Customer loyalty dimensions: Female and male Clubcard

Fig 13 Overall customer loyalty for Tesco-Clubcard members and non-members

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Fig 14 CLI of Clubcard and non-Clubcard members on loyalty parameters Fig 15 Fig 16 CLI of Clubcard members by occupation CLI of Clubcard members by size of household

Fig 17 Percentage of monthly grocery budget spent with Tesco (Clubcard-members) Fig 18 Percentage of monthly grocery budget spent with Tesco (non-Clubcard members) Fig 19 Fig 20 Fig 21 Fig 22 Factors in selecting a supermarket The Loyalty Cube Six Key success factors COFP diagram

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List of Acronyms CIU Customer Insight Unit CLP Customer Loyalty Program CLI Customer Loyalty Index CRM Customer Relationship Management LTV Life-time Value LTVA Life-time Value Analysis RFV Recency, Frequency, Value ROI Return on Investment SWOT Strengths, Weaknesses, Opportunities, Threats TPF Tesco Personal Finance 4Ps - Price, Place, Product, Promotion,

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Introduction (Overview and Background)

Traditionally, marketing has focused on market share and customer acquisition rather than on retaining existing customers and on building long-lasting relationships with them (Kotler, 2003). More recently, however, market share has been gradually losing its revered status as marketings holy grail and the wisdom of focusing solely on customer acquisition (hoping that this effort will compensate for high levels of defection) is now being seriously questioned and considered as very high risk since ever more players enter an increasingly crowded marketplace (Baker,2000). In response to these changes there has been a new emphasis on defensive marketing, which focuses on holding on to existing customers and getting more custom from them (higher share of customer), in contrast to activities which focus on winning new customers. Calls for a paradigm shift to the pursuit of loyalty as a strategic business goal have become increasingly popular over the recent years (Sharp & Sharp, 1997).

Accordingly, in Feb 1995, Tesco changed the way it did business so fundamentally that its effect is still seen in every part of the company. The events changed the way Tesco makes decisions, develop products, manages its stores and, most importantly the way it serves its customers. On that day Tesco launched Clubcard, its customer loyalty programme. As a major food retailer, in a competitive market sector, there is always a need for brand loyalty. Customer loyalty schemes were not a new idea when Tesco launched it but Tesco developed a contemporary version of the original concept which went much further in developing an active relationship with customers. Today, Tesco Clubcard has established itself as one of the most successful loyalty schemes over the past nine years,
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and a key driver of this is that the scheme in integral to Tescos stated core purpose, To create value for customers. By understanding its customers more and using this insight to deliver back what the customer wants, Tesco is succeeding in its purpose- to deliver value to the customer and earn their lifetime loyalty. Working with its suppliers, it helps both parties to gain a better understanding of what the customer wants in terms of good value quality products and in-store promotions. Tescos marketing works because they combine insight with creativity, value and scale. Before Clubcard, Tesco was stuck as UKs second-ranking supermarket. Today, not only is it the UKs largest grocer, it is the worlds most successful Internet supermarket, one of Europes fastest growing Financial Services company and arguably one of the worlds most successful exponents of CRM. The Tesco Clubcard is the most successful CLP currently running in the UK, used by one third of all UK households (there are 25 million Clubcards in circulation, of which 10 million are active in any one week), with 82% of Tescos turnover going through the Clubcard (in out-of-town superstores, this figure rises to over 95%). ( Humpy et al. , 2004). No one would claim that Clubcard is exclusively responsible for the success of Tesco, but it is clear that the benefits of the Clubcard are now written through the Tesco business like lettering (Mason, 2003 cited in Humpy et al.)

though a stick of rock.

Tesco may well have got this enviable position without Clubcard but it could not have done so as quickly or as cheaply as it has done without the Clubcard data an insight the Clubcard provides. This information guides almost all of the key business decisions the management team makes, reducing the risk of taking bold new initiatives. As Mason points out It changes the behavior of the businesses. With Clubcard, Tesco gets
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personal by introducing a medium through which it can treat customers as individuals. It can mass-customize to suit the needs of all the types of customers, of all tastes and incomes and ages. Not on the basis of what they think the broad mass of customers want but in knowledge of what individual customers actively choose and what they prefer. While every business talks about being customer centered, Tesco has made that commitment tangible. It designed Clubcard not just to show customer loyalty to Tesco, but more important, to recognize Tescos loyalty to customers.

Clubcard is a reflection of the attributes of the business and its commitment: a strong team ethic, a commitment to serving customers, and most of all, top-to-bottom retailers pragmatism. Tesco made customer loyalty marketing work, when every other British supermarket loyalty programme in the late 1990s failed, faltered or never got started.

Every year since 1995, headlines have proclaimed the death of loyalty scheme, usually enthusiastically supported by other retailers whose loyalty schemes are distant memories. Yet Clubcard is never questioned as a strategic priority by the management. Instead, Tesco has responded to the critics by measurably building sales through Clubcard, using the relevant knowledge it creates to improve the way it runs its business. In short, Tesco hasnt found that its loyalty programme is a costly overhead. Because Tesco made Clubcard work, it can find out what its customers need and generate enough sales by satisfying those needs cover the cost of finding out. Tesco runs Clubcard, and has been doing so since 1995, for no net cost.

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Aims and Objectives

Aim To analyze and examine the concept of loyalty in retail and to assess its effectiveness as a corporate strategy through a Tesco Plc Case Study.

The Purpose of this research is to gain fresh insights into the concept of loyalty and customer relationship management and the part it plays in strategic decision making. Its the strategic implications of loyalty schemes that the project seeks to look into. Objective 5 is in a way the primary objective of the research, all other objectives are necessary to be realized before a thorough understanding of the strategic ramifications of loyalty programmes is acquired. Thus, objectives 1-4 are important stations (intermediate goals) which help reach the final destination or purpose (objective 5).

Objective 1 Analyze and define the concept of loyalty and identify the relationship between customer satisfaction and customer loyalty

Customer Loyalty has been one of the most misunderstood concepts of recent years (Payne, 2002). Unfortunately there is no universally agreed definition of loyalty (Jacoby and Chestnut 1978; Dick and Basu 1994; Oliver 1999). Oliver (1999) suggested that loyalty and

satisfaction are linked inextricably, but also that this relation is asymmetric, arguing that although loyal customers are usually satisfied, satisfaction is an unreliable precursor to loyalty. This

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research seeks to define the real meaning of loyalty in retail terms and how it differs to satisfaction.

Objective2 Examine the conditions under which customer loyalty enhances profitability

Some loyalty Schemes are termed as a disguised from of Sales promotion. They are just another way of bribing the customers (Woolf, 1996), Its a zero sum game as profit margins are squeezed to run the scheme (Oliver, 1999). Handling data is like drinking water from a fire-hose (Humpy et al, 2004). Still, loyalty schemes are practiced by big retailers. This study seeks to identify the variables which help make a loyalty scheme successful, and clearly identify the conditions under which loyalty enhances profitability.

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Objective 3 Assess the role of loyalty programs in promoting loyalty and building favourable customer relationships Our Customers told us that they prefer pound in their pockets. (Zaria Pinchbeck, Asda, 2003, cited in Web 1). Trying to analyze all the data is madness (Waitrose, cited in Web 2), Dropping the loyalty card is inconceivable (Russell Craig, Tesco, 2004, cited in Web 3). The market research company Mintel, says that there is mixed evidence that loyalty cards really do promote loyalty. Gary Davies (2004), professor of retailing at Manchester Business School (cited in Web 4), believes that loyalty cards have run out of steam stating that most of us have cards for at least two stores, so that defeats the point [of loyalty]. The UK's top two supermarkets, Tesco and Sainsbury's, both say that loyalty schemes are an integral part of their retailing strategy and insist they remain committed to them. The study seeks to assess the contribution of loyalty programs in creating long-term relationship with the customer. Objective 4 Evaluate the extent to which loyalty marketing makes its contribution to TESCOs success and identify key areas where TESCO outwits its competitors

The study seeks to point out the parameters TESCO considers to quantify the effect of its loyalty program and assess if those parameters are justified. Safeways loyalty scheme (ABC card) started off well but was finally withdrawn four and a half years after its launch. ASDA shied away from rolling out the loyalty card nationwide after having trials at different stores. TESCO Clubcard was three times more famous than Sainsburys Saver card and achieved two and a half time greater
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awareness than any other card. (Woolf,2002) TESCO CEO Terry Leahy puts it Its not the skill but the will that counts. This research seeks to examine TESCOs skill and the will which makes its loyalty program stand out and the extent to which it contributes to the retailers success.

Objective 5 Assess whether loyalty marketing should form a part of a retail firms overall business strategy

Is Loyalty Marketing dead or is it a vital force to reckon with? AntiLoyalty lobbyists argue that loyalty programmes are little more than a discount scheme ; that do nothing to engender consumer allegiance. Loyalty aficionados, on the other hand, claim loyalty programmes form the core of their business strategy, enabling them to increase customer value, grow market share, and successfully populate new markets. The research will explore the myth and realities of loyalty marketing and the part it plays in shaping Tescos overall business strategy.



Since the study examines the Tesco Clubcard only, the results cannot be generalized for every loyalty schemes. Future research should seek to replicate the study onto other retailers in order to be able to get a broader understanding of the loyalty effects of customer-loyalty-programmes. Also, this study only examines the loyalty effects of the Tesco Clubcard in terms of its marketplace impact; it does not examine the loyalty effects in terms of the financial impact of the programme. The econometrics of the Clubcard doesnt form a part of the research.

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The interesting perceptions with contradictory thinking with regards to loyalty in retail and loyalty schemes is what aroused sufficient interest in the author to go in for a research into this elusive concept. Although conventional wisdom dictates that customer loyalty is the most vital aspect of every business because companies live or die from repeat business, in reality, loyalty programmes are surprisingly ineffective and almost 50% of them miss their business objectives partly or completely (Web 5). Yet, most of the major supermarket multiples have already joined the bandwagon, for some, its a roaring success while for others it turned out to be more than a liability. This tricky tale of retail was what made the author go in for a research on loyalty as no existing literature gave a clear-cut judgment on the subject of customer loyalty in retail. Is loyalty an armoury which came, conquered and died?



In order to approach the above mentioned research objectives, this longitudinal exploratory study took into account both qualitative and quantitative research strategies which is often necessary for triangulation meaning getting a fix from two or more places (Green et al, 2002). The Research Approach is a combination of deductive and inductive approach. Deductive, because the existing concept of loyalty and its impact on business decisions and strategy is first tested using data and Inductive, because the data collected is analyzed to give new

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dimensions to the loyalty concept and its strategic effect on business decisions.

A Case Study (Tesco) Strategy is taken as it involves an empirical investigation of the loyalty phenomenon within its real life concept to the particular retail firm. Quantitative and qualitative research is applied, both using primary and secondary information that is gathered and assembled specifically for this study. Qualitative secondary information from a variety of sources is gathered like Tesco Case Studies, Tesco Brochures, Tesco Web page, Reference books, Journals, Online journals, Newspaper and Magazine (The Grocer) Articles, Taped interviews, Business news channel views, Research Agency (e.g Mintel) databases. Quantitative data from Tesco Company reports and other supermarkets is collected and analyzed to compare and contrast the effect of loyalty. Primary data is collected using mall-intercept-interviewing (Zikmund, 2000). For this purpose, a convenience sample of Tesco shoppers is surveyed in front of local Tesco supermarket Other primary data collection methods included a questionnaire that divides customers into two categories, namely Tesco Clubcard members and non-members, which was important to know in order to have a benchmark to find out how the Tesco Clubcard affects its members loyalty towards Tesco. The Satmetrix Market Stat was made use of; it is a dynamic tool for customer satisfaction and loyalty measurement that uses the customer loyalty index as key metric in order to measure overall customer loyalty.


Conclusions and Recommendations

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Tescos loyalty marketing project has become a pillar of its business strategy and has helped Tesco evolve in its strategic thinking and direction from being an outstanding food retailer to being an informationdriven business, constantly searching for ways to act as the value-adding agent for its customers, Its customer information assets uses to allow it to take a strategic approach to customer management. Tescos loyalty scheme suggests that a loyalty scheme can only have a sustained impact on the bottom line when, from its inception, it changes the dynamic culture of the organization. When the board recognize that loyalty scheme data is the bedrock of their business, then the considerable investment in technology, manpower and other resources really starts to pay dividends.

Companies embarking on a loyalty scheme should make sure that data is analyzed with an eye on desirable economic outcomes and companies should make sure that they establish what they are trying to accomplish with the program and continually measure its performance.

Summary This chapter provided us with a basic guideline of the things to come. It gave a detailed description of the aim, purpose and objectives of the study and what the study seeks to achieve. It clearly mentioned the scope of the research and areas where the study will not throw much light on. The study now moves forward into the journey of exploring the true meaning of loyalty in retail and discusses different theoretical frameworks of customer loyalty programmes and their individual characteristics. It delves into both soft and hard aspects of loyalty and evaluates the success factors and conditions which encourage loyalty.

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The aim of this chapter it to clear the air of confusion with regards to the concept of loyalty and bring out its true meaning considering both attitudinal and behavioral dimensions. It goes on to give a detailed account of relevant loyalty frameworks and models put forward by purists and examines the reasons for the popularity and sudden proliferation of loyalty schemes. It then evaluates whether successful loyalty programmes are a stand-alone entity or form a part of the overall strategy and help in strategic decision making. The chapter concludes by highlighting the hype and hoopla surrounding loyalty schemes and the myths associated with it. Loyalty The elusive phenomena


According to the Oxford Dictionary of Current English (2003, pg 327), loyalty is defined as being faithful or steadfast in allegiance but as Payne (2002) points out customer loyalty has been one of the most frequently discussed and most misunderstood concepts of recent years . This is further evidenced by the fact that some authors use customer loyalty interchangeably with other constructs, including customer repeat purchasing behaviour and customer retention. However, it has been suggested that the construct of customer loyalty differs from the one of repeat purchasing behaviour in the way that it implies an intentional component, i.e. there is always a reason for the customers repeat purchase and it does not happen by chance (Hansen,2000) .The construct of customer loyalty also differs from the one of customer retention in that customer retention has a purely behavioural character, whereas todays interpretations of the loyalty construct usually include both behavioural and attitudinal dimensions; moreover, while the construct of customer retention considers the
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marketer as the active party, loyalty focuses more on intrapersonal aspects of customer behaviour (Hansen,2000) .

Loyalty is seen as something that consumers and customers exhibit towards brands, products, services, stores, as well as salespersons (Laurent, 1997) .The level of attachment a customer feels toward a product or service is a prerequisite to loyalty and that a second factor that marks a customer's loyalty is repeat patronage. Attachment is shaped by two dimensions: the degree of preference (the extent of the customer's conviction about the product or service) and the degree of perceived product differentiation (how significantly the customer distinguishes the product or service from alternatives). The highest attachment occurs when a buyer feels a strong buying preference coupled with a high degree of perceived product differentiation. (Griffin, 2005, cited in Web 6))

2.1.1 Categorization of The Loyalty Concept ( from the Retailers perspective)

Figure 1

Adapted from Bergeron, 2000, pg 135-147

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Repeat Purchase






Aw areness

Brand Value



According to Bergeron( 2000) , the definitions of loyalty fall into three broad categories: Transactional loyalty, in which the customers buying behaviour is seen to change or be changed, although what motivates that change may be unclear. These are often the most popular choices, as they relate most closely to commercial results. Transactional loyalty is the ultimate objective of any supermarket; Tesco encourages transactional loyalty by concentrating on more emotional aspects of things. Therefore research will deal more with Tesco form of loyalty which is more emotional and less transactional. Perceptual loyalty, in which the attitudes and opinions of the customer are the key, but there is not necessarily evidence of an impact on purchasing. Sometimes these are regarded as more significant, because they are seen to reflect possible behaviour
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patterns that could be created in the future, not patterns of what has happened in the past. Perceptual loyalty will be researched upon in more detail as customer attitudes and opinions or the softer side of loyalty is what Tesco concentrates on.

Complex loyalty, where there is a combination of these two effects. Within each of these categories there are a number of terms, all of which have been, or are being, used as definitions of loyalty.


Cross-selling - seen as loyalty when a customer buys a new, different product or service from the same supplier, rather than choosing an alternative. Up-selling - a customer buys more from the same supplier, usually of the same product or service. Repeat purchase - obviously, buying the product again, when the same need arises. Persistency - maintaining a relationship rather than concluding it.

Perceptual Satisfaction - an easy and obvious use of loyalty is within the context of the degree of satisfaction felt by users of a product or service; the kind of emotion articulated in response to the question how was it for you?. However, customer satisfaction can be a misleading measure as there are many examples of customers changing supplier despite high levels of satisfaction. The research
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will provide greater insights into satisfaction levels and how that relates to loyalty, which would also bring the author closer to one of the research objectives. Awareness - loyalty is seen as a function of the extent to which the business is known within its target market, driven perhaps by word-of-mouth recommendations or simply the extent of knowledge of the supplier.


Lifetime value - the commercial benefit of the relationship with a customer can be calculated over time, to generate a lifetime value. Brand value - Strongly branded businesses often rely on the strength of their communications, and their wide consumer awareness, to give customers a sense that they must be dealing with the right organization, such that they may not even consider. The relative benefits of a competitor. Indeed, the purpose of branding is entirely to ensure that the customer returns to a given supplier again and again. Enhancing brand value and preventing brand fatigue is one of the key objectives of the Club card, it will be looked into in greater detail during the course of the research.

When retailers look at winning and keeping the loyalty of their customers they are looking to achieve a little extra goodwill, a slight margin of preference, an incremental shift in buying behaviour. (Humpy et al,2004)

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2.1.2 Conceptualizations perspective)






Figure 2

Adapted from Uncles et al., 2002

There are three popular loyalty conceptualizations put forward by Uncles et al.(2002): loyalty as primarily an attitude that sometimes leads to a relationship with the brand (Model 1); loyalty mainly expressed in terms of revealed behavior (i.e., the pattern of past purchases) (Model 2); and buying moderated by the individuals characteristics, circumstances, and/or the purchase situation (Model 3).
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Analysis of models put forward by Uncles will bring us closer to one of the objectives of the research as it may reveal the real meaning of loyalty in attitudinal and behavioural terms and the conditions which help a loyalty scheme prosper.

Loyalty has been largely defined and measured in either behavioural terms (stochastic approach), or attitudinal terms (deterministic approach) and although it has been suggested that the concept should be understood in both terms, there is still little agreement when it comes to measuring it (Rundle-Thiele, 2001) .This disagreement has led to a debate that originally started almost 30 years ago between Jacoby and Kyner and is still going on in present times (RundleThiele, 2001) . Defenders of the stochastic approach consider loyalty as behaviour and argue that the customer who buys the same brand systematically is loyal. Loyalty, like love or loathing, is impossible to quantify exactly. What can be quantified is customer behaviour and where customer loyalty is concerned, the closest factor that can be measured is customer behaviour. (Stone, 1997) .Loyalty, here is defined mainly with reference to the pattern of past purchases with only secondary regard to underlying consumer motivations or commitment to the brand (Ehrenberg 1988; Fader and Hardie 1996; Kahn, Kalwani and Morrison 1988; Massy, Montgomery and Morrison 1970). Stochastic modelling techniques describe the observed patterns of customer buying. Loyalty to the brand (measured by repeat purchase) is the result of repeated satisfaction that in turn leads to weak commitment. The consumer buys the same brand again, not because of any strongly-held prior attitude or deeply-held
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commitment, but because it is not worth the time and trouble to search for an alternative. If the usual brand is out of stock or unavailable for some reason, then another functionally similar (or substitutable) brand (from the portfolio) will be purchased ( East 1997; Ehrenberg, Barnard and Scriven 1997). Problem with this approach lies in the fact that it considers loyalty behaviour as too complex to be comprehended due to the number of explanatory variables and their frequency of appearance and therefore makes the processing of loyalty in a dichotomous way loyalty Vs. disloyalty, which is singularly short of nuance, and requires a very arbitrary categorization of customers into one of the two categories (Odin,2001) .Moreover, it has been suggested that only a few customers are 100 per cent loyal to a single brand, but rather, are likely to have a repertoire of two or three brands within any product category from which they regularly buy i.e. polygamous or divided loyalty (O Malley, 1998) .Another shortcoming of the stochastic approach is that it does not tell whether repeat purchasing has been done out of habit, due to situational reasons, or due to other more complex psychological reasons and it has been argued that the narrow technical definitions of the stochastic approach do not capture the full richness and depth of the loyalty construct (Odin,2001). Many researchers and consultants argue that there must be strong attitudinal commitment to a brand for true loyalty to exist (Day 1969; Jacoby and Chustnut 1978; Foxall and Goldsmith 1994; Mellens et. al. 1996; Reichheld 1996). Oliver (1997) has this in mind when he defines customer loyalty as: A deeply held commitment to re buy or re patronize a preferred product/service consistently in the future, thereby causing repetitive same-brand or same brand-set purchasing despite situational

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influences and marketing efforts having the potential to cause switching behaviour

This determinist approach considers loyalty more as an attitude and argues that there are a limited number of explanatory factors responsible for it, which can be isolated and manipulated (Odin,2001) , including:

Customer satisfaction: Oliver (1999) suggested that loyalty and satisfaction are linked inextricably, but also that this relation is asymmetric, arguing that although loyal customers are usually satisfied, satisfaction is an unreliable precursor to loyalty, which is further evidenced by findings from the automobile industry, in which 85 % to 95 % of customers report that they are satisfied, but only 30% to 40% return to the previous make or model. This gives us a pointer that satisfaction may not be as intricately linked to loyalty as assumed and brings us closer to Objective 1. Commitment and Trust: According to Morgan and Hunt (1994), commitment and trust not just one or the other are the key to success in relationship marketing, since trust implies that the consumer has confidence in the brand/firm and is willing to rely on it though there is an evidence of risk involved, while commitment reflects a psychological

attachment to the brand/firm and an enduring desire to maintain the relationship.

The determinist approach is not based on loyalty/disloyalty opposition, but seeks to measure the degree of intensity of loyalty
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(Odin, 2001) .Nevertheless, the determinist approach has been criticised for only relying on customer declarations without taking into account their observed behaviour and also for using either antecedents, or consequences of loyalty to measure the former and not loyalty in itself (Odin, 2001). Despite the psychological and sociological richness of the attitudes drive behaviour and relationship approaches to understanding customer loyalty, these conceptualizations of loyalty are not without their critics (Dowling 2002). They are thought to be less applicable for understanding the buying of low-risk, frequentlypurchased brands, or when impulse buying or variety seeking is undertaken, than for important or risky decisions (Dabholkar 1999). Also, as Oliver (1999) has noted, there is little systematic empirical research to corroborate or refute this perspective of customer loyalty. Those who subscribe to the attitudes drive behaviour and relationship approaches expressly rule-out revealed behaviour as a dominant measure of loyalty. That, they argue, may merely reflect happenstance. Even combined measures of revealed behaviour and satisfaction may not probe deeply enough for us to be sure there is true loyalty (Arnould, Price and Zinkhan 2002). Brian Woolf (2004) puts Loyalty as a positive attitude built up over a series of favourable interactions expressed in a customers behaviour.

As a result, it has been suggested that neither attitudinal nor behavioural measures on their own are sufficient to explain or define the complex construct of loyalty and therefore, a number of hybrid frameworks have been developed which try to combine both dimensions of loyalty in an attempt to overcome such problems.

2.1.3 Loyalty Frameworks

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A popular framework that tries to take into account both dimensions of the loyaltyConstruct has been proposed by Backman and Crompton (1994) (cited in OMalley, 1998), which results in a number of different categories of loyalty, each of which have clear managerial implications as demonstrated in Figure 3.

Figure 3

Adapted from O Malley 1998, pg 47-55

Patronage Behaviour
Low Latent Loyalty

High Loyalty
Organisations must not become complacent and managerial efforts should be continually focused on reinforcing attitude and behaviour, particularly as the consumer is likely to be targeted by competitors. This may involve maintaining a price advantage, and/or providing additional services, whic h offer value to the consumer Spurious Loyalty In order to defend the customer base against competitive attacks managers can attempt to maintain spurious loyalty and/or develop sustainable loyalty .Little difference is perceived betw een retailers, there is often inertia w hic h keeps a customer loyal based on habit.

Relative attitude

Managerial efforts are best focused on removing the obstacles to patronage, for example by extending the branch network. Occurs when the customer feel san element of loyalty yet will not buy from that retailer on every occasion No Loyalty Managers can attempt to generate spurious loyalty through such means as in-store promotions, loyalty clubs and special offers .Is a state whereby customers will move from retailer to retailer as there is little benefit and difference perceived betw een any of the outlets in the marketplace.

In an attempt to explain the forces affecting loyalty in more detail, Diller(2000) has proposed a model of loyalty motivators and demotivators that is based on background theory from consumer motivation research and is illustrated in Figure 4.


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Figure 4

Adapted from: Diller, 2000, pp 39 43


Social Integra tion

Variety seeking

Contin uity


Relief +

Intensity of loyalty

Opportunism versus Relief

Arguably the strongest factor constraining loyalty has been termed opportunism, which in this context stands for the willingness of customers to take advantage of any opportunity to get the maximum benefit (value for money), to be completely flexible and to be only interested in their personal benefit (also
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known as smart shoppers).

The model suggests that everyone is a smart shopper to a certain degree, but also that everyone (to various degrees) is tired of only looking for economic advantages and therefore opportunism is weakened by the need for relief, which originates from the need for more freedom of economic pressures and tasks, and a consciousness of alternative human values, including humanity, solidarity or personal loyalty.

Variety versus Continuity

The second pair of ambivalent loyalty forces suggested by the model includes variety seeking opposing loyalty while the need for continuity makes it more attractive.

The desire for variety has its roots in a general motivation for stimulation and absence of boredom, while at the same time, man is a creature of habit who loves the well-known and familiar, thus people are curious, but still have their habits and like the certainty of knowing what they will get for the money paid.

Autonomy versus Social Integration

The third pair of ambivalent loyalty forces suggested by the model includes the need for autonomy opposing loyalty while the need for social integration makes it more attractive.

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Autonomy in this context means freedom from others and decision-making independence, which is becoming increasingly important in a time of customer emancipation, where selfesteem is highly regarded and attempts made by suppliers to restrict this freedom might achieve the opposite of the intended affect.

However, even in times of individual isolation, social integration remains a widespread need and therefore many customers long for social integration, a sense of social security and a sense of affiliation or social esteem within different relationships or groups.

Loyalty has become one of the most sought after concepts in the business world and it is often the most elusive phenomena. Loyalty cannot be blueprinted. It cannot be produced on an assembly line. In fact, it cannot be manufactured at all, for its origin is the human heart -the centre of self-respect and human dignity. It is a force which leaps into being only when conditions are exactly right for it, and it is a force very sensitive to betrayal. (Maurice R. Franks, 2004)

Businesses can succeed with a great product or service, but will fail without loyal customers. (Anon, 2004)

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It is now appropriate to discuss the possible effects of the construct of loyalty for retailers and why it has become increasingly popular over the recent years.

2.1.4 Reasons for the rapid increase in popularity of customer loyalty

A critical evaluation Gronroos (19994b, p9) described the objectives of relationship marketing as being to identify and establish, maintain and enhance and, when necessary terminate relationships with customers and other stakeholders, at a profit so that the objective of all parties involved are met, and this is done by a mutual exchange and fulfilment of promises.

Customer loyalty is a strategic approach to improving shareholder value through the development of appropriate relationships with key customers and customer segments.(Payne & Ballantyne,2002). Proponents tend to focus on the psychological bonding that eventuates from membership (a customer benefit), and the enhanced customer insights that can be gained from analyzing the program database (a firm benefit) (Brown 2000; Pearson 1996). Critics argue that the loyalty both attitudinal and behavioral for most customers is quite passive and resembles habit rather than serious commitment. Where the focus is on individual customers, loyalty programs can be seen as vehicles to increase single-brand loyalty, decrease price sensitivity, induce greater consumer resistance to counter offers or counter arguments (from advertising or sales-people), dampen the desire to consider alternative
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brands, encourage word-of-mouth support and endorsement, attract a larger pool of customers, and/or increase the amount of product bought( Bolton et al., 2000) Two aims of customer loyalty programs stand out. One is to increase sales revenues by raising purchase/usage levels, and/or increasing the range of products bought from the supplier. A second aim is more defensive, by building a closer bond between the brand and current customers it is hoped to maintain the current customer base. The popularity of these programs is based on the argument that profits can be increased significantly by achieving either of these two aims. In today's economic climate loyalty programs can help companies do more with less. They have been able to provide a sense of personal service without an actual person which is clearly apparent from Tescos case (Seybold, 2001) Loyalty schemes can lead to more purchases more often, give the ability to mass customize marketing communication, minimize waste and help promote trust. It attempts to win a slightly larger share of the customers spend than would otherwise be the case if the additional value of the scheme were not offered (McAlexander,2002). Loyalty programmes seeks to identify and talk to individual customers on a massive scale and torrential flow of live transactional data offers the possibility to transform how retailers manage their business. Research will analyze in greater detail the ways in which loyalty programmes can transform the business and help make strategic business decisions, which is the purpose of the research (to evaluate loyalty as a strategy). One of the reasons for the great popularity of customer loyalty is the recognition that losing a customer means in fact more than a single sale: It means losing the entire stream of purchases that this particular customer would make over a lifetime of patronage also known as the customer lifetime value(Kotler and Armstrong,2001).
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Another reason for the rapid increase in popularity of customer loyalty can be found in the impressive array of suggested evidence in support of loyalty, such as the figures provided by the associates of Bain & Company, claiming that the net present value increase in profit that results from a 5% increase in customer retention lies somewhere between 25 and 95% in over 14 industries (Oliver, 1999).

Loyal customers are supposed to buy more, pay higher prices and bring in new customers through word-of-mouth support (Morgan et al.,2000).Another profitability-argument in favour of loyalty includes that in many cases the management of loyal customers is supposed to be cheaper since they are usually better informed and therefore ordering and delivering procedures can become routine (Scott, 2000, cited in Web 7).However, some of these profitabilityarguments have been challenged recently by Reinartz and Kumar (2002), who compared the behaviour, revenue, and profitability of more than 16,000 individual and corporate customers over a four -year period, concluding that they discovered little or no evidence to suggest that customers who buy on a steady basis are necessarily cheaper to serve, less price sensitive, or particularly effective at bringing in new business. They also found that a considerable amount of loyal customers were only marginally profitable, while a large percentage of short-term customers were very profitable.

This has arguably to do with the fact that many non-loyal customers can be highly profitable at the beginning, causing companies to chase after them in the hope of future profits, but once these customers cease their buying activity, they may become unprofitable because the
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company continues to invest in marketing to them (Reinartz and Kumar,2002).A recent Best of Biz (2003) report also questioned customer loyalty as the driver of profitability, arguing that profitability might ultimately be more related to business

fundamentals such as superior products, services or processes. Academicians have also argued that loyalty programmes are ultimately self-defeating when competition confronts the first mover. Woolf (1996) puts it great success comes from a marketing strategy base firmly on understanding customer economics and only secondarily on customer loyalty. Other pro-loyalty arguments include that loyal customers may bring more certainty into the business, e.g. through increased customer immunity to competitive offers, through higher tolerance of mistakes made by the supplier, through increased customer feedback (loyal customers are supposed to be more prepared to complain and to participate in surveys).On the other hand, however, loyal customers may also seduce suppliers into

complacency and encourage inactivity and carelessness or the supplier may become too reliant on them, which may mean that they fail to adapt to changes in market structure or to respond to the changing importance of certain market segments

(Diller,2000).However, despite their criticism, even critics themselves have suggested that customer loyalty is a worthy contributor to the shareholder value of a company(Diller,2000;pg33), and that firms are encouraged to study their position and options in the pursuit of this goal(Oliver,1999; pg37). The research will extensively analyze the reasons for popularity of Tescos loyalty programmes and compare it with other loyalty schemes which are one of the objectives of the study (to compare and contrast Tescos loyalty schemes with its competitors).
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The notion of customer-loyalty-programmes

is not

really a

revolutionary idea and it is probably fair to say that the cooperatives pioneered the modern day programmes already in the mid 1800s (Sparks,1999).What distinguishes todays customer-loyalty

programmes is their ease of use for consumers as well as the degree of technology involved. However, the rationale behind modern CLPs is still the same, to build lasting relationships with customers, and to do so by rewarding loyal and heavy or frequent buyers, in the hope of achieving benefits of loyal customers. The ultimate goal of every CLP, according to Stauss et al. (2001), is to increase general operational profitability by customer retention. However, Butscher (2001) argues that profitability should be considered as a medium- or even long-term goal which can only be achieved if other intermediate goals are reached first, such as building a strong customer database. Most modern CLPs are using some form of membership card which is presented at the point of sale in order to identify the customer and to record the purchase details (e.g. time of purchase, value and type of items etc) and/or the value of the rewards earned. There are various different types of cards issued by and on behalf of retailers, including: Payment cards: provide a mechanism for customers to pay retailers and are sometimes known as store cards Reward cards: provide a mechanism for retailers to reward their customers for repeat purchasing and are sometimes called bonus cards or club cards which is what Tescos club card is all about.

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Combined cards: act simultaneously as payment and reward card

According to Cuthbertson and Williams (1999), retailers have four different CLP-card strategies available:

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Figure 5

Adapted from Butsher,2001, pg 123-131

The 5 P Loyalty Strategy

Pure Strategy: Spending and accruing benefits with only the card-issuing retailer. Means, strengthening the existing bond between the customer and the retailer, so that the retailer can find out what the customers wants, and give the customer more of it. Pure loyalty schemes aim to establish a two way dialogue so that the retailer can act to improve the basic offer. (Rayner, 1998). Tesco used to follow a Pure Strategy and even now the Clubcard is more or less based on a pure strategy with the primary objective and being, strengthening the the two way better.


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Although Tesco has partners like Allders, H Samuel, Powergen etc under Tesco Freetime but it is Tesco which issues the Clubcard points and the partners buy those at a rate negotiated with Tesco. But they are the Tesco Clubcard points redeemable through Tesco or Tesco Freetime only.

Push Strategy: Spending at several retailers, accruing benefits with the card-issuing retailer. Means, creating a scheme to

encourage customers to use a way of shopping that they would not have done before ,pushing customers through new channels, or trying to create new types of behaviour. It is a technique used by low-cost airlines to encourage customers to book online, or it can be used by a retailer expanding into non-core businesses to draw customers with it.

A pure loyalty card strategy primarily affects current customers. If successful, new primary customers would then need to be attracted via a Push loyalty strategy.( Rayner ,1998) Pull Strategy: Spending at the card-issuing retailer, accruing benefits outside the retailers everyday range. Means, attracting customers by augmenting a retail offer, so customers will find that buying one product means that they get an offer on another, linked product. At a simple level buy one get one free. Effectively it is an inducement to create more sales by encouraging customers to buy something new.( Sharp,1997) It is best suited when a retailer's offer is not sufficient in itself to attract new primary customers or retaining the existing ones.

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Purchase Strategy: Spending and accruing benefits across many retailers. A Purchase Strategy is primarily aimed at increasing customer purchases regardless of where those purchases take place. It is suited to financial services and transaction processing providers and to mainstream retailers wishing to develop financial or transaction processing services. To encourage usage, successful Purchase loyalty card strategies tend to rely on high use availability, high brand awareness and low costs, especially processing costs. They tend to act as payment cards first and reward cards subsequently.( Reichheld , 2000) Purge Strategy: Represents a deliberate choice by retailers to avoid a loyalty card scheme, target customers of other schemes with alternative benefits and increase the number of primary customers and overall market share. Therefore the key measures should aim at increasing the competitiveness of the retailer rather than any specific measures related to loyalty cards

Butscher (2001) has suggested that the information obtained from CLP-members are particularly useful as they have already identified themselves as having a special interest by signing up for the programme and sometimes depending on the type of programme (limited programme versus open programme), even pay a membership-fee an effort that non-interested customers would probably not invest. The advantage of a limited programme, where members have to pay a joining-fee and/or annual-membership fee is that it has a positive influence on filtering out unwelcome members

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Figure 6

Adapted from: Butscher, 2001, p 51








Limited or Opt-it CLP Membership cover costs. Membership helps prerequisite channel fee helps to A

Open CLP wider number of

customers can be reached. Database more complete Potential customers and

membership/focus on target groups. Limited access makes

competitors customers can be reached more easily. Completeness of database could, after further analysis, lead to segmentation and segment-specific communication. Larger number of members helps to reach critical mass, which makes loyalty

membership more valuable. Clearly defined membership structure makes

communication more effective Membership prerequisite

keeps number of members, and thus cost , down. Database members average product Membership payments raise expectations, so the loyalty programme management is constantly forced to improve
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includes with an

only abovein the

programme become more cost-effective sooner.



Will be the better approach for companies: Trying to reach/reward their top customers. Preferring a more focused approach With smaller budgets In clearly segmented markets In markets In markets with homogeneous customers business-to-business

Will be the better approach for companies: With very little knowledge about current and potential customers Following a more general approach With budgets In unsegmented markets In business-to-consumer long-term larger

markets With commodity products

The Tesco Clubcard falls into the category of open CLPs, since everybody living in the UK aged 18 years or above can register for it for free via an application form which provides essential information for targeted promotions (Tesco Clubcard Brochure). Since this research takes a Tesco Case Study, it only takes into consideration Open-CLPs.

Figure 7

Opportunities for using customer information

Define Sales goals

Generate sales contacts

Direct Sales

Report Sales success

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Respond customer inquiries


Product analysis

Pursue customer issues


Product demand

Assess customer satisfaction

Servi ce


Produ ct

Product development

Monitor service quality

Marketi ng

Competitive analysis

Program Planning

Program preparation

Program testing

Program analysis

It should be kept in mind that a loyalty card is not a replacement for any of the basic loyalty drivers but is a supplement to them. Just as a hammer doesnt build a house, a loyalty card doesnt build customer loyalty. Both the hammer and the card are tools that, when properly and appropriately used, help bring the architects blueprint to life. (Woolf, 2004)

2.2.1 Building a CLP

Setting up a customer-loyalty-programme requires careful planning and should include detailed plans and methods for customer identification and registration, segmentation, reward design, and
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programme maintenance operations. Moreover, setting up a CLP is very resource intensive and therefore the company developing the programme should take it very seriously, i.e. being aware of the time, effort, financial investment and above all, being aware of entering a long-term commitment (Butsher,2001). In order to be a source of sustainable competitive advantage, the company developing the CLP must always take into account what its loyal customers value, since loyalty is inextricably linked to the creation of value, and then design a programme that directly supports their value proposition (Morgan et al, 2000). The greater the perceived value of a companys goods or services, the greater the loyalty effect. (Bryan, 2002). A value proposition is the full positioning of a brand , the full mix of benefits upon which it is positioned and the answer to the customers question Why should I buy your brand?(Kotler &

Armstrong,2001).Moreover, in order to be viable, a CLP must build and sustain noticeable differences in its offerings that are difficult to copy, since a lack of differentiation removes any potential of competitive advantage which is anything but easy in retailing, where first movers are quickly imitated (Morgan,2001).Thus, the right combination between soft (e.g. magazine, travel aids, special products, services, events) and hard-benefits (e.g. discounts, rebates, coupons) is essential and Tesco is a champion at this, because it knows fully well that although savings are at the top of the custo mers wish list, hard benefits are usually copied by the competition and therefore it considers soft benefits as the key to its loyalty programme as they are less likely to be copied due to their mostly intangible nature. Five elements which determine Tescos loyalty programmes value are (1) cash value (how much the reward represents as a proportion of spend); (2) choice of redemption options (the range of
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rewards offered); (3) the aspiration value of the rewards (how much the customer wants the rewards); (4) the perceived likelihood of receiving the rewards; and (5) the schemes ease of use .In addition to the elements are the psychological benefits of belonging to the

programme and accumulating points.

In order to be able to deliver a unique value proposition (that is still in line with an organisations overall strategy), CLP-managers have to select an appropriate CLP-format which can be further categorized into behaviour-based models, attitude-based models, hybrid models and relationship-based models (Morgan et al.,2000).In practice, most CLPs follow the behaviour-based model, focusing on behavioural outcomes such as repeated patronage and targeting immediate benefits for the organisation by providing easily observable typically economic benefits to cause the customer to purchase, repurchase, or purchase more frequently the firms offering ( Figure 8).However, this stands in contrast with the long-term character of the relationship-marketing concept and as a result of that, behaviourbased customer-loyalty-programmes have been criticised as dressedup sales promotions that are highly questionable as relationship building initiatives which fail to emphasise on emotional elements and do not necessarily lead to greater marketing efficiency and effectiveness (Tynan,2000).According to Dowling and Uncles (1997), behavioural based models might well stimulate sales for the duration of the promotion but do not have any long-term behavioural aftereffects.

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Figure 8

Adapted from: Morgan et al., 2000, p 73

Behaviour-based CLP Programme tactics Programme outcomes

Habitual buying Price advantage Switching costs Persuasive communication

Repeat patronage

Economic benefit

Promotional expenses

An alternative approach followed by Tesco and proposed by Morgan et al. (2000) is known as the relationship-based model, which is based on relationship marketing theory, consumer behaviour theory and strategic marketing theory (Figure 9)

It has been suggested that in any marketing relationships, all partners engage to some extent in economic, resource and social exchanges and therefore these three areas of relationship content build the starting point for the relationship-based CLP:

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Economic Content. The economic content of relationships deals with the economic benefits and costs of participating in the relationship and it has been suggested that customers are only willing to participate actively in a CLP, if their individual costbenefit calculation leads to a positive result, which then provides the partners with an incentive to explore the relationship further, cooperation may become more attractive as enhanced economic returns will be expected thus, a strong economic relationship content can contribute to the growth of loyalty (Stauss et al.,2001).Loyalty marketing is, essentially, all about economic differentiation. Its about deciding how to optimize long-term yield from the limited resources we have. Understanding our customers behaviour and economics (derived from loyalty program) allows to do just that. ( Woolf,2003 ) Resource Content. It has been suggested that parties engage in relationships to secure valuable resources that they would not be able to acquire more efficiently elsewhere, which, in a business/consumer exchange means that the business requires the purchasing power and effort of the consumer, while the consumer wants reliability, status, safety, and other facets of reputation and tangible value in the products and services they purchase and according to Morgan et al.(2000), the resource content of relationships can contribute to commitment among exchange partners through dependence, strategic interest, reciprocity and equity.

Social content. The relationship-based model suggests that although economics and resources may indicate a prosperous
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relationship, no relationship can be successful in the long-term without a social environment that nurtures communication, honesty, fair play and an awareness of mutual interests and therefore a CLP should accommodate opportunities for interactions so that friendships may be developed.

Customer loyalty and customer trust are the key variables of Tescos relationship-based model which it considers to be the crucial in building the intermediate goals of the model and providing competitive advantage, as they lead directly to a successful outcome.

Figure 9

Adapted from: Morgan et al., 2000, p 79

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Relationship-based CLP Relationship content Outcomes Key variables

Customer retention

Share of customer Economic content Customer Loyalty Resource content Customer trust Social content Promotional expenses

Customer referral


Product development expenses

2.2.2 Tescos CLP-Mix Tescos CLP falls into the category of so-called integrative due to its capability to combine

instruments (Stauss et al.2001)

various elements from existing tools as it relies on a differentiated set of product, price, communication and distribution issues to organize the customer benefits (although it has been claimed that relationship marketing offers an alternative to the traditional 4P classification,
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most scholars do still use the classic paradigmatic framework when identifying adequate tactical marketing tools for building and maintaining relationships with customers (Hansen,2000). The product-mix consists of goods and services of the specific CLPoperating company (Tesco) or its coalition partners (partners under Tesco Freetime). The price-mix, contains member discounts, favourable conditions of payment as well as financial advantages via bonus programmes. Communication issue is of great importance for the interaction with CLP-members and with Tesco, communication with members is exclusive, meaning that it is only accessible to members, integrated in the sense of everything Tesco does (and sometimes does not do) sends a message that can strengthen or weaken relationships, as well as interactive in that Tesco not only talks to their CLP-members but also listen to what they have to say (Hansen, 2000). For this purpose Tesco has exclusive CLP-magazines (Clubcard Magazine), regular newsletters or mailings, or CLP meetings and events for members (Butsher, 2001).


Loyalty as strategy

In order to realize the purpose of the research, its important to assess loyalty schemes as a part of a strategy rather than a stand-alone entity. It must be considered that CLPs do not exist in a vacuum, but should be a coherent element of a companys overall strategy and capabilities (OMalley , 2000).Given the potential benefits of customer-loyaltyprogrammes, firms like Tesco have adopted them as a core business strategy (Morgan et al,2000). Tescos design of a loyalty program takes into account the nature of the business, its market position and strategic goals, and the competitive landscape. (Fournier et al, 2001). It is
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essentially a long term CRM strategy that not only evaluates the current performance of Tescos relationship with its customers, but also drives its strategic direction (Roberts, 2004). The success strategy is always to closely align an organization with its customers but bringing this vision to reality is far from easy ( Sawhney, 2001). Tescos concept of Relationship Management begins and ends with the customer.

Strategists have put in place a framework for understanding and meeting the needs of the customer or which (Fournier et al, 2003) calls as The Ideal Customer Experience.

A framework for the Ideal Customer Experience is designed by (Fournier et al.,2003) to deliver a Customer Experience that meets the needs of the individual customer. The strategy behind this (and behind Tescos strategy) is that a customer whose needs are understood and met will continue to purchase from the company with increased frequency and value. The result is win-win between the company and the customer.

Figure 10

Adapted from Fournier et al, ,2003 pg 133-151

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Customer Loyalty Measures Customer Loyalty measures are designed for the people within a company who dictate the strategic direction of the company. These measures evaluate the performance of a companys current customer base and drive the future direction of a companys overall customer strategy. Tescos loyalty measures are comprised of: Average Profit per Customer by Tenure Size of Customer Base by Tenure Lifetime Value of Customer Base by Tenure Potential Value of Customer Base by Tenure Although Loyalty measures are discussed in brief, the study doesnt deal in depth with the econometrics of the Clubcard.
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Rank the Customer Base by Value One of the key outputs of determining the Customer Loyalty Measures is to rank the customer base by value. This is very crucial as it should drive decisions on where a company should allocate resources. Initially, Tescos loyalty scheme was one size fit allin this case but later on it realized the importance of doing something extra for its more profitable Premium Loyal customers. Now Tesco understands the pivotal concept in determining a customers value, that some customers are much more important than others.

Customer Strategies Tesco establishes customer strategies to retain High Value customers, grow High Growth customers, acquire either High Value or High Grow customers, and determine if negative value customers can be turned into profitable customers. Each individual Customer Strategy outlines the steps that need to be put in place to retain, grow, acquire or terminate specific customers. These strategies are executed via the Customer Experience. The strategies designed are created with the primary objective of meeting the needs of the customer, and its success is dependent on whether the needs of the customers have been met.

Customer Strategy Measures

Customer Strategy measures attempt to answer the following questions: 1. Which customers should a company retain/grow/acquire/terminate?

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retaining/growing/acquiring/terminating the appropriate customers? However, Tescos Customer Strategy measures delve into deeper detail by breaking down the measures by each customer segment, which breaks it down by Value and Customer Characteristics/Preferences. Also, each customer strategy contains tailored Customer Strategy measures, such as Wallet Share for growth strategies, and Retention rate for retention strategies. The results of these measures enable Tesco to allocate specific resources to target a specific customer segment. The resources that work within a targeted customer segment shapes the customer experience for the individual customers within that segment.

The Customer Experience is comprised of the following components: 1. Populating the Customer Profile To create the Ideal Customer Experience, Tesco populates the Customer Profile with the relevant information to properly understand and meet the customers needs. The Customer Profile will continue to be enriched as the relationship between the company and customer grows deeper 2. Delivering and Receiving Value at Each Customer Interaction Tesco views each interaction as a golden opportunity to deliver value through its products, services, and processes, as well as to receive valuable information from the customer in the form of feedback 3. Customizing the Customer Experience By understanding an individuals needs, it creates the Ideal Customer Experience by

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customizing the products, services, and processes to meet the needs of the individual customer The Customer Experience bit is where Tesco hugely outflanks its competitors. Detailed examination of all the factors will be done which will make the author reach closer to Objective 4.

Tactical Measures Tactical Measures are all measures that evaluate the performance of the Customer Experience, Customer Ownership, and Technology. These measures are critical to detecting the success or failure of any component within the Customer Experience.. Depending on the models (shown in Figure1) one adopts, the strategy adopted can be significantly different. For example, advocates of the attitude approach (Model 1) ( more or less adopted by Tesco) aim to increase sales by enhancing beliefs about the brand and strengthening the emotional commitment of customers to their brand. Moving customers up a loyalty ladder through image-based or persuasive advertising and personal service (recovery) programs are frequently used tactics (Brown 2000; White and Schneider 1998).

Managers who adopt (Figure 2 Model 2) approach try to maintain their share of category sales by matching competitor initiatives and avoiding supply shortages, and achieve growth via increased market penetration. Under these circumstances, a loyalty program might be launched for mainly defensive purposes, in a bid to match competitors with no expectation of dramatic changes in customer attitudes and behaviour.

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Advocates of the contingency approach (Figure 3 Model 3) emphasize what might seem to be prosaic factors such as avoiding stock-outs, extending opening hours, offering the appropriate assortment mix. They also often use price promotions, deals and special offers to attract the customers of competitor brands. Here the potential for loyalty programs to impact demand is very limited.


Rhetoric vs. Reality

There is confusion regarding the nature, scope, role and influence of customer relationship marketing. From a functional perspective, many marketers believe that the route to customer loyalty is through the operation of a number of mechanistic, tactical initiatives such as loyalty cards, points schemes, events and promotions. It is hoped that customer incentives and rewards are a sufficient basis to build loyalty, generate knowledge and change customer behaviour. On the other hand, an organizational perspective views relationship marketing as a total firm customer orientation one that seeks to integrate and align multiple sources, processes and activities for creating superior customer value on a consistent basis. Although the applied marketing literature suggests that there are very high expectations for CLPs, in reality they are surprisingly ineffective and it has been suggested that almost 50% of them miss their business objectives partly or completely (Reinartz, 2002). One reason therefore can be found in the fact that many CLPs have been launched as competitive-moves in order to combat a competing programme, with quality often being sacrificed for speed in many cases (Butsher, 2001). Too often, loyalty programs appear to lack clear goals or are not tied to overall business strategy which is
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what makes ineffectual and ineffective. As markets mature, there is increasing saturation and cannibalization of loyalty effects, making it difficult for smaller programs to compete effectively .Another reason, according to Cigliano et al.(2000), is that many organisations underestimate the full cost of setting up and sustaining CLPs, arguing that even those that increase sales might actually be still draining money which could have a variety of reasons apart from underestimating CLP-set-up and maintenance costs, such as getting caught up in price wars with competitors due to heavy financial incentives, or investing in the wrong customers (in some cases, the demand of certain customers is so small, even after a lifetime, that the cost and effort of turning them into loyal customers are out of proportion to the revenue they could generate (Butsher,2001)).It has also been suggested that far too many customer-loyalty-programmes have overemphasized voluntary on information participation gathering in the rather than

relationship building and have thereby ignored the need for customers programme

(Tynan,2000).One reason therefore might be found in the false assumption by many marketers that every customer is keen to develop an intense and devoted relationship with them, while in fact it has been suggested that they are more likely to view companies as enemies, not allies(Fournier et al,1998) .Furthermore, it has been argued by Fournier et al.(1998) that the very things that marketers are doing to build relationships with customers are often the things that are destroying those relationships since what is called intimacy by marketers is often viewed as intrusive by the customer in a world where customers want, and will increasingly demand control over their own data (Tynan,2000). Also, there is a clear limit to the number of such schemes the customer will take the
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trouble to join. The greater the proliferation of loyalty schemes, the less they act like loyalty schemes, appealing more to the minority of customers who are especially susceptible to promotions. One must question whether the proliferation of loyalty programs represents real value creation or is simply a case of keeping up with the neighbours. (Kadar & Kotanko, 2004).

Summary This chapter dealt with the relevant theories and concepts that pertain to the concept of loyalty in general and illustrated the brand of loyalty which is relevant to Tesco. It gave us the outline of the form and structure of Tescos Clubcard and how its embedded within the organization. The study now moves ahead into adoption of appropriate methodologies to figure out what loyalty approach Tesco adopts, how its strategy aligns with the loyalty model and overall business objectives, if loyalty forms the core of its business strategy and how much does it contribute to enhancing customer experience and achieving business objectives. Through appropriate methods in place, it also seeks to evaluate the loyalty concept and its effectiveness in future.

The aim of the next chapter is to achieve the research objective by applying the appropriate research approach, strategy and

methodology. The chapter also seeks to ensure that the data collected is valid and reliable, is not contaminated and bias is reduced to a minimum. For this purpose the tried and tested Satmetrix Loyalty index is applied to measure Customer Loyalty Index to find out the
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effect of the Clubcard. Focus groups, Telephonic and face to face interviews are also conducted as a part of primary data collection, which help to triangulate findings.

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In order to approach the research objectives, this longitudinal exploratory study is taking into account both qualitative and quantitative research strategies, which is often referred to as triangulation meaning getting a fix from two or more places(Green et al,2002). The triangulation approach strives to capture a more complete, holistic, and contextual portrayal of the phenomena under study, and is intended to neutralize bias in any one approach applied (Green et al., 2002). According to Bonoma (cited in Lewin & Johnston, 2002), researchers can pursue high levels of data validity and generalizability by adopting triangulation strategies which provide replication and/or corroboration of findings across methods (i.e. experiments, surveys, case studies). It has further been suggested that the integration of both research strategies within a single project opens up enormous opportunities for mutual advantage, since inherent weaknesses of one approach can be overcome only by using other methods (Simon & Vosseberg , 2001).

The Research Approach is a combination of deductive and inductive approach. Deductive, because the existing concept of loyalty and its impact on business decisions and strategy is first tested using data and inductive because the data collected is analyzed to give new dimensions to the loyalty concept and its strategic effect on business decisions.

Both Quantitative and qualitative methods of data collection technique is applied, although the major part of the research relies upon qualitative data and its analysis. Qualitative secondary information from a variety of sources are gathered like Tesco Case Studies, Tesco Brochures, Tesco Web page , Reference books , Journals , Online journals, Newspaper and Magazine (The Grocer) Articles , Taped interviews , Business news channel views , Research Agency (e.g Mintel) databases . Quantitative
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data from Tesco Company Reports and other supermarkets are collected and analyzed to compare and contrast the effect of loyalty.

Before embarking on a definitive research methodology (Philosophy, Strategy and Approach) each research objective was taken into consideration separately and a SWOT analysis was done for each data collection approach against each objective. A rationale was established behind each research method before going ahead. It was ensured that the data collection methods were more or less interdependent so that each method filled the hole or covered the areas which could not be covered by the other.(e.g Focus groups helped in redesigning and reframing some of the questions in the questionnaire, telephonic interviews and Face to Face interviews were only conducted after the secondary data was collected and analyzed to properly design questions in order to keep the interview short , exact and effective)

Initial secondary data collection method included reading through the relevant material in Books , Journals , Online Web pages, White papers, Seminar papers, Company Reports, Tesco website, Tesco cases studies, Research databases (Mintel) etc. Keywords were then generated to refine the search.

Keywords generated: - Customer Relation Management, Loyalty Marketing , Direct Marketing , One-to-one Marketing , Database Marketing , Relationship Marketing , Customer Loyalty, Retail Strategy, Co-creation, Integrated marketing communications, Affinity programs , Buyer behaviour.

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Generation of keywords made the secondary data collection a lot easier as it gave a specific direction to data collection , more relevant material were available in less time.

Primary data collection methods were embarked on only after sufficient insight had been gained from secondary data and most of the secondary data was collected and analysed and the loyalty concepts fully understood.

For the fulfilment of Objective 1, Objective 2 and Objective 3, Focus groups have been conducted to reveal both behavioural and attitudinal aspects of loyalty and to decipher if loyalty schemes encourage loyalty or is it just another marketing tool. Focus groups are a cognitive form of qualitative research. There is less structure to the group, with group members being encouraged to take their own paths of discussion, make their own connections and for the whole process to evolve. It seeks to encapsulate the experiences and feelings of respondents in their own terms. The purpose of the project is disclosed to the respondents or is otherwise obvious to them from the questions asked. Focus group is a tool borrowed from psychotherapy where it has long been realised that people can be encouraged to open up if they are asked to share their views as part of a small group.(Edmunds,1999). It has a brainstorming effect so that a comment from one person sparks ideas from another and groups can yield more ideas than one to one interviews. The group may gel and a bonding between members acts as further encouragement to disclosure.

Focus groups reveal customers viewpoint and perception and looks at loyalty programs through customers eyes. By historical evidence it is
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found that women and old people were more loyal in their shopping habits while men and students are the most promiscuous and fickle. The variables taken into consideration in the formation of focus groups were Age, Gender, Income, Religion (in some cases), closeness to the supermarket, weekly shoppers and weekend shoppers. The details of the participants were tried to be matched against the profile of the customers, to ensure that the conclusions drawn were statistically significant. Focus groups gave customer viewpoint on loyalty, satisfaction, loyalty schemes and what kind of loyalty programs they preferred and what changes they thought would make them to visit the store more often. It also gave insights into customers feelings about loyalty schemes and whether they built any longer term relationship because of the loyalty programs. Focus groups helped the author gain sufficient insight into customers minds. They also helped the author reframe some of the questions in the questionnaire so that the customer understood it better. It was the first phase of primary data collection, five focus group sessions were conducted altogether and the number of participants ranged from 5-8.

To test the information generated from focus groups and to gain further insight a convenience sample (convenience sample due to the lack of time and financial resources) of Tesco shoppers has been surveyed in front of a local Tesco supermarket which is also known as mall-interceptinterviewing( Zikmund,2000).Mall intercepts have been used because it was thought that feedback from a larger population than a focus group was desired and also because mall intercepts can provide more

statistically reliable data than a focus group. Mall intercept interviews lasted somewhere between 5-12 minutes.

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As in Focus groups , they helped attain Objective 1 , Objective 2 and Objective 3. In order to reduce possible shopping pattern biases and ensure data reliability, a more representative sample of the overall population has been taken and the interviewing took place on a weekend, Saturday late morning till late afternoon, Sunday late morning till late afternoon and Monday during morning office hours and evening times when people get out of work. This was to ensure that both Cash/ Stress rich time poor and Time rich cash poor customers were considered. Reliability of data was achieved by minimizing participant error as timing didnt dilute the results and the data wasnt contaminated . Also, there was a high degree of structure to the interviewing to reduce observer error. The advantage of interviewing a convenience sample is that it is relatively fast and inexpensive, however, the drawback of this method is that there are no statistical techniques to measure the random sampling error (Random sampling error is the difference between the sample result and the result of a census conducted by identical procedures), and therefore it does not allow the researcher to project the data beyond the sample (Zikmund, 2000) For mall intercept interviewing, a questionnaire has been developed that depending on the interviewee-response divides them into two categories, namely Tesco Clubcard members and non-members, which is important to know in order to have a benchmark to find out how the Tesco Clubcard affects its members loyalty towards Tesco which represent the same questions as applied in the Satmetrix Market Stat to measure the Satmetrix customer loyalty index. To evaluate how the Tesco Clubcard affects its members loyalty towards Tesco it was originally planned to use a customized version of the Customer Acid Test (Web 9) to measure
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each categories loyalty towards Tesco and then compare the findings against each other.

However, it turned out that the entire Test would be too long for interviewing shoppers in front of a supermarket and therefore it was decided to use the first section (the first four questions) of the Customer Acid Test only, which represent the same questions as applied in the Satmetrix Market Stat to measure the Satmetrix customer loyalty index.

Satmetrix Systems is claimed to be the leading provider of enterprise solutions for improving business loyalty and profitability with leading companies around the world relying on its systems, including Cable & Wireless, eBay, E*Trade, Hewlett-Packard, Honda, Lucent Technologies, Network Associates and Siebel System( Web 10). The Satmetrix Market Stat is a dynamic tool for customer satisfaction and loyalty measurement that uses the customer loyalty index as key metric in order to measure overall customer loyalty (Web 11).It is used by many leading companies across a large variety of different industries, including retailers and consumer goods leaders, which are all using the following listed questions in order to measure customer loyalty (each question is rated on a 0-to-10 scale (Renis Likerts scale 1932), with 10 representing the highest score): How satisfied are you with this providers overall performance ? How likely is it that you would recommend this provider to a friend or colleague? How likely is it that you will continue to purchase

products/services from this provider?

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If you were selecting a similar provider for the first time, how likely is it that you would use this provider again?

The questions address both the perceptual components - which are based on customer attitudes, opinions, and emotions, such as satisfaction - by asking for the overall level of satisfaction, likelihood to recommend, and likelihood to choose again as if for the first time, as well as the transactional components of the loyalty construct - which are based on the customers intended or actual purchase behaviour by asking for the propensity of making repeat purchases, and therefore the Satmetrix Customer Loyalty Index (CLI) comes close to hybrid models of customer loyalty measurement that try to measure the attitudinal and behavioural dimensions of the customer loyalty construct( Web 10) Although the Satmetrix Customer Loyalty Index does not take into account such constructs like commitment, trust, liking and identification as recommended by Diller (2001), a research tool had to be found that does not cost the interviewee too much time (otherwise the likelihood of getting an answer from the interviewee without much thought just to get finished with the interview is likely to increase), but still has a reasonable level of validity (validity is the ability of a scale or measuring tool to measure what is intended to be measured (Zikmund, 2000)), and therefore the Satmetrix customer loyalty index appeared to be the best compromise, since it takes into account both dimensions of the loyalty construct by asking the above mentioned questions and also due to the fact that it has been developed, tested and applied by a highly regarded institution which has many industry-leading clients around the world and employs several leading authorities in the field of loyalty research,

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including Fred Reichheld, whose publications include widely read articles in the Harvard Business Review and The Wall Street Journal ( Web 11)

However, it was thought that the behavioural aspect of the loyalty construct is somehow weakly represented by the Satmetrix customer loyalty index since there is only one question concerning repurchase intentions and for this purpose the research tool developed for this study included two more items to measure the perceived behavioural dimension of the loyalty construct, including a question regarding the customers perceived expenditure in terms of a percentage figure of their monthly grocery budget spent with Tesco (categorized into four options: (1) less than 25%, (2) 25 50%, (3) 51 75 %, (4) 76 100%), as well as a yes/no option for Clubcard members regarding whether they have spent more money with Tesco since they have had a Clubcard or not (however, these added items are not included in the CLI, but treated separately).

To quantitatively measure the loyalty effect of the Tesco Clubcard, the arithmetic mean of each question representing the CLI is calculated for both, Tesco Clubcard members and non-members who have participated in the interview and then compared against each other. Afterwards, the overall CLI for each category (Tesco Clubcard members and nonmembers) is measured by calculating the arithmetic mean of all four questions representing the Satmetrix Customer Loyalty Index.

The two additional items capturing the behavioural dimension of the customer loyalty construct are used to demonstrate what percentage of their monthly grocery budget (their share-of-wallet) Tesco Clubcardmembers spend with Tesco as compared with non-members as well as to
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show whether Clubcard members have increased their spending behaviour since they have had a Clubcard or not.

In order to find out the importance of a CLP for Tesco customers, the research tool also employed a question regarding the most important aspect for them when they are selecting a supermarket (options available: location, brand assortment, value for money, one-stop-shopping, and club scheme). This part of research threw up interesting findings, since customers chose value for money as the most important factor while selecting a supermarket , which seemed to contradict previous researches conducted in 2003 and 2001 which pointed out Location and One stop shopping as the single most important criteria ,respectively. Just to make sure the findings were right and to probe into it more deeply, interviews were conducted with 12 of the known respondents who had chosen Location as the single most important criteria when choosing a supermarket. The interesting bit was 9 out of these 12 respondents interviewed responded that they didnt consider Store Location a factor at all which literally meant that just because they stayed near a particular store , it didnt occur to them that store location can be a factor at all. Only when they were given the scenario of living somewhere far away from their favourite super store, they could imagine store location as an important factor. So , perhaps store location can be a bit more important a factor than what the questionnaire results reveal.

Since demographic criteria are often mentioned to influence shopping attitudes and behaviour (Carman 1999, cited in De Wulf, 2000), the research tool developed for this study also took into account questions to obtain coverage on gender, occupation (divided into Professional, Skilled Worker, Retired, Unemployed, Homemaker, Student) and size of
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household (1,2,3,4 or more) in order to be able to conduct some cross tabulations (in order to see a complete copy of the research tool, please see Appendix).

For attainment of Objective 4 , quantitative analysis and examination of Company Reports has been done. Quantitative measures of

effectiveness have been developed by typically comparing and contracting post-program levels of sales, customer retention, customer satisfaction, etc. with pre-program measures and noticeable differences were carefully studied while taking into consideration the control group (group subjected to the same new service regime, but without the benefit of a loyalty program). Other criteria which may directly relate to the Clubcard such as increase of customer base , increase in average spend , increase in shopping frequency were studied in detail and

conclusions were tried to drawn from them. Regular increase in sales, number of outlets , operating profits and the strengthening of Tesco Brand and the overthrowing of Sainsburys to second place meant that Tesco was doing something special in relation to other supermarkets. Success evaluation was done to figure out the contribution of the Clubcard. Focus groups and mall-intercept interviewing helped in findings regarding other supermarket loyalty schemes and Tesco scheme was the most preferred one. Also, going though research databases such as Mintel and Grocery magazines such as The Grocer revealed important difference between Tescos and other supermarket loyalty schemes which helped compare and contrast supermarket loyalty programs.

For the attainment of Objective 5, organizational viewpoint was necessary. Qualitative data collection technique embarked upon was
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Semi-structured in- depth interviews with Tesco Store managers. Interviews would reveal the importance of Clubcard and the role it played in the overall strategy. The interview also tried to probe deeply into training of staff and the emphasis given to the Clubcard during training . Both the semi-structured interview and the telephonic interview had questions on training to figure out how much Clubcard knowledge permeates from the managers to the floor staff (customer facing staff) Questions also related to any possible link of Clubcard to other factors (store formats, non food expansion) which has played significant role in Tescos success, to assess if at all a link can be established between the Clubcard data and other factors. Managers were also questioned regarding the potency of Clubcard and what made Tesco Club card stand out and different from others. Strategic questions were also included in the interview to figure out to what extent does Club card play a role in the overall strategy of the firm. Managers were also asked to rate Tescos success factors and which factors they considered made Tesco stand out in comparison to its competitors.

Another qualitative data collection technique for attainment of Objective 5 included Telephonic interviews with Tesco staff. Interviews would reveal the importance of Clubcard and how much emphasis was paid to the club card during training. As they interacted directly with the customers, they had to be the advocates of Clubcard. The author thought that if Tesco considered Clubcard as a part of its strategy, special emphasis and extra sessions should be dedicated to the Clubcard during staff training so that the staff were aware of its importance in the firms overall progress and treated it as an essential ingredient in companys success.

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Summary The results by and large indicated that women were more likely to own a Clubcard and more likely to be influenced with the loyalty schemes. They were significantly better at recommending and once satisfied served as better advocators. There was a noticeable difference in shopping behaviour between Clubcard and non-Clubcard members as well, with Clubcard members scoring higher than non-Clubcard in every loyalty dimension. Results also revealed a correlation between household size and CLI, it was noticed that loyalty was more or less directly proportional to the household size (the more the size of household, the more loyal the members and visa-versa). Result also indicated that Clubcard may have an effect on customers monthly spend, with Clubcard members spending major portion of their monthly spend with Tesco as compared to nonClubcard members. Though all these factors pointed towards the positive effects of Clubcard, none of the participants declared Clubcard as the prime reason for selecting a supermarket.

After having the appropriate methodologies in place and collecting the required amount of data over a period of time, the study now moves into the analysis part, where the qualitative and quantitative data collected will be carefully examined, analyzed and discussed. Data collected from various sources will be triangulated before coming to a definitive conclusion.

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Introduction This chapter is devoted to the presentation and analysis of the information collected. The results of the mall intercept interviewing will be discussed and analyzed first. Analysis of focus groups, telephonic interviews and face-to-face interviews will follow. These findings along with the findings from the secondary research will be triangulated and a thorough examination of the Tesco Clubcard will be done. The factors which have led to the success of the Clubcard will be highlighted and the strategic implications of the Clubcard will be analyzed. The evaluation of loyalty as a corporate strategy will be discussed. 4.1 Results

Data from the questionnaire indicates that more than three quarters (77.22 per cent) of the 158 respondents surveyed participate in the Tesco Clubcard programme. Although it was tried to get an equal gender distribution, men were much more likely to refuse to participate in the survey than women, and as a result of that, 92 out of 158 respondents were female of whom 83 (90.2 per cent) owned a Tesco Clubcard, and 66 were male of whom 29 (43.93 per cent) owned a Tesco Clubcard.

The survey also revealed that 55.74 per cent (68) of the Clubcard-holders interviewed participate in more than one Supermarket CLP, of whom 86.76 per cent (59) were female and 13.24 per cent (9) were male.

The data further indicate that women were not only more likely to participate in the survey and more likely to own a Tesco Clubcard, but they also scored higher in terms of overall CLI than their male surveycounterparts, as demonstrated in Figure 11
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Figure 11
Customer Loyalty index sorted by female and male Clubcard members

8.79 10 8

6 4 2 0 0 0 0 0 0


0 0

Female participants generally scored higher in every single dimension of the CLI, but the most significant difference between male and female Tesco Clubcard-members occurs in the Recommendation dimension as
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shown in Figure 12, where female Cardholders scored 9.15 Index-points as compared to only 7.45 Index-points of male Cardholders.

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Figure 12
Customer loyalty dimensions: Female and male Clubcard members

10 8

8.1 8.32

7.85 8.19

9.15 9.51 9.15 7.45

6 4

Female Male

Overall satisfaction choose first time purchase again recommend

In terms of their occupation, the data show that 31.15 per cent (38) of the Tesco Clubcard-members interviewed were Homemakers, 27.05 per cent
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(33) Professionals, 16.39 per cent (20) Retired, 16.39 per cent (20) Skilled Workers, and 9.02 per cent (11) Students, of whom 12.30 per cent (15) are living in a single household, 22.13 per cent (27) in a doublehousehold, 18.85 per cent (23) in a household of three, 30.33 per cent (37) in a household of four, and 16.39 per cent (20) in household of more than four people.

Regarding their loyalty towards Tesco, Clubcard-members scored reasonably higher than their non-member survey counterparts with an overall CLI of 8.68 for Clubcard-members as compared with 7.84 for non-members, accounting for a CLI difference of 0.84 Index-points in favour of Clubcard-members.

Figure 13

Overall customer loyalty for Tesco-Clubcard members and non-members

non -Clubcard members


Type card of Club customer members

7.4 7.6 7.8

8 8.2 8.4 8.6 8.8

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As shown in Figure 14, the biggest difference between Clubcard-holders and non-holders occurs from the Recommendation dimension of the CLI, with Clubcard- holders scoring 8.87 Index-points as compared to 7.19 Index-points of respondents without a Tesco Clubcard, accounting for a difference of 1.68 Index-points in favour of Clubcard-holders, while the Overall Satisfaction dimension of the CLI accounts for the smallest difference (8.29 Index-points for Clubcard-holders as compared to 8.15 for non-holders) with a surplus of 0.15 Index-points in favour of Clubcard-holders. In terms of Choose first time, respondents holding a Clubcard membership scored 8.13 Index points, compared with 7.33 Index points of respondents without a Clubcard membership, while in terms of Purchasing again they scored an Index of 9.45 as compared with 8.89 of non-members.

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Figure14 141414

Clubcard and non-Clubcard members on loyalty parameters

9.45 8.69 8.87

10 9 8 7 6

8.29 8.14

8.13 7.33 7.19

5 4 3 2 1 0

Clubcard members non-Clubcard members

Overall satisfaction

choose first time

Purchase again


When manipulating the data according to occupation, results reveal that Homemakers holding a Tesco Clubcard-membership are most loyal towards Tesco, scoring a CLI of 8.77, followed by Retired Clubcard-

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members (8.75), Professionals (8.73), Students (8.68) and Skilled Workers (8.53) (also illustrated in Figure 15)

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Figure 15
CLI of Clubcard members by occupation

8.77 8.8 8.65 8.7




8.6 8.5 8.4

Student Homemaker Retired Professional


Skilled worker

When manipulating the data according to size of household (as shown in Figure 16), results indicate that Tesco Clubcard-members living in a household of more than 4 people represent the most loyal category with an overall CLI of 8.80, followed by Clubcard-members living in a household of 4 with an overall CLI of 8.72, with single households being the least loyal with an overall CLI of 8.54.

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Figure 16

CLI of Clubcard members by size of household

8.8 8.8 8.7


8.65 8.54



8.6 8.5 8.4


Size of household

As illustrated in Figure 17, 13.93 per cent (17) of Tesco Clubcardmembers responded less than 25 per cent compared with 25 per cent (9) of non-members when they were asked for their monthly grocery expenditure spent with Tesco as percentage of their overall monthly grocery budget, while 30.33 per cent (37) answered 25 50 per cent in contrast to 41.67 per cent (15) of non-members, 37.70 per cent (46) replied 51 75 per cent as compared with 22.22 per cent (8) of participants without a Tesco Clubcard membership, and 18.03 per cent

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(22) of Tesco Clubcard-members responded 76 100 per cent compared to 11.11 per cent (4) of without a Clubcard membership.

Figure 17

Percentage of monthly grocery budget spent with Tesco (CLubcard-members)

18.03% 37.70% 13.93%


< 25%

25-50 %



Figure 18

Percentage of monthly budget spent with Tesco(nonClub card members)

11.11% 22.22%



< 25%

Page 87 25-50%of 157 51-75%


When asked whether they have increased their spending with Tesco since they have had a Clubcard membership, 61.48 per cent (75) responded No and 38.52 per cent (47) responded Yes.

In terms of what is most important for them when selecting a supermarket, none of the respondents mentioned Clubcard, while 49.18 per cent (60) of all Tesco Clubcard-holders and 41.66 per cent (15) of all survey-participants without a Clubcard responded Location, followed by 39.34 per cent (48) of Clubcard-members and 36.11 per cent (11) of non-members who perceive value for money as most important when selecting a Supermarket, with brand assortment being most important for 9.02 per cent (11) of all Tesco Clubcard-holders and 19.44 per cent (7) of respondents without a Tesco Clubcard, and one-stop-shopping being ranked as most important for 2.46 per cent (3) of all Tesco Clubcard-members and 2.78 per cent (1) of all non-members (also demonstrated in Figure 19)

Figure 19

Factors in selecting a supermarket

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49.18 50 40

41.66 36.11 39.34 19.44 9.02 2.46 2.78

30 20 10 0
location Brand

Value for money

One stop shopping



4.2 Discussion of the survey results

The prime interest of the survey was to examine the impact of the Tesco Clubcard on its members loyalty towards Tesco by applying the Satmetrix Customer-Loyalty-Index, and to analyse the success factors behind the Tesco Clubcard model.The results from the survey provide some evidence for a positive impact of the Tesco Clubcard on its members loyalty towards Tesco, since surveyed Clubcard-members generally scored a higher CLI than survey participants without a Tesco Clubcard-membership. The survey also provided other valuable indicators which are discussed below.

Figure 11 and 12

It is also worth noting that female participants were generally more likely to own a Tesco Clubcard (90.02 per cent of all female respondents owned
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a Tesco Clubcard, as compared to 43.93 per cent of all male respondents) and also scored higher in terms of CLI than their male surveycounterparts as demonstrated earlier in Figure 11 and 12, which supports claims that gender is a key discriminator in CLP-card

ownership/participation (Wright & Sparks ,1999) (according to an AGB Omnimas loyalty scheme tracking survey, supermarkets and department stores are more likely to attract female participants, while petrol loyalty schemes tend to be male dominated), and also justifies investments into promotions specifically targeted at women (e.g. iVillage.co.uk). Figure 12 also indicates that female have higher CLI than men on all CLI parameters which effectively can mean that its easier to satisfy females , they are more loyal , they shop more often and are more likely to be locked-in. Also, the high difference in CLI with regards to recommendation suggests that Females are good advocators. As Focus group discussion had revealed that customers rate word-of-mouth publicity as the most important factor affecting their shopping habits, which means that females are in a way Tescos biggest asset. Even if they do not shop a lot, they are good at recommending and promoting things. Thus, as with Baby Club , Tescos future loyalty strategy should be to try to target females and bring them in under the Clubcard umbrella. The fact that more often than not ,females do sign up for loyalty schemes makes matters easy.

Figure 13 and 14

There appears to be clear evidence of a positive impact of the Tesco Clubcard on its members loyalty towards Tesco, since Clubcard-members scored higher in overall CLI and in each single dimension, this is particularly true in the case of the Recommend dimension of the CLI
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meaning that Clubcard-members are much more likely to recommend Tesco to their friends and colleagues than customers without a Clubcardmembership, making them far more better word-of-mouth marketers for Tesco. The Overall Satisfaction dimension, accounts for the smallest difference of only 0.15 Index-points between Clubcard-members and non-members. This could be perceived as a weakness of the Clubcard since one of the main targets of customer loyalty programmes is to increase customer satisfaction, but on the other hand, the small difference between Clubcard-members and non-members in terms of Overall Satisfaction could also be seen as a strength of Tescos overall strategy (apart from investing in the Tesco Clubcard, Tesco invested heavily in a series of other initiatives designed to offer better value, improve its stores, and give a higher level of service to its customers (Peck ,1999), since Tesco shoppers without a Clubcard-membership are almost as satisfied as Clubcard-members despite the fact that they do not receive the additional benefits Clubcard-members get. But then it could indicate that Clubcard does not enhance the satisfaction factor among its members. The huge difference in other CLI parameters except Satisfaction does seem to suggest that Clubcard directly or indirectly does affect the shopper in one way or the other. Interesting bit to note is, if we consider satisfaction as the base and compare it with other loyalty parameters it reveals that though there isnt much difference in the Overall Satisfaction parameter between Clubcard members and nonmembers the difference is huge when it comes to Recommendation. Even in the case of Choose first time and Continue purchasing there is quite a bit of difference between Clubcard members and non-members which means that for Club card members the satisfaction does get transformed into transaction more easily and perhaps transaction into loyalty which can be justified by their habit of recommending.
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Figure 15 and 16

The results also indicate that there appears to be a positive correlation between household size and CLI, since respondents living in a household with several members were inclined to score higher in terms of CLI than respondents living alone, which is in line with the research findings by McGoldrick et al.(1997), suggesting that loyal customers are more likely to live in larger households. However, Mason (1996) found little difference in customer loyalty according to household size, but suggested that the full-time employed tend to be more store loyal, which is inconsistent with the research findings of this study in that Homemakers and the Retired scored the highest CLI and Students even scored higher than Skilled workers and only marginally lower than Professionals (however, it must be recognized that process of sample selection of the present study is different from that employed by Mason). We find that the CLI of Homemakers is the highest and considering that women form a major chunk of Homemakers category, it only justifies the previous finding that women are more loyal than men. More interesting things emerge when we try to analyze Figure 16. We notice that CLI increases in direct proportion to the size of household which means the bigger the size of household the more loyal customers are . But loyalty can be because of several factors, Tescos Value for money products with its Tesco Value lines, product variety, location, One stop shopping etc. But it wont be unreasonable to think that with bigger household, customers have to spend more which can mean that they may be more price conscious than the ones with single households and may value discounts a lot more . It here then that the Clubcard may have an effect., customers may want to shop at Tesco to add points and
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get discounts. Thus Clubcard may make the larger households least susceptible to competitor attack by making them stick to Tesco for Clubcard points and subsequent discounts.

Figure 17 and 18

A positive impact of the Tesco Clubcard on its members loyalty towards Tesco appears to be further evidenced by , demonstrating that more than half (55.73 per cent) of all Tesco Clubcard-members surveyed responded that they spend more than 50 per cent of their monthly grocery budget with Tesco, compared with one-third (33.33 per cent) of all surveyed non-members. However, 61.48 per cent (75) of all surveyed Clubcardmembers responded No when asked whether or not they have increased their spending with Tesco since they have had a Clubcard (however, this figures have to be treated carefully, since it has been suggested that consumers are not necessarily objective in regards to purchasing behaviour and that they are not likely to admit being influenced, when in fact their shopping patterns might show otherwise (Wright & Sparks ,1999). Thus (assuming that the respondents were objective), since Clubcardmembers tend to spend a higher percentage of their monthly grocery budget with Tesco, but the majority of them did not increase their spending with Tesco since they have had a Tesco Clubcard, it could be argued that the majority of them have already been high spending/loyal customers beforehand and that the Clubcard did not fundamentally change their loyalty and shopping patterns but it also suggests that Club card also acts as a lock-in for the customer and makes them less
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susceptible to competitor attack. On the other hand, there were considerable 38.52 per cent (47) of all Clubcard-members surveyed who responded Yes when asked whether or not they have increased their spending with Tesco since they own a Clubcard, which does suggest that Club card does have a role to play as far as consumer spend is concerned. Also, there is a significant amount of difference between the percentage of monthly budget bought from Tesco by the Clubcard members and nonmembers which again suggests that Clubcard may be the driving force behind it.

Figure 19

Another interesting result of the survey includes the fact that none of the participants, neither Clubcard-members nor non-members responded Clubcard as being most important for them when selecting a supermarket, while the vast majority of both categories responded Location as being most important, followed by Value for money being second most important, with Brand assortment being third most important and One-stop-shopping being fourth most important . These findings are inconsistent with the findings of a survey conducted by Verdict (Cuthbertson,2001), suggesting that one-stop-shopping is the most important factor for keeping UK-customers loyal (here again, this might be due to differences in sample selection and study methodology, since the sample of the present study was geographically concentrated to the City of Cardiff as well as just to one supermarket). But the fact that Clubcard wasnt the most important criteria doesnt suggest that it wasnt important at all, it may have been one of the important factors though not the most important. So, in no way can a judgment be made that customers do not value their Club card, may be they value it less than the other
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factors mentioned. Another interesting bit is the difference in Brand Assortment , non-Clubcard members seem to value Brand assortment a lot more than Clubcard members which means Tesco can rethink its strategy with regards to branded goods. Perhaps with the addition of some branded stuff it can increase satisfaction levels of non-Clubcard members and make them a part of the Clubcard. Another research finding revealed that 55.74 per cent (68) of all Clubcard-holders surveyed participate in more than one Supermarket CLP, thereby supporting claims that consumers are more likely to have a repertoire of two or three brands within any product category from which they regularly buy, rather than just one i.e. polygamous or divided loyalty (OMalley,1998)

4.2.1 Analysis of Focus group

Analysis of focus group sessions revealed important insights about customers perception towards Clubcard and supermarkets in general. About 15-20% of the participants shopping at Tesco were not aware of the Clubcard, some even thought that Clubcard was an opt in scheme where they have to pay for being a part of the scheme. This meant that Tesco is lacking somewhere in creating the right kind of awareness and perhaps not promoting the Clubcard properly. Though interview with employees revealed that they were always asked to emphasize on Clubcard, most of the respondents of the focus group stressed that there were never asked or encouraged to sign up for the Clubcard and even the employees were not sure of the exact benefits. It was only the word-ofmouth publicity that was making customers sign up for the Clubcard , Tesco isnt doing enough to encourage customers to get enrolled in the loyalty scheme. Most of the respondents who had a Clubcard , did mention that their buying habits changed negligibly because of the
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Clubcard ( e.g they knew that 1point gets added every pound , so they made sure that they bought stuff in multiples of a pound and would not shop for 3.92 but would make sure that the bill reaches 4 and they dont miss a point) The habits did not change completely but Tesco does manage to bring in something extra. The interesting aspect was, none of the participants knew the percentage or the share of discount Clubcard gave them. Most of them thought the discount was something around 5% on their spend. After being informed that its 1%, most of them were shocked and disillusioned. Tesco does well enough to create a positive hype around the Clubcard which helps creating a mirage in customers minds. There was very little awareness of the Clubcard other than the points. No one knew that Clubcard points can be added elsewhere also and that Clubcard umbrella encapsulated other companies besides Tesco. Customers associated Clubcard with Tesco only, they thought that points could be added and redeemed only at Tesco and no where else. Again, suggests that Tesco is failing to create the right kind of awareness. Though general view was that Clubcard didnt encourage loyalty, yet respondents did say that they would feel unhappy and even cheated if Tesco tries to do away with it. Though this emotion may not get transmitted into changing of shopping behavior. (e.g they would not stop or reduce their frequency of shopping at Tesco). Most respondents refuted that loyalty can be generated by a loyalty scheme. Some of them did say that loyalty does have a part to play as far as supermarkets are concerned but the reasons for loyalty were value for money, Product Variety, Quality of products, Good customer service , Tesco Value products and Good shopping environment (like less wait at the till ). Regards Clubcard , most of them said that they signed up for it because they had nothing to lose. Respondents were happy over the Clubcard in the key ring format which meant they didnt have to remember taking the
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Clubcard whenever they shopped at Tesco. Tesco does concentrate on every little that can lead to customer satisfaction and to an extent this satisfaction does get converted into loyalty as seen from the survey results. Tesco stores have become the no.1 retailer in UK by investing in better retail environments , value added services, employee training, supply chain efficiencies and customer relationship management. The company has an enviable reputation for being innovative by offering good value across an extensive range of products while providing a convenient , quality shopping experience. Tesco is blatantly aware of the fact that customers regularly appraise the TESCO brand according to these criteria, and it uses this knowledge to employ a coordinated and proactive marketing approach successfully.

4.2.2 Analysis of Semi-structured interviews with Check-out (Customer facing) staff Interviews with Tesco check out staff revealed important insights. All the interviewees did say that quite a bit of emphasis was paid to the Clubcard during the training period and all effort was being made for the employees to understand its importance to the business. Videos of

Clubcard launch were also shown during the training days to have additional impact on the staff so that they understood its importance and relevance. But ironically, even after all this most of the Tesco staff didnt know much about the Clubcard , other than this being a discount scheme. 60% of them didnt even know how the points added up and those that did was only because they themselves were Clubcard members. Above all, none of the staff interviewed had any idea how Clubcard helped the organization. They had absolutely no clue as to why Clubcard data was collected and how it was beneficial to the organization. With regards to customers , all staff interviewed were of the opinion that
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customers valued their Clubcard a lot. Even if they forgot to bring the Clubcard, customers had the receipt safe and made sure they got the points added the next time they shopped which seems to show that customers did care for points and the subsequent discounts. Some staff were of the view that some customers purposely shopped more to add Clubcard points which seem to point out that Clubcard may increase customer spend in certain circumstances. Tescos key ring Clubcard format went quite well with the customers. Customers were also quite satisfied with the coupon format and the quarterly Reward scheme. A Clubcard member values his or her statement mailing because it is personal , the quarterly me ( Mason ,2003). Although , it was revealed that Tesco did value their staff and staff were given various privileges like Clubcard linked to staff discount card etc, but there was a lack of motivation due to long work hours and due to which the staff admitted missing out on asking the customers about the Clubcard. Most of them didnt bother to ask customers to sign up for a Clubcard and those who did could not explain the exact benefits of the Clubcard. None had any ideas that Clubcard points can be added and redeemed elsewhere and that Tesco was in partnership with other firms. Nor was anyone aware that Clubcard points can be viewed on the Tesco.com site.

4.2.3 Analysis of Semi-structured face to face interviews conducted with Store Managers

The main purpose of interviewing Store Managers was to find out the importance of loyalty as strategy and to what extent they thought Clubcard was important to the overall decision making and functioning of Tescos business. The interview would also help to triangulate the findings . The answers related to training seemed to endorse the point
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made by front-line staff, that there was quite a lot of emphasis on Clubcard during training and staff were made to realize its importance and relevance and Clubcard was projected as a potent force. Managers felt that much more emphasis was paid on Clubcard during training than before. This was because they had to make sure that more and more customers joined the Clubcard which would give Tesco an opportunity to lock them in with their promotions and special offers, which would reduce defection levels and reduce churn. They thought that the emphasis paid on the Clubcard was justified. Customer-centricity was highlighted regularly during the course of the interview with clichs such as customer is the king, customers set the agenda and customers are the regulators. In fact, the word customer cropped in to the point of irritation which suggested that Tesco did value their customers and the Clubcard for them was a way to customer-centric market research. Managers thought that the data collected from Clubcard was exact through which they knew more about customer behaviour than its nonloyalty program rivals such as Asda. For example , they said that Asda relied on market research which only gives them an approximate idea regarding customer purchase patterns while Clubcard data was exact and reliable. They thought Nectar card didnt work on the same philosophy as Tesco and though it was a loyalty card , it didnt generate the same type of information as the Clubcard and because of being a multi-branded loyalty card , it didnt generate loyalty at all which defeated the whole purpose of a loyalty program. One note worthy feature was, though the Store managers had enough knowledge of the Clubcard and its workings, the knowledge didnt seem to permeate down to the customer facing staff. Even after training, the floor staff had no clue regarding the importance and workings of the Clubcard which seem to suggest that Tesco did lack somewhere in the training part. Interviews did reveal that Tescos value
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their Clubcard a lot and to an extent they did rely on Clubcard data to make strategic decisions especially the ones related to promotion. They believed that Clubcard was making customers loyal . One of them cited the example that , a customer can drive to any super market within 15 mins , so it wasnt because of the store location but its was customer loyalty that was making them shop at Tesco and that loyalty has been built from listening to the customers and giving them what they wanted. With regards to the future strategy, managers were of the opinion that Clubcard would always be a strategic weapon and will guide Tesco to reach its short term and longer term objectives. There were no plans to shelve the Clubcard in near or distant future. The interview did reveal that Tesco soundly backed its Clubcard and to an extent does rely on the data generated. It cannot be ascertained from the interview if Tescos foray into non-food or international expansion can be related to Clubcard data in any way but promotional effectiveness can undoubtedly be attributed to the Clubcard and the information it generated. Tesco do have a commitment and dedication to make the maximum use of its Clubcard data and do value their loyalty program.

4.3 Origin and Motives Before assessing Tescos loyalty scheme, it is important to understand the circumstances under which it started and the objectives Tesco had in mind before embarking on it , because this would make it easier to evaluate its effectiveness.

Tesco started the concept of loyalty marketing primarily due to three major reasons:-

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Technologically feasible- It was technologically possible to process the volume of transactional data that a loyalty scheme would generate. For the first time there was a realistic prospect of collecting and managing masses of accurate customer-based transactional data and using it to provide insight advantage. Having at their disposal, resources and capabilities which made their chosen strategy feasible. Me too factor - All major retailers were starting to think on these lines and loyalty was the latest buzzword in retail . Safeway , Sainsburys were all testing it , already. Tesco didnt want to be left behind. Competitive Pressure - Tesco was not in a market leading position . Pressured from above by a seemingly unassailable market leader in Sainsburys, with a looming threat from below from pricecutters like Asda and Kwik-Save, and facing the prospect of an invasion from German and US discounters like Aldi and Costco, Tesco needed to fight back against the competition. It needed to protect its current market share by sustaining and developing the value of its customer base. Club card became one of a series of initiatives to break the cycle of under-achievement. Tescos biggest leap into the unknown. The underlying motive, therefore was to increase market share. 4.4 Tescos definition of loyalty (The Loyalty Cube) Customers location in the loyalty cube suggests what sort of action is appropriate to earn their lifetime loyalty. The three axes on the loyalty Cube signify Contribution, Commitment and Championing.

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Figure 20

Adapted from Humpy et al., 2004

The Loyalty Cube

Championing Z

Commitment Y

Contribution Customer X

Contribution Signifies customers profitability. Some very loyal customers can make very low contribution to company profits while some occasional customers can make greater contributions. Contribution ,does not, in Tescos model, reflect loyalty Terry Leahys concept of the scheme is to encourage loyalty , not just profitability.

Commitment Measures future value. This contains two elements: the first is how likely the customer is to remain a customer, because a defecting customer has no financial value in future. It also measures headroom, this is the potential for the customers to be more valuable in future, provided everything possible is done to demonstrate value in that headroom.

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Customers who are already buying as much as possible have little headroom, for these customers new complementary areas become much more important, such as new departments in a store. Headroom is vital to a mature loyalty scheme like Clubcard and Tesco knows this and constantly works to increase the headroom. Commitment has special significance in Tesco loyalty model as it always works to enhance value for the customers to increase headroom.

Championing Customers with little headroom can act in a third dimension in the cube: as an ambassador for the brand. This is where the idea that loyalty program members are members of the brand comes to life. If they see value in a program they will recommend it. The long term value of a low value customer in Tesco is in recruiting higher-value customers. The analysis of survey results do reveal that Clubcard members are quite good at advocating and recommending which means Tesco has been to an extent, successful at championing . Championing is of utmost importance in the Clubcard model as Tesco knows that word of mouth publicity is the most effective way of marketing.

4.4.1 Understanding the DNA of loyalty Tescos loyalty program is a success because Tesco understands the basics of loyalty. Brand Values This is a key ingredient in Tescos loyalty programmes genetic code. Its loyalty programme is the active expression of its brands personality and
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values. Whatever the characteristics of the brand are, the qualities that customers recognize and admire, the Clubcard programme is that brand in action. Business dynamics Tescos loyalty programme does not exist in isolation from day-today business dynamics of the company. What ever opportunities or constraints exist for the business as a whole , it is reflected in the loyalty programme. Customer behavior It is axiomatic for Clubcard and any other loyalty programme that aims to succeed, that the focus of the programme should be to encourage profitable customer behavior Reward the behavior you seek as

it is known at Tesco. Tesco establishes priorities for the change it wants to see in customer behavior. 4.4.2 The Launch Because Clubcard was the first loyalty scheme to be launched nationwide , the launch was where it could have hit or miss. The successful launch of Clubcard provided the initial impetus. Several factors contributed to making the Launch a success

Secrecy and Momentum Tescos office relating to Clubcard activities was named the bunker and it was completely isolated to prevent any information leak because the race for first mover advantage was on with Sainsburys. The secrecy around the national launch wrong footed competitors, who had assumed that Tesco would move to a larger trial , or that it would take it longer to
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launch nationally. Tescos determination to gain first-mover advantage paid off. Tesco set the agenda and the only option for the competitors was to react.

Simplicity The advertising message was right Save on your shopping today. It was simple , direct and emphasized what customers got out of the deal in the most basic terms. It fitted customers expectations of their supermarket brand. Every Little Helps and Thank You were a natural fit. The word discount was banned internally and was never mentioned during the launch , suspecting of sending the wrong message.

Control and Involvement The Tesco Board trusted the marketing team to do what they wanted , driven by customer response and the growing vision of what customer understanding could do for the business. The front-line staff were always informed and closely involved at every key stage. They acted as marketers for the scheme too. Because it was their Clubcard , they backed the advertising messages in their dealings with customers at the local level.

Infrastructure Before the launch Tesco made sure that its preparation and infrastructure was fully in place. The phone lines were in place to handle customer queries, the marketing material was tested, the IT infra structure was in place, the processes and means to deal with customers in a new way were ready. Careful planning and detailed knowledge on methods for customer identification, registration, segmentation, reward design, and programme maintenance operations were also in place.
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Tesco made sure that the launch was well planned and no stone was left unturned , it desperately wanted the Clubcard to reap dividends for them .

4.5 Success Factors First-mover-advantage Since the Tesco Clubcard was the first nationwide supermarket CLP in the UK, it provided Tesco with considerable first-mover-advantage, one month after its launch, over five million people had joined the Clubcard scheme and Tesco recorded a like-for-like increase in sales (household penetration had increased by almost 1 per cent, meaning that an additional 200,000 households had come to shop with Tesco and over one third of the gains were reported to be at Sainsburys expense) (Peck et al., 1999). Time between Tescos Clubcard launch and Sainsburys Reward Card, according to Market researcher Taylor Nelson AGB, customers spent 28% more at Tesco and cut spending at Sainsburys by 16%. Tim Mason, Marketing Director of Tesco plc, suggested that the reason why the scenery only changes for first-movers is because customers realize that organizations who do something first do it for their customers and the ones who follow do it to neutralize competitive advantage (cited in Web 8). This principle is further embedded in Tescos core purpose of Creating value for customers, to earn their lifetime loyalty, making Tesco what has been termed a Value innovator (Mauborgne, 1999) (Value innovators are companies that instead of striving to match or outperform the competition, cultivate value innovation by placing the buyer, not the competition, at the centre of strategic thinking).

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Complete integration Tesco Clubcard does not exist in a vacuum, but is a coherent element of Tescos core purpose of Creating value for customers, to earn their lifetime loyalty(Web 9). Tescos customer management has the ability to link and integrate customer information across the entire business, at different customer interfaces and throughout the duration of the customer relationship. It has completely integrated the Clubcard programme into its online and offline operations allowing Clubcard-members to accumulate points whether they buy in-store or at Tesco.com (as well as with Tescos coalition partners) across almost every product category offered. By allowing Clubcard-members to check their points balance whenever they want via the Internet, the programme creates value to its members in that it contributes to improve its ease of use and its transparency. By integrating various other Club-schemes, such as the Tesco Healthy Living Club or the Tesco Baby Club into the Clubcard framework and allowing Cardholders to communicate with each other via Internet chat rooms provided by the Internet service provider iVillage.co.uk, Tesco allows its Clubcard-members to exchange information on topics like healthy living, diets, fitness, pregnancy and baby, and many more topics, thereby trying to create value particularly to its female members by giving them the chance to build friendships and by promoting a sense of belonging, which has been suggested to be an essential element of successful customer-loyalty-programmes that is difficult to emulate for competitors due to its emotional and intangible nature (Dowling & Uncles , 1997).

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Technological and analytical prowess Although a growing number of retail organizations have realized the importance of customer information and therefore started to collect large amounts of customer specific data, according to the Accenture Institute for Strategic Change (Harris et al,2001) often less than 5 per cent of this data is ever analyzed. Dunnhumby( marketing data specialists and market research company that s 53% owned by Tesco) makes sure that this does not happen to Tesco, arguing that Every little piece of information helps. Tesco knows exactly how much, where, when and what products Tesco Clubcard-members buy. Armed with this data, Tesco has built a suite of sophisticated customer segmentations according to real purchase behaviour, rather than a version of purchase behaviour based on demographic or socio-economic stereotypes (Pack et al., 1999). This allows Tesco to tailor sophisticated campaigns and to offer Clubcardmembers more of what they value by sending out targeted offers based on what they do and do not buy, their expenditure levels on particular products and parts of the store, their responsiveness to previous promotions, likely competitive threats based on where they live and their loyalty towards Tesco. The range of products in Tesco stores is also tailored using knowledge of how Clubcard-members shop across brands. The mechanics of the reward had been done elsewhere in the world before Tesco but the thing that Tesco sets apart is the depth of its data analysis. The big step forward isnt to launch a card with magnetic stripe on it, it is understanding the value of the information it provides.( Keith Mills , Air Miles Founder, 2003). Rather than analyze the data in a random fashion, Tesco maintains a carefully constructed knowledge profit and loss account to measure customer investments in the scheme, the amount of analysis resources applied and the additional returns and
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new customer value created. Tescos approach to advanced Data Mining has helped them to drill to the earths centre and beyond. Yet, many other companies, in comparison, are still tending to their companys flowerbeds (Ahlert,2000). Tesco uses intuition and creativity as well as statistical know-how and always tries to make best and efficient use of technology available. It realizes fully well that that technology supports the Customer Experience rather than drives it. Benefit package and not just another marketing gimmick According to Butscher (2001), the most important aspect of any CLP is the benefit package a programme offers to its members, which is one of the main success factors behind the Tesco Clubcard, since Clubcard vouchers can be used for a huge variety of benefits that cover a broad area of interests ,which are likely to appeal to people from all kind of social classes with different interests, and also increase the likelihood of creating aspirational value (how much the Clubcard-member wants the reward, e.g. exotic free travel might be more desirable than in-store shopping discounts) to Clubcard-members (O Malley, 1998). By providing Clubcard-members with the opportunity to accumulate and redeem Clubcard points not only with Tesco but also with its coalition partners (i.e. purchase strategy), Tesco increases the likelihood of creating what has been termed by OBrien and Jones (1998) as cash value (how much the reward represents as a proportion of the actual expenditure) for Clubcard-members since it provides them with the opportunity to accumulate points more quickly.

The internal customer

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Tescos loyalty program rollout established loyalty marketing at the heart of the business. The staff at every level from the main board to the frontline staff is made to understand why the scheme is important to the customers and to the businesses future and are made to nurture and encourage it at every opportunity. Tesco staff have been an important ingredient in encouraging customers first to take up, and then to use Clubcard. They are briefed early and thoroughly not just about what will be different for their job , but about what Clubcard does for the business as a whole. If a loyalty scheme is to be integrated with the business, it has to be a part of the working lives of the people who run the business in the stores, too.(Cigliano et al.,2000) During the launch in 1995, Maclaurin criss-crossed the country to make sure that every member of staff knew exactly what was needed, and felt valued and understood. Tesco produced a video presented by Tim Mason encouraging staff to sell the card to shoppers and making sure they knew what the benefits were, what they did was effectively grassroots marketing using Tescos own staff. It's near impossible to build strong customer loyalty with a staff that is constantly turning over, because customers buy relationships and familiarity. They want to buy from people who know them and their preferences (Fournier et al,1998). The key rule of customer loyalty is, Serve your employees first so they, in turn, can serve your customer which is what Tesco is good at. Loyalty programs stand and fall on how they are represented by the employees that personify it.

The Emotional factor Loyal customers may value help and advice as much as cash. The Baby Club provides information at a time when potential parent needs it. The value of that information builds on the fact that Tesco is a trusted brand,
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offering straight forward advice on a range of different subjects. Tesco has found that when it provides information that is objective and useful, it deepens the trust amongst the customers who have opted-in to that part of the programme. The World of Wine Club provides easily digested specialist advise on wine enjoyment, and has been successful in engaging more experienced premium wine purchasers who might otherwise not have considered Tesco as their wine merchant. Professionalism and pragmatism Successful retail loyalty programmes are created by matching good marketing skill and commercial pragmatism with a hard-headed attitude to data.(Gilbert,2003)During initial Clubcard days, Tesco found that the best way to get around the complicated data warehousing was to start small with a Datamart. The designers of datamart took pragmatic decisions on data, time and resources and made compromises. In effect, they decided not to use data to answer every question about every customer , but to answer some of the biggest questions about most customers. They broke down data to test a series of hypothesis. It was data realism , not idealism. Immediate results of data analysis were apparent, Tesco found that in any single store, the top spending 100 customers were as valuable as the bottom 4000. The analysis also established that the stores with the highest Clubcard penetration were least effected by competitor attacks. Tesco started not from what would we like to do but from what can we realistically do, and will make a profit? ( Humpy, 2004) Tesco didnt agonize over information it couldnt extract at first, or hold up the process until it could get information. Instead, it asked questions that it could answer, and found that there were surprisingly many of them. It built on each new discovery.

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Clubcard wasnt just about passively observing trends, it was a massive laboratory of customer behavior. (Humpy,2004)

Six Key Factors Besides other factors , six key success factors that contributed to the success of the loyalty scheme as depicted in the figure below are

Figure 21

Adapted from Ahlert et al.,2000, pg 21-

Commitment Rewards Key Success Factors Measurements Flexibility Simplicity Differentiation

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Tesco made sure right from inception that there was commitment and involvement of all departments, and Clubcard wasnt left solely to the marketing team. The whole organization was and is involved with the introduction, execution, and on-going refinement of the loyalty program.


Tim Mason defines differentiation as having two aspects: differentiating the company in the customers eyes, and differentiating the customers in the companys eyes. Most loyalty programs try their hardest to differentiate the company in the customers eyes but forget to differentiate the customers in the companys eyes. The Clubcard program works to accomplish both.


The more a program gets cluttered with options and exceptions, the more it loses its appeal.( Hansen et al.,2000) Tesco is a great believer in the divinity of simplicity which is why its loyalty card program is easy-tounderstand. As Tim Mason points out Clubcard is to improve our performance at every point of contact with our customers, to make them happier and the company richer .Its no more complicated than that.


Tesco has shown the flexibility to alter, refine, and replace the various parts the loyalty program. As Humpy (2003) puts it , Seldom does any great idea play out forever; it needs to be refreshed.


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Mainline; dont marginalize your customer data. Dont leave it in the marketing department. Thats like leaving store performance data sitting in the accounting department and not getting it to the operators who can use it. (Humpy et al., 2004). Tesco has turned customer information into ongoing measurements to help improve all parts of the business. It hasnt just used it to help develop targeted mailing lists and for promotional matters.

Reward (Not being a part of the wall paper)

It was particularly kept in mind that the benefit offered to the customers or the Clubcard reward didnt become a part of the wallpaper. With a scheme based on rewards-on-demand we may get an increase in behavioral loyalty but there is no opportunity to extend emotional loyalty.( Tim Mason , 2003). Terry Hunt calls it loyalty-cul-de-sac. The team want to keep Clubcard as a chosen rather than a given: an active rather than a passive feature and that thinking has led Tesco to transform from being one of countrys biggest TV advertisers into one if its biggest direct mailers.

Customer Centricity Tesco is a prime example of a company that believes in customer being the regulator. As Terry Leahy puts it Never stop listening to customers and giving them what they want. It has always tried to make changes to the Clubcard according to customers choices and right from the start , the Clubcard has been a act of co-creation .For example, when Clubcard was introduced, shoppers had to pay 10 in one shop to qualify for any points but with majority of customer feedbacks having a common gripe, the 10 minimum spend required to make before qualifying to earn Clubcard points, Tesco now follows a pound a point strategy. It abolished the
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concept of minimum spend all together to make sure that low spending customers are not alienated.


evidences showed that customers did value having more

opportunities to earn points on their spending than those offered at Tesco alone. Some customers also said they valued the holiday and travel offers that they could get with the Safeway ABC card. Tesco made a deal with Thomson holidays and Lunn Poly to give customers more opportunities to earn points. This demonstrates that Tesco is willing to change its policy if it adds value to the customer experience. From top to bottom, there is relentless commitment to making sure that everything that the company did was relevant to customer needs. 4.6 Strategic implications of the Clubcard Segmentation Strategy Tesco has made a long hard journey in its understanding, analysis and use of data, from a basic Recency , Frequency and Value model, to life-stage categorization , through life-styles to Shopping Habits Segments. Clubcard has constantly created value for the business along the way and taught Tesco how to make customer segments helpful and relevant. Tescos segmentation strategy, today, is built on shopping habits, which is based on not just what people buy, but why and when they shop. The Shopping Habits categories are developed using a combination of mathematical rigor, creative analysis and old-fashioned retail nous. They create a new way for Tesco to present itself to particular customers that made the brand more relevant to their daily lives and provide information about what customers want. Tescos segmentation isnt just freak measurement effect, but a significant clue to customer behavior. ( Humpy
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et al.,2004) Its segmentation works, not through spectacular changes in customer behavior, but by encouraging fractional changes in the way shoppers shop. Every little does indeed help. Tescos particular segment has three specific attributes: Identifiable- A segment is allocated to all of the customers. viable It is large enough to make it economical as business generating tool. A viable segment has quantifiable value that is, it is possible to market products and services to that segment that will make it worth wile. Distinctive It has characteristics that make it clearly different to other segments, and those characteristics must have meaning when the segments are used for the purpose intended.

The segmentation strategy is practical and scaleable. It produces results cheaply enough, quickly enough and flexibly enough to be useful in existing conditions of the business. As Terry Leahy says, It is not just sales tool. Segmentation has deepened the relationship between Tesco and its customers, and puts Clubcard data into the decision making progress at every stage.

Communication Strategy The concept of a loyalty contract also leads to critically important decision in Tescos communication strategy. It has led to the quarterly mailing programme, arguably the worlds most successful sustained use of direct mail as a communications medium. The quarterly direct mail programme gives Tesco the opportunity to sustain a regular conversation with customers. Each response gives Tesco an opportunity
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to learn , refine and improve. For example, by producing targeted versions of Clubcard magazine , or producing special mailings for vegetarians, Tesco learnt that the more relevant the brand is, the more responsive customers are and less profligate the business needs to be with discounts and offers. As Leahy points out Talk, listen and learn .Give people what they want. Tesco uses customer insight to evaluate the effectiveness of, and reduce overall cost of, their promotions. Armed with Clubcard information, they find out Which shoppers use them Which shoppers like them If there is a way to focus promotions on best customers How they can take investment from promotions and return it back to the business which results in over 60% fewer promotions, reduced management cost, the redirecting of money back into the business (further contributing to price reduction), and more tailored, effective promotions.( Kelly,2002)

Pricing Strategy Brasher believes that Clubcard makes Tesco understand which customers care most about discounts, and also which products they most want to see discounted. This makes Tesco fight the battle as fiercely as any rival but on their own terms, investing in price cuts where the money would work hardest. It acts as a sustainable customer proposition and not merely a short term promotion. Tesco tries its hardest to ensure that the entire product range on sale at each store accurately represents, in selection and proportion, what the customers want to buy. Tesco has been the first to
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introduce Value lines, offering basic items at low prices. The logic is simple: we all want lower prices, but only a section of us shop exclusively on that basis. If Clubcard data could identify the products that were bought by price conscious shoppers, but not by the rest of us, then lowering those prices would have a huge benefit for them, at the lowest possible cost for Tesco. (Brasher, 2003). Targeting Strategy Much effort goes into improving the targeting of the product-specific coupons. For example , in the very first statement mailing it was one size fits all. Today, four coupons are for goods that the shoppers already buy, two are for related items. The coupons are chosen using an analysis that shows that the customer has a high propensity to buy a product (that is , other similar customers buy it regularly, but so far that the customer has not tried it). Tesco is the first supermarket to have a Targeted marketing director and a Customer Insight Unit. The tone of the Clubcard

Magazine has changed over the years from a very soft sell to a much more product and price-oriented agenda. This transformation has come about because Tesco found that what was once feared by customers as a hard sell is now much more easily accepted , even liked because it is information they can act on during their next shop. Not surprisingly , we found that all out customers really value relevance (Brasher, 2003)

Risk minimization by bridging the knowledge gap The opportunity to look into each basket, knowing what the profile of that customer is and what that household prefers to buy, gives Tesco the capacity to minimize the risk of all promotions. The transactional history of millions of customers bridges the gap between how customers think
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they act, reported through a selective research panel , and what they really do when they are shopping. All other techniques and measures are inadequate compared to Clubcards accuracy. Tesco is able to identify accurately which customers react positively to promotions, and in which ways their brand preferences are affected in future .For example, analysis of Clubcard data allows Tescos marketers to see which promotions create a lasting change in shopping habits, and which are one-offs. This has helped Tesco reduce the quantity of promotions by concentrating on those that have the greatest potential to be successful.

Measurement Criteria (The measure of success) Tescos loyalty programme invites the marketing team to think in terms of segments of customers .What is Market Reseach for other firms is customer insight for Tesco and Clubcard has made Tesco to measure success in the form of share of customer and not just share of market. There are two special aspects that Clubcard tracks :Results and Trends.

Results Clubcard has been developed on the principle that there is no such thing as complete success or total failure. Everything what happens is an opportunity to learn and everything that goes wrong contains the germ of future success.( Brasher, 2003) The main success criteria is return on investment (ROI). From the first mailing Tesco has been able to measure the ROI of the statement mailing to the nearest 100,000 from sales value during the period of anything up to 7 billion. This is calculated from The value of vouchers sent out The total cost to Tesco of the vouchers and the money-off coupons redeemed
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The like-for-like sales uplift that resulted The regional variations The customer segment variations The take up rates of different product coupons Predict trends Through meticulous planning of the statements mailing contents Tesco future proofs the Clubcard effect. This planning goes hand-in-hand with stock control and store logistics, so that any demand created by the mailing is properly satisfied in stores. Loyalty information helps build product/buyer profiles. Tesco can see whether new products are cannibalizing existing products and what items best customers buy and make sure that those items are always in stock and displayed prominently and the range is expanded. Timing is everything and the analysis of results from previous campaigns enables Tesco to predict what will occur next with ever-improving accuracy.

The offshoots

Tesco Personal Finance Tesco has a joint venture with Royal Bank of Scotland, with each party owning half of what is called Tesco Personal finance. Success of the Clubcard scheme encouraged Tesco to look more closely at the whole complex issue of financial services. We didnt know an awful lot about banking, but we knew much about banking as the banks knew about customer service. As we knew a lot more about customer service than they did, we thought we had a chance to be successful at doing part of their job. (Brasher, 1997) Tesco has developed its financial services
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strategy from Clubcard as the transactional data recorded by Clubcard is invaluable. Through the intelligent application of transactional data, Clubcard enables Tesco to target the right financial services products to the right customers at the right time. Through the quarterly statement mailing Clubcard provides TPF with one of the most cost-efficient recruitment media known in the retails finance business. As through the use of Clubcard points as an integral benefit to TPF products, Clubcard provides a widely valued currency that gives TPF a clear competitive edge. With information derived from its loyalty card and enriched by appended external demographic data, Tesco can readily develop profiles of customers who would most likely be interested in basic banking services as well as an array of related options. It costs Tesco significantly less than half of what it costs a bank to acquire a financial services customer. For example, when the company launched a credit card through Tesco Personal Finance, the card data allowed them to pitch the offer so accurately at the right profile people that Tesco became on of the UKs leading card issuers in a matter of months by volume. Without a doubt, having detailed customer information gives them a competitive edge.(Brian Woolf, 2002). Clubcard has contributed significantly to the birth, growth and enduring success of TPF.

Baby Club When Tesco Clubcard team was looking at the shopping habits of young families with babies, it discovered a useful potential source of revenue :families with young children. Clubcard helped Tesco identify a group of shoppers but Tesco had to look into why parents chose not to buy their baby products at Tesco , when stores carried the full range of products and brands. The Clubcard team , looking into this found out that in spite
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of its price (20% cheaper than Boots) , parents shopped at Boots for their baby products. The reason being, the strong bond that Tesco brand had with loyal customers, was more rational, the emotional bond was much weaker. Customer feedback told Tesco that mothers were looking for emotional security. They trusted Boots as a source of expert help and advice. Boots was their inner circle . The concept of Inner circle had been core to Tesco thinking since the launch of Clubcard. Tesco had means to make a difference to this customer segment . It has since deepened customer knowledge than any of its rivals and has membership relationship with its customers that was proven in establishing new behavior from them. Tesco has created a smaller, more targeted club specifically for customers at a very special and challenging life stage. It uses the successful medium of personalized direct mail , and the Clubcard idiom of saying Thank you to members in a relevant and value-adding way. Its aim is to create the degree of trust in Tesco brand. Tesco has gone for a new type of loyalty offer by launching Baby Club, one that is true to the principles and the methods of the Clubcard and piggybacks its infra-structure, but which has its on strengths. We want to create a sense of what we would call emotional loyalty, create goodwill show we really care for our most loyal customers , we look after them.( Scott, 1997). The focus was on showing empathy with the aspirations of young mums. Baby Club was a move to introduce active choice into Clubcard, to generate goodwill amongst a very special audience. Since the Launch of the Baby club Tesco has learnt the importance of sub-clubs and makes sure that each sub-club has the capacity to deliver value to Tesco and connects it to the customer emotionally. Tescos brand, today, is the third most trusted in UK.(survey conducted by Marketing Magazine,2004) Tesco.com
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When it came to home shopping, Clubcard gave Tesco a huge head start. Its data management skills as a company was way ahead, but more than that, the Clubcard database generated a fantastic list of people to go after , and a sophisticated understanding of those customers. Thus, Tesco could be very specific in terms of targeting. This was a huge built-in advantage when starting up a business in the form of Tesco.com.( Carolyn Bradley, 2001) Tescos plan to target online shoppers via Clubcard , rather than just fishing in the pool of internet users, paid off. The contribution of Clubcard isnt just about finding new users, it also makes it easier for Tesco to keep its online customers. From the earliest days, the home shopping team uses Clubcard data to the full, combines with other data sources, to identify which Tesco stores offer the greatest potential for the service, which stores offer the best potential to expand the service, where the greatest concentration of prospective Tesco.com shoppers could be found, what take-up would be and what sales value could be predicted.. Clubcard provides the means to understand how to target customers and gives the ability to validate what is right. Clubcard has also helped in planning exactly what message needs to be communicated at each stage of the relationship. When launching the internet shopping trial, Tesco was a lot stronger position than rivals it knew the names , addresses and shopping habits of millions of possible customer already. Without Clubcard, the company would have had all the risk and the same unsustainable cost of customer acquisition. Using best practice direct marketing techniques learnt from marketing Clubcard over the years , Tescos dot com marketers have increased their success rates. By analyzing the Clubcard, Tesco can easily identify the types of shopper who have the highest likelihood of actively using the online service, Tesco can easily target outside sources of data and market more
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effectively to shoppers who are not yet Tesco customers. Also ,by basing the expansion of Tesco.com on its network of stores rather than regional warehouses, Tesco can use Clubcard customer data to prioritize those stores offering the best potential where the greatest concentration of prospective Tesco.com shoppers can be found. Research suggests that customers who engage with a firm through multiple channels exhibit deeper loyalty than single channel customers. Tesco tries to give consistent service whether coming into the store, logging on the Web site, or calling the service center is concerned. It internally coordinates sales and service across multiple channels so customer preferences are accessible no matter how the customer chooses to interact.

Convenience of location (New store formats) Convenience of location is a major determinant in the loyalty process, not simply the fact that someone has joined a loyalty scheme.(Berman et al.,2001) By analyzing the penetration of Clubcard membership by postcode, the Clubcard data gives a sharply defined picture, store by store of how far valuable customers are willing to travel to shop. It shows in which neighborhood competition is biting, who is coming back several times a week, and who saves up their shopping for a weekend. All this information helps Tesco to plan the location of its stores. Helped with Clubcard data, Tesco was the first one to start the Metro format , situated in the middle of town because it realized that busy customers didnt want to travel a lot for their grocery shopping . Tescos Metro format makes sure that these customers are not alienated. With multiple ranges and unparalleled spread of formats, as well as the largest online
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grocery sales in the world , Tesco has profited from the cash-rich time poor phenomenon in Britain.

4.7 Competitive Pressures: Comparison with other supermarket loyalty schemes Sainsburys loyalty scheme (The partnership puzzle) Sainsburys local store-based scheme ( Reward scheme)

reached its

greatest coverage in June 1996. It had some key differences to Clubcard. While Tesco told shoppers that it wanted to say Thank You, Sainsburys told shoppers that it was A new way to save which meant that the Reward Scheme gave the impression of being just a margin-sacrificing discount scheme. The Reward programme also rejected the concept of accumulated value, deciding to let customers take rewards on demand which did not provide it the opportunity to be valued highly both by customers and in stores. Each customers Saver card could only be used at a single named Sainsburys store, customers could not present their card at any Sanisburys store and earn their points .Sainsburys also promoted a sliding scale of loyalty rewards in order to give proportionately higher benefits to the highest spenders. The scheme lacked the simplicity that Clubcard offered. Also, the biggest disadvantage of Saver Card was it could not promote it widely and could not generate national news coverage and advertise on national television as Tesco. Thus with not great success behind it the Saver card was abolished and Nectar Card was launched with a line up of founding partners including Sainsburys , Barclay Card, Debenhams, British

Petroleum and it was soon joined by Vodafone, Adams and Threshers. It is more of an outsourced scheme created by Air Miles that Sainsburys is
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a part of. In this sort of loyalty scheme, there is an imbalance of commitment from the participating brands, each retailer is restricted in its access to useable customer data , there is a lack of control over promotional activities and there is the potential for inter-brand disputes. The pool of Nectar users will always contain shoppers who are strangers for each retailer. There will always be a question of loyalty to what? (Levy, 2004). Also, the chances to introduce tactical marketing initiatives swiftly is reduced and innovation limited, as decisions have to be agreed between member companies. Sainsburys doesnt have a clear cut direction as far as the loyalty initiative is concerned and as SunTzu points out in the art of was A confused army leads to anothers victory. Mason asks Is a loyalty scheme an integral part of your business , or something you just bolt on when it is convenient?

Advantage of the Tesco Clubcard over the Nectar programme is that it directly enhances the Tesco brand, whereas in a coalition programme of the type of Nectar, the programme itself is the brand and as a result, the customers loyalty is typically to the programme itself and not necessarily to any specific partner in the programme (Rogers, 2002). Safeways ABC loyalty concept (The skill: will imbalance) Safeways ABC card, launched on 23 Oct 1995 was backed by 7 million in advertising. Like Tesco, Safeway wanted to create a data driven view of its customers and wanted to use the single customer view to identify and provide what customers wanted with ever greater accuracy and relevance. Where ABC was a departure from the Clubcard model was that Safeway customers could redeem points outside of their store, using the dividend from their supermarket shopping to buying from a mail
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order catalogue of toys and clothing, or taking family days out at theme parks. But, unfortunately the companies strict interpretation of which customers it wanted to become most loyal tended to alienate the other customer segments. There wasnt in it for affluent retirees, or metropolitan child-free yuppies. In April 2000, Safeway card was scrapped. We havent got enough customers and loyalty cards are not good for getting new customers Finance director Martin Laffin (2000).Safeway didnt make a priority of the ABC card, and failed in using its technological expertise to gain a truly customer focused approach. It had the skill but not the will. When Safeway abandoned the ABC card, it complained that trying to generate useful insights from the data was like drinking water from a fire hose. It was the same for Tesco but instead of drowning, the company simply decided to siphon off what it could deal with at any time, and get on with the real work of selling to customers. Both Sainsburys and Safeway loyalty scheme did not create specific goals that were relevant to three strands of DNA of loyalty ( Brand value, business dynamics, customer behavior) and thus had less chance of succeeding and little chance of surviving beyond the first few years. Several retailers have their respective loyalty schemes, discussing the effectiveness of each one of them is beyond the scope of the research. After analysis and in-depth examination of Tescos loyalty cards, the study now summarizes the important findings in the form of conclusions and gives the appropriate recommendations to overcome the gaps spotted. It also points out the scope of the research and the areas where further research may be taken.

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Introduction After careful examination, evaluation, assessment and analysis of data, its the prerogative of every study to point out how the aims and objectives of the research were met, which is what this chapter aims to do. It points out how the respective objectives were realized and tries to give an answer to the research question. The chapter also encapsulates Clubcard specific recommendations and discusses the limitations of the study and areas where further research may be carried out. Objective 1 Analyze and define the concept of loyalty and identify the relationship between customer satisfaction and customer loyalty. Loyalty is an emotional response based on empathy, not a logical response based on bribery which seems to strengthen Olivers (1999) views discussed in Chapter 2. Loyalty does not imply low price sensitivity (Some customers are price sensitive; all customers are value sensitive). As pointed out by Oliver (1999) in Chapter 2, the loyalty, satisfaction relationship is asymmetric, customer satisfaction does not necessarily imply customer loyalty (customer satisfaction is at an all time high; customer loyalty is probably at an all time low). Loyalty programs do not necessarily make customers loyal. Loyal customers do not necessarily increase company profitability. Customer data from loyalty programs are often more valuable than the loyalty programs themselves Win the hearts and the heads will follow

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Objective 2 Examine the conditions under which customer loyalty enhances profitability

"...organizations need to adopt a more structured and rigorous approach to development, based on a real understanding of what their customers actually want from them. The bottom line must always be to start with the basics of what is most important to the customer and build from there." (Jeremy Braune, Head of Customer Experience at Detica)

As pointed out by Morgan and Hunt(1994) and Dowling (2002) in literature review ; for loyalty programmes to be successful and enhance profitability companies should:-

1) Have a good base product that performs well in the market and is in some way differentiated. 2) Focus on intrinsic rather than extrinsic awards 3) The reward should be genuinely valued and perceived as taking some effort on part of the company to deliver. Those that will ultimately be successful are those that add value to the core experience the consumer is buying . 4) Offer a strong personalization factor, superior loyalty schemes offer the consumer considerable choices in respect of how their reward may be redeemed. For example, literally every version of the Clubcard magazine is personalized .

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5) Distance itself from price discounts, all too many loyalty programmes are little more than discount schemes designed on the principle of the more you buy the more you get. In that case, it is not brand loyalty that is being built up, but transactional loyalty. The danger with this approach is that whenever the competition comes up with a better scheme, consumers will defect in their thousands. An effective loyalty program should have the opposite effect and actually decrease consumer sensitivity to price as a genuine affinity with the brand is engendered. Clubcard has helped Tescos business grow based on a strength of a listening relationship. Leahys insistence that successful retailing is the result of listening to what customers tell you they want is real in the Clubcard programme. Its core purpose and value To create value for customers to earn their lifetime loyalty and no one tries harder , and treat people how they like to be treated are made real in Clubcard. We have values in this business. A good company is run on principles and values, it is not run on last weeks results. Over the long term, what matters in building a business is how the company conducts itself, not just what it does. It is how it does that counts. Clubcard is entirely consistent with that (Leahy, 2002). Just introducing a points program in the hope of profitably increasing sales and not using the customer data is like a dairy farmer, who after separating the cream from his milk, pours the cream down the drain. The richest part of the program is being wasted (Cuthbertson et al.,2001 cited in Web 10). Value is Co created by producer and consumer

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Crawford Davidson, director of Clubcard uses the analogy of a cappuccino, My role as Clubcard director is sprinkling the chocolate on top of the cappuccino. Marketing provides the froth to the milk. But both have to be based on the good, fresh, hot coffee. Its Tescos ability to cut through the jargon and focus sharply on what really drives their customer behaviour that makes it different. Its the great amount of conviction that underpins the programme, which is responsible for the greater payback. Tesco views its loyalty scheme as an integral part of its business where the customer is all-important; where doing everything possible to please them is paramount; where keeping in close contact with them is vital. It acts as a vehicle for Tesco to add value to customers in the form of services, product range, and prices as well as enabling the company to say thank you to its customers. In essence, its Clubcard is: A tool to understand the customer A way to communicate value A symbol of commitment More than the skill, its the will

The longer a loyalty scheme is running, the richer and more rounded an understanding the company has of its customers, and the better equipped they are to push relevant offers and rewards out to their customers. Essentially, value increases as the loyalty scheme gathers momentum. The success of a loyalty campaign is intimately connected with the conviction that lies behind the decision to launch, maintain and build upon a loyalty programme. A successful loyalty initiative depends upon a marriage of clear objectives from the outset, buy-in from board level to front-line staff, and significant investment in expert personnel( Harris et
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al.,2001, cited in Web 11).Once a decision to launch a loyalty initiative is made, full commitment and a shift in corporate culture is required to take the scheme from an added extra to long-term programme that will deliver return on investment in spades.

Organizations that labour under the illusion that loyalty schemes offer a quick-fix to a customer retention problem soon founder. A loyalty card program is not something that, once introduced, automatically increases customer loyalty. (Woolf, 2004)

Recognize first, reward later. Serve first, Sell second Objective 3 Assess the role of loyalty programs in promoting loyalty and building favorable customer relationships.

A card-based loyalty scheme is not a credible alternative to being the right price, offering excellent service, innovative products and customer care, because any business that neglects factors like these is extremely unlikely to have long-term success in achieving customer loyalty. Loyalty schemes supplement service and its important to understand that these initiatives and a card-based loyalty scheme are not mutually exclusive. Loyalty programs create relevance for the customer which may create an emotional bond. They are starting point for deepening the customer relationship, which flourishes in many ways .Customer loyalty is not a game; rather it is the result of a game.(Woolf, 2001) Loyalty cannot be earned with a programme, but information can be bought with a loyalty programme, and that information will highlight the
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strengths and weaknesses of the business which can be used to improve the core offering of the business, and the improved core offering can bring loyalty. Loyalty comes from a firms core offering and their products and the way it satisfies its customers. In order to feel loyal to an organization, a customer must feel that all his need and desires are not only satisfied, but intelligently predicted and understood. Before an organization can expect loyalty, it must inspire loyalty by demonstrating that it cares about its customers. Customers must be at the center of the CRM strategy (as well as the focus of the business itself). Its not the technology, not customer profitability, not loyalty programs or cards; its the customers themselves, as individuals that should truly be at the center of all that a company does. Once this customer-centric vision has truly been established, the individual customer can truly begin to be understood and valued, loyalty can be earned. Tescos loyalty programme is designed to appeal to customers heart as well as heads. Positive shift in shopping behavior and emotional commitment is the goal for Clubcard. It is about behavioral and attitudinal change and combined together these two things add up to genuine customer commitment. It caters to both emotional and rational aspects of behavior. Tesco is very good at doing what it does. It uses its knowledge of its customers to improve its service and products but it doesn't rely on the Clubcard to keep its customers loyal. A loyalty card is not a replacement for any of the basic loyalty drivers but is a supplement to them. Just as a hammer doesnt build a house, a loyalty card doesnt build customer loyalty. Both the hammer and the card are tools that, when
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properly and appropriately used, help bring the architects blueprint to life.( Egan et al., 1999, cited in Web 13)

Objective 4 Evaluate the extent to which loyalty marketing makes its contribution to TESCOs success and identify key areas where TESCO outwits its competitors

Clubcard has transformed customer behavior and attitudes. It has provided unprecedented levels of hard information to Tesco that no other source could provide.

Tell me what you eat and I will tell you what you are The information Clubcard provides has been one of the special goldtipped arrows in Tescos quiver for building its highly successful business. (Mayne, 2003) Clubcard has demonstrated that the investments needed to set up and maintain a loyalty programme are not at all additional spend. Much of it is replacement spend , diverted from traditional forms of communication and promotion for example door to door distribution or TV advertising. The Clubcard mailing communicates economically and effectively with millions of customers at a time which means that Tesco is less reliant on bought-in media to reach those same customers at a time. Clubcard has formed a firm foundation for enduring success. Incisive and leveraged customer data has enabled Tesco to put distance between themselves and competitors, in both traditional and nontraditional retail markets. Clubcard has helped Tesco increase the value of customer experience as the needs of the customer are satisfied, it has customized the customer experience for its customers, and made
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customers less likely to defect to a competitor. It has helped Tesco develop an emotional connection with a customer which has made the customer less susceptible to competitor attack . As Jack Welch puts it: "We have only two sources of competitive advantage: The ability to learn more about our customers than our competition, and the ability to turn that learning into action faster than the competition." According to Sir Terry Leahy What creates loyalty is how much we understand your life and what we do about it helps your life. Our competitors had all the details of what their customers bought too, but if you dont have the vision as a retailer that you are doing this is to understand customers better, and deepen that relationship, youre always going to wonder why you are making the effort. Tescos spin on loyalty is different

Factors that differentiate Tesco from its competitors are Marketing savvy , its analytical ability, its technical superiority, its simplicity and consistency, its audaciousness, its committed, focused and incredibly ambitious leadership , depth of customer knowledge, a focus on retention, profitability and segmentation and the organization-wide dispersal of customer information.

Objective 5 Assess whether loyalty marketing should form a part of a retail firms overall business strategy.

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As pointed out in Chapter 2, if loyalty is to be a long term success it has to be regarded as a strategic tool of the business, reflecting the brands core strengths . Each loyalty programme has to be tailored to the brand, and the nature of the relationship that the brand has with the customers .Since, a brand is a collection of defined perceptions in the mind of the consumer, so the loyalty programme has to reinforce and live up to these perceptions. Most importantly , a program has to be loved by the business. Just as marketers and managers have to love the brand, they have to equally commit to the loyalty programme that represents its brands to its members. The design of a loyalty program must take into account the nature of the business, its market position and strategic goals, and the competitive landscape. Program design requires consideration of four key variables, reaping the benefits requires a high level of analysis, a clear strategy and the ability to adjust to changing circumstances. Majority of loyalty schemes are sales promotion programmes in disguise and sales promotion has always been tactical, smoothing out spikes and troughs, never strategic. To tackle this uncertainty, retailers must align any scheme with their strategic objectives and should have in place a durable analytical framework to develop a scheme, which is right for them, or consider rejecting the concept altogether. Loyalty marketing should be a strategy, not a tactic and this strategy should be driven by knowledge which comes from data which should be good quality customer data, rich, relevant and recent . Tesco is recognized as the epitome of best practice loyalty, having put Clubcard at the heart of its corporate strategy.(Palmer et al, 1999 cited in Web 14). David Reid, Tescos deputy chairman, acknowledges the strategic importance of the loyalty cards, stating that without them it would be like flying blind. Tescos loyalty marketing project has become
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a pillar of its business strategy and has helped

Tesco evolve in its

strategic thinking and direction from being an outstanding food retailer to being an information-driven business, constantly searching for ways to act as the value-adding agent for its customers. Tescos customer information assets uses to allow it to take a strategic approach to customer management. The data and analysis drive organization-wide customer decision-making to direct promotions, category management, local store ranging and even store location. True value of a customercentric business is found in its customer knowledge . Tesco uses its card data to basically run the business: it is used for pricing, format development, to plan store re-launches when theyre refitted, for customer acquisition for new products like Tesco Personal Finance and a host of other purposes. The data, information and the subsequent knowledge generated has become a part of the companys culture. It solves real problems and is not just associated with marketing strategy. Tesco builds an image of a customer built from seven pieces,: life-stage, shopping habits (frequency etc.), basket topology (what they buy), promotional promiscuity, primary channel (how they like to buy), brand advocacy and profitability, including the element of cost to serve and then they follow a plan act measure approach. Customer insights define corporate strategies and are acted upon by implementing customerfocused plans, and then measured. It is an approach that enables Tesco to evaluate its success, and to test, reapply and learn as it goes. Incorporating Clubcard data as its core business strategy allows Tesco to change business practices to respond to the individual customer and therefore, to practice true CRM.. Tescos loyalty scheme strengthens the view put forward by Morgan et al. (2000) in chapter 2, that a loyalty scheme can only have a sustained
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impact on the bottom line when, from its inception, it changes the dynamic, the whole culture of the organization. Tesco board recognizes that loyalty scheme data is the bedrock of their business. Its the fundamentals of the Clubcard programme that have formed such a firm foundation for enduring success, its the insights that preserved customer interest and have driven results for the business, the marketing power of statement mailing, the development of better targeting, richness of data that help to run Tesco on a daily basis and the opportunities that have given Tesco to think creatively about its customers. Ten years after its launch , the secret marketing project from the bunker has become a pillar of Tescos business strategy. A stand-alone loyalty scheme is vanity, loyalty as brand enhancing strategy is sanity Although Clubcard forms a part of Tescos success , it cannot be claimed that Clubcard was the exclusive reason for Tescos success. Almost simultaneously with the introduction of Clubcard, Tesco beat competition from other supermarket chains notably a strong bid from Sainsburys, to purchase Scottish supermarket chain William Low, transforming Tesco into a truly national retailer. Its Tescos philosophy of Circle the

Customer which is doing wonders for it. A new low-price label, Tesco Value, was launched as a direct response to the discounters. Tesco also made its stores more customer-friendly; for example, the one in- front programme was launched to eliminate queues at the check-out counter. With less scope for building out-of-town stores, Tesco introduced new formats for inner-city locations, Tesco Metro for small high street stores and later Tesco Express, convenience stores usually linked to petrol stations. Nonetheless Clubcard is fundamental to Tescos accelerating

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business success , its may not encourage the required amount of loyalty which Tesco wants but gives Tesco enough information which after properly handling and analyzing helps to change customer behavior. Figure 22 encapsulates Tescos success factors.

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Figure 22

Adapted From Financial Times( 03/06/2005)

COFP (Customer, Operations, Finance, Operations) diagram

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iy nit ru ort pp t o op t on An to ge og



A more exact test of the effectiveness of the loyalty program would be to compare the post-program results with what may have been achieved had the full costs of the program been used in another way, such as establishing a policy of everyday low prices, a new product introduction, more direct forms of brand extension, an increase in advertising spend, or improvements in the channels of distribution. (Hammond, Keeney and Raiffa 1999). In this research, the comparison is made on evaluations based on one alternative (introducing the loyalty card) versus the status quo. Also, it should be noted that this study only examined the loyalty effects of the Tesco Clubcard in terms of its marketplace impact, it did not examine the loyalty effects in terms of the financial impact of the programme. Another potential shortcoming in the study is related to the measurement of purchasing behaviour, since its true meaning may only be partially captured due to the fact that its measure was self-declared by respondents (who are not necessarily objective in regards to their purchasing behaviour, since people do not necessarily like to admit being influenced) no database information could be used as input for measuring actual purchasing behaviour.

5.3 Recommendations Data should be analyzed with an eye on desirable economic outcomes and companies should make sure that they establish what they are trying to accomplish with the program. Performance of loyalty program should be continually measured. All too often programs are started and then left to run by themselves. Rarely, do companies go back to see if they were
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successful in changing their customer behaviors as planned. Companies should quantify the success of benefits in driving shopping behavior . Some of the things they can look at are changes in the size of the market basket, increases in use of products or services, amount of transactions involving loyalty program ID numbers, and the amount of redemptions being made. Customers are perverse, emotional, awkward, unreasonable people who want things done on their terms. Understanding what things really matter most to the customers, companys should not only think in terms of appropriate service and quality strategies that match the most important needs of the target customers but also should have the ability to deliver. Before embarking on a loyalty program, following questions need to be clearly answered What demand-side goals are there for the loyalty program maintaining customer loyalty or enhancing it? How will these goals be set and assessed? In general, will the program focus on the most profitable customers? What time frame is to be used to assess the program profitability? What is the appeal of the program for these customers? How will the program be used in combination with other marketing activities? Will these initiatives grow share and sales revenues? Can the customer data be analyzed in useful ways? Are the sales and cost data reliable? Is the evidence contradictory? What benchmarks have been chosen to assess the loyalty program and are these appropriate? How will the overall profitability of the program be calculated?
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and the following questions need to be looked at to avoid major traps

Are there too few customers who will actually be interested in loyalty programs? Does the scheme have little appeal for customers? Or, has the scheme been too indiscriminant perhaps all three types of customers have joined because they see it as a (relatively) free option and/or a reward for their current purchase behavior? Are customers more loyal to the scheme than the brand? What are the chances of a competitor retaliating to nullify the impact of the program? counter-initiative Is the need to service large numbers of members driving up running costs? Have competitors already launched a

5.3.1 Challenges for Tesco Clubcard as a Global scheme With Tesco going global at a rapid pace (almost half of Tescos retail floor space is now cited overseas), the emerging question is , will Clubcard work as effectively in the companys new markets? Past researches have shown that loyalty programs travel poorly. Superficially, there are common shopping traits around developed world , but consumer attitudes and habits in other markets often differ in subtle but important ways. Shoppers in some countries are moved by immediate discounts and have no patience with accumulating rewards, even if the ultimate deal is better. Other regions have under-develop retails brands and more fragmented markets, so customers are far more likely to graze for
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bargains across a number of shops in their area. Even, the legal environments may be significantly different. For example, Germany has a number of uniquely restrictive laws such as Free Gift Ordinance and Discount Act, which make loyalty marketing more difficult. With having done the hard bit with hosting the worlds most sophisticated loyalty program, the challenge for Tesco is to take the loyalty program into its overseas market to give itself a competitive edge. Issuing Rewards One of the hidden strengths of Tesco Clubcard has been the way that customers accumulate their rewards rather than redeem them on an ad hoc basis. Though, the quarterly mailing program works well for Tesco, but customer research suggests that customers value some

acknowledgment for their loyal custom in the store. They also like the freedom to claim membership benefits as and when they choose. So, Tesco may be better off designing some on-the-spot discounts and promotions and catching the customer in the shop to reinforce Clubcard when they are thinking about their shopping. Perhaps, personal media like SMS text messaging to the customers mobile phone could be an option in the future. Loyalty or lock in Supermarkets and discounting have always gone hand in hand. Eye catching promotions on specific products have been the trusted weapon in the retail armoury. In todays world , its all the more difficult to make the customers move away from the mindset of discounts. Customers are losing interest in loyalty schemes and its very difficult to get them involved. A perception against the concept of loyalty schemes is slowly developing with proliferation of loyalty schemes. Real loyalty is elusive
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as customers have become more fickle than before. In such a scenario , Tesco should constantly work to keep refreshing the Clubcard and add value to it , perhaps by the addition of more brand assortments in store or adding more associate partners to its Clubcard scheme. Since the days of true loyalty may be over, Tesco should perhaps concentrate more on locking-in the customer with its Clubcard than trying to develop true loyalty. The loyalty warriors Tescos front-line (check-out) staff who deal directly with the customers are the greatest advocators of the Clubcard and can be termed as the loyalty warriors. Interviews with them revealed their lack of awareness and knowledge regarding the loyalty scheme, it was found out that as far as the benefits of the Clubcard was concerned, the staff knew no better than the customers. Now, if a firms biggest advocators are themselves uninformed or less informed of the actual benefits that Clubcard has on offer, how will they be able to promote it successfully? More astonishingly, none of the front line staff were sure of the benefits of the Clubcard to the organization. Until and less, the staff knew the importance and the relevance of the Clubcard to the firm, they wont be promoting it with the required vigour and enthusiasm. Observations did reveal that staff seemed hardly interested in promoting Clubcard and lacked motivation to insist non-Clubcard customers to sign up for it. Partly, because they didnt knew what Clubcard meant to the organization and partly because as they treated the Clubcard as secondary , they were too busy to be bothered. When new customers do not sign up for the Clubcard, no information about them can be gathered which defeats the whole purpose of the loyalty scheme and may lead to its premature death. Tesco, therefore should work hard to make its staff realize the importance
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of Clubcard, both for the organization and for the customer. Efforts should be made to include majority of Tesco shoppers under the Clubcard umbrella. Focus groups with Tesco shoppers revealed that certain shoppers werent even sure if Clubcard was an open CLP and thought it was an opt in scheme where they had to pay for it. Awareness regarding the Clubcard should also be increased , as at present the Tesco staff and the word-of-mouth publicity are the only two ways in which it gets advertised, which perhaps isnt sufficient in itself. Its of utmost importance that Tesco keeps adding more and more shoppers to the Clubcard, otherwise Clubcard may fail to reap the required benefits and slowly start becoming a financial burden on Tesco. It should be remembered that Loyalty cards do not go a long way generate loyalty but generate information which can be used in a powerful way. Evidences do seem to suggest that some sort of complacency and increasing arrogance is developing with regards to the Clubcard which Tesco has to watch out for in future.

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Berman, B. & Evans, J. (2001) Retail Management : A Strategic Approach , New Jersey, Prentice Hall Inv.

Brown, Stanley A. (2000), Customer Relationship Management, New York, John Wiley & Sons. Butscher S. A. (2001) Customer Loyalty Programmes and Clubs, London, Macmillan Business. Cranfield school of management (2000) Marketing management , a relationship marketing perspective, New York, Palgrave. Christopher,M , Payne, A & Ballantyne, D (2002) Relationship Marketing , Oxford, Butterworth Heinemann Diller H. (2000) Customer Loyalty: Fata Morgana or Realistic Goal? Managing Relationships with Customers in Hennig-Thurau T. and Hansen U. (eds) Relationship Marketing Gaining Competitive Advantage Through Customer Satisfaction and Customer Retention,Berlin, SpringerVerlag. Edmunds,H (1999) The Focus Group Research Handbook, Illinios, NTC Business Books Fern, E (2001) Advanced Focus Group Research , London , Sage Publication.
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