LITERATURE REVIEW
Loyalty programs
Loyalty programs have long been used as a mean of strengthening customer relationship. Programs are designed to fit in different industries, such as airline, hospitality and banking industries, to retain their customers by rewarding their loyalty, so as to boost companies’ profits.
The concept of loyalty program started to appear in the 1950s, S&H Green Stamps and Raleigh cigarettes coupons adopted similar concept in encouraging repeat business; the more customers purchased, the greater the benefits. On May 1, 1981, Advantage as a frequent flyer program of American Airlines was launched. It was the first loyalty program introduced in airline industries, and was quickly followed by its competitors, such as United Airlines, Delta Air Lines and Trans World Airlines.
Frequent flyer programs offer members to redeem tickets, upgrade service class, or obtain free or discounted car rentals or hotel stays, or others products services through various linkages. Today, frequent flyer programs are everywhere, being recognized as one of the most effective and successful marketing tools.
However, do these marketing programs really built loyalty to the airlines? Or do they merely create a group of customers who simply want to be rewarded for their spending.
By identifying individual customers, frequent flyer programs designate customers with colorful names, for example, True-Blue, Executive Club, Flying Dutchman and Frequent Flyer, then differentiate members into groups, for example, the four tiers in The Macro Polo Club, so that each membership has its own exclusivity and distinctive features.
Modeling of frequent flyer program is very important to the success of a company. Should a company regard this program as a reward program? Or should it be a loyalty program? These questions also trigger the effectiveness of such program, and so as the sales generated through operating it. In the retail industries, according to the Center or Retail Management at Northwestern University, both business and consumers have recognized the value of loyalty programs. Only 12% – 15% of customers are loyal to a single retailer. But that small cadre of customers actually generate between 55% – 70% of company sales.
However, being able to identify individual customers, to measure and to understand their individual behaviors and desires is of great importance to the success of a loyalty program. Companies should also avoid developing loyalty programs with good intentions but unclear objectives.
In order to acquire new customers, retain existing ones and increase their spending through loyalty programs, products and services provided should be shaped with objectives, and have their characteristics identified apparently. Services are generally described as having four key characteristics: intangibility, simultaneity, variability and perish ability. Kotler, An strong, Saunders and Wong (1996) have given a contemporary definition of service in relationship management context: “A service is any activity benefit that one party can offer to another, which is essentially intangible and does not result in the ownership of anything. Its production may or may not be tied to a physical product.”. However, the airline industry definitely is a service provider; thus, loyalty marketing activities becomes part of service relationship management (RM). During the course of managing relationship in the service sector, it is crucial for marketers to understand it is to strengthen the bonds between the service provider and the customer rather than to increase the number of transactions (Gordon, 1998, p.10) that is the heart of RM.
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