CHAPTER 6

Building Brand Equity Through Relationship Marketing

Introduction

This chapter introduces various relationship marketing tools that contribute to building and enhancing brand equity. It consists of two parts. The first part discusses the use of loyalty and rewards programs as relationship marketing instruments. After indicating a brief history of loyalty and rewards programs, it discusses the future of loyalty programs and highlights the potential importance of loyalty program coalitions. The second part introduces the use of Internet and social media in building and developing business-to-business (B2B) and business-to-consumer (B2C) relationships. It discusses how firms can use Web 2.0 technologies in incorporating customers in direct, personalized, multidimensional communications and interactions that help them build strong and value cocreating relationships. The chapter concludes with two case studies, one indicating the use of loyalty program coalitions and the other illustrating the use of Internet effectively in building long-lasting relationships.

Loyalty and Rewards Programs

From supermarkets, coffee shops, and casinos to airlines, hotels, department stores, and cellular phone service, programs designed to improve customer loyalty in return for rewards are ubiquitous. The average U.S. household enrolls in 22 loyalty programs and is active in about 10 of them.¹ They help the firms understand their customers better; increase switching costs, retention, and share of wallet; and sell more of excess and more profitable inventory. Table 6.1 provides a glossary of key terms of loyalty and rewards programs:

Table 6.1 Glossary of loyalty and rewards program terminology

Source: Adapted from An Oracle White Paper (2005).

History

According to a survey, loyalty program memberships grew about 35 percent in six years and there are more than 1.3 billion individual members in the United States!² This is a staggering number that must be qualified further.

What does this membership number—more than four times the total US population—say about active participation in loyalty programs? Is every man, woman and child in the country earning points and miles in an average of four different programs? Are loyalty-marketers padding their membership numbers or counting the deceased? Most importantly, is this 35 percent growth a sign of the industry’s overall health—or a sign that loyalty has peaked?³

An estimated 20 percent of the population does not participate in loyalty programs. Further examination reveals that active program memberships represent about 40 percent of the 1.3 billion figure, while some programs have only a 25 percent active member base. This suggests that a significantly smaller proportion is heavily engaged with these programs, while the remainder may represent costly drains in the system. In popularity, the airline frequent-flyer programs (see American Airlines case-in-point) are followed by financial sector, specialty retail, and grocery programs.

The Future of Loyalty Programs: Co-Marketing

We expect that loyalty program coalitions, already popular in Europe, will become more prominent. For example, Nectar loyalty card in the United Kingdom surpassed Tesco to become the most popular loyalty card in less than a decade. The launch members of the program are the supermarket chain Sainsbury’s and BP. Currently, the program involves 17 members including Expedia, Hertz, American Airlines, Homebase, eBay, and others. Users can also earn points for online purchases from a number of retailers via the Nectar online store such as asos.com, Apple Inc., and Dell. Today, Nectar has 400 online affiliates and 19 million members.⁴

The users receive about 1 percent discount on purchases (the savings practically do not expire), whereas the retailers observe an estimated 50 to 250 percent return on investment, increased customer retention, acquisition, and share of wallet. The program has societal benefits as well: for example, the customers earn extra points for using of old shopping bags at the supermarket.⁵

There is ample room for growth for loyalty programs cocreated through coalitions. The customers draw rewards from a broader shopping base, and the marketers can design progressively more valuable offerings as they get to know their customers’ shopping habits better.

Furthermore, there is a need to differentiate between loyalty and rewards programs, even though their main difference is not acknowledged in practice. Point rewards for purchase can influence short-term behavior and behavioral loyalty (loyalty derived from actual purchase patterns) but do not necessarily impact attitudinal loyalty (loyalty derived from customer statements), the kind of loyalty that is immune to defection and counts in the long run. Personal and customized touch is often a prerequisite for attitudinal loyalty. This calls for the design of an effective customer relationship management strategy. For example, it has been suggested that technology firms should track and manage both measures of loyalty as opposed to emphasizing one over the other.⁶ A technology orientation that favors automation and behavioral loyalty at the expense of a more comprehensive approach may be misguided.⁷

Finally, it should be recognized that there are alternatives to loyalty programs. These include special recognition programs, affinity programs, community programs, and knowledge building programs.⁸ The optimal program mix for customer relationship management should be designed based on situational analysis.

All was not always roses for Nectar. When the American Express Nectar card was first introduced, the customers were confused because the regular American Express credit cards were not being accepted by Sainsbury’s supermarkets and several other Nectar partners at the time.⁹

Social Media and E-Relationship Marketing

The advent of Internet and the widespread use of social media have the potential to significantly affect relationships between firms and customers and provide firms new directions and benefits in relationship marketing. Interactive electronic commerce through the Internet has become a significant channel for consumers. Owing to the widespread use of the Internet, and its characteristic features, firms tend to build online relationships with customers and use the Internet as a potential bridge to maintaining relationships. The Internet enables firms to communicate one-on-one and collect transactional data and other personal information that can be used to precisely target offers to specific consumers.¹⁰ In this context, we define electronic relationship marketing (e-RM) as all online marketing activities aimed at building, developing, and maintaining successful relational exchanges and enhancing value cocreation. It involves any kind of online activity for creating, communicating, and delivering value to and by customers.

Today, many consumers are actively using Web 2.0 technologies to engage in close relationships, collaboration, and interactivity with firms such that they involve in designing and manufacturing products and have the opportunities to customize and personalize products as part of the relationship.¹¹ Collaborative, participatory, and user-friendly socialmedia tools are based on Web 2.0 technologies, defined as “a collection of open-source, interactive and user-controlled online applications expanding the experiences, knowledge, and market power of the users as participants in business and social processes.”¹² These tools provide significant opportunities for relationship marketing based on the firms’ capacity to expand marketing communication; embrace consumers’ diversity, selfexpression, and involvement; and allow for open conversations in the online marketplace. Proactive utilization of these tools in incorporating customers in direct, personalized, multidimensional communications and interactions helps firms build strong and value cocreating relationships. The key features of these technologies are that¹³

(a) the Web itself becomes the platform and is based on using open standards, decentralization, and Internet protocols … ; (b) the Web is used to harness the collective intelligence of its users, also known as the wisdom of crowds … ; (c) data and, in context, content, represent the value rather than hardware or software; (d) users become developers; (e) a business model for software development emphasizes open platforms and shareability; (f) applications are seamlessly deployed over any type of device (e.g., PC, mobile phone); and (g) there is a rich user experience facilitated by technologies for animation, visualization, and interaction.

With the advent of Internet, individuals have been immersed in social media and two-way communications. This development introduces opportunities and challenges for marketers who are seeking to build long-lasting relationships with consumers. These marketers should adopt new technologies and approaches and make the best use of social media such as blogs, social networks (e.g., Twitter), content communities (e.g., YouTube), forums and bulletin boards, and content aggregators (e.g., RSS feeds). Social media enables consumers to connect, communicate, and collaborate with others. It allows for user participation on a massive, collective scale, and the contributions are disseminated among the participants to view, share, and progress. In this context, social media plays crucial role in achieving the objectives of relationship marketing (e.g., developing long-term relationships, achieving value cocreation, and improving customer satisfaction). As such, social media (blogs, social networks, content communities, forums and bulletin boards, and content aggregators) contributes to the achievement of relationship marketing goals.¹⁴

As a modern marketing channel, the Internet has unique characteristics compared to traditional marketing channels. In online shopping, consumers tend to base their judgments on product or service information available to them on the Web sites (e.g., for hotels room pictures, virtual tours, service information, customer reviews). Specifically, consumers evaluate the firm or its products based on the firm’s Web site design and appearance of various elements such as product or service descriptions, product or company pictures, virtual tours, graphics, quality information, mission statement, and video clips of the product. In this context, the promise of e-commerce and online relationship exchange is mainly determined by user interfaces and the way consumers interact with computers, mobile devices, Web sites, and social media. Enhanced design and easier navigation nurture a shopping environment, and effective and strategic utilization of Web site elements improves relational exchanges, which highlights the importance of social aspects of e-commerce design. Consumers seek two positive outcomes from their utilization of a firm’s app or Web site: (a) “utilitarian shopping orientations resulting from achieving a particular goal including the purchase of an item”¹⁵ and (b) “hedonic shopping orientations obtained when the Web is used for the enjoyment of the online experience itself.”¹⁶ While utilitarian shopping orientations are related to achieving certain objectives, hedonic orientations are based on enjoyment, pleasure, fun, and amusement through Web interaction. Therefore, firms should design their Web sites based on both utilitarian and hedonic orientations in order to develop effective market relationships.

Characteristics of the utilitarian features include accessibility, ability to effectively search for information, and the provision of comprehensive product and service information. For users seeking utilitarian features, web designers need to be aware of the availability of information and intuitive design interfaces that facilitate the use of the site for information searches. … hedonic features represent the interactive and social aspect of an e-commerce website … Hedonic features are strongly connected to leisure activities with a focus on the fun-based aspects of using information systems, encouraging prolonged rather than the productive use.¹⁷

The notion brand loyalty has been extended to the technology-mediated online consumer experience by researchers and practitioners proposing the concept e-loyalty, which refers to consumers’ intention to revisit a firm’s Web site or to repurchase from an online vendor. Eloyalty is derived from the ease of ordering and selection, the availability and easiness of product information, fast delivery, trust, satisfactory privacy policies, online resources, and e-commerce quality. In this context, a Web site designed based on both utilitarian and hedonic orientations and involving social aspects of e-commerce will help firms enhance e-loyalty, which is crucial for long-term marketing relationships.¹⁸

Case-in-Point: American Airlines

Despite the continuous troubles and shrinking profits, there is one thing in the airline industry that has continuously grown: the customer loyalty (frequent-flyer) programs. The modern age of loyalty programs reportedly began in May 1981 with the launch of the American Airlines AAdvantage program. United Airlines responded within one week with its Mileage Plus program and other carriers followed suit. To this day, airlines still have the largest loyalty program membership with more than 250 million members.

Just weeks before the launch of the first frequent-flyer program, a new no-frills, low-cost airline was launched out of Newark, NJ. Phenomenally successful at first, People Express collapsed under the weight of its initial success. American Airlines and other major carriers used revenue management systems to meet People Express on price and beat it on service. Unable to compete with new customer relationship management (CRM) technology and burdened with debt, People Express was doomed.¹⁹

Source: American Airlines: Wikimedia, Lasse Fuss; People Express: Wikimedia, Aero Icarus.

The idea behind the frequent-flyer programs was to target passengers, especially business passengers who tend to pay more and fly more frequently, and motivate them to use a focal carrier for most or all of their flights. These programs were attractive to the business travelers because it typically enabled them to collect points using their business accounts and later redeem these points for their leisure travel. The programs enabled the airlines to build brand loyalty in a highly competitive and undifferentiated market.²⁰

The reason for the ongoing splurge of frequent-flyer programs has been based on their multigenerational nature (transcending from baby boomer members to Gen-X and Gen-Y travelers), the addition of new loyalty programs by low-cost carriers (especially since 2000), the introduction of thousands of partners and ways to earn and redeem miles, and consolidation among frequent-flyer programs (e.g., United Airlines has partnerships with 25 other carriers, making mile swapping possible). Experts believe that the current pattern of “infrequent flyers” is not sustainable as is. Member growth is being offset by the devaluation of mileage points through shorter expiration periods, and fewer and less desirable seats allocated to rewards, and stricter rules on how to earn and spend points. Frequent-flyer programs may have all but lost the effectiveness to make a difference. Ultimately, airlines have to focus the majority of their efforts on marketing to their most valuable customers.

Case-in-Point: Kickstarter and the Irrational Game

Kickstarter,²¹ an independent, founder-controlled company of 118 people working together in New York City, is an enormous global community built around creativity and creative projects. Kickstarter aims at helping artists, musicians, filmmakers, designers, entrepreneurs, and many others find resources and support that they need to make their projects come true. It is a platform that provides the project owners a space to work with people who know, love, or support them. The project owners have complete ingenious control over their work and the opportunity to disseminate it with an exciting community of supporters. Project deadlines are generally set at 30 days or less.

The mission statement of Kickstarter is “to help bring creative projects to life,” and it views itself as a “benefit corporation.” Since its launch, on April 28, 2009, Kickstarter community has helped 95,875 creative projects come to life. About $2.1 billion has been pledged and 9.9 million people from all over the world have supported Kickstarter projects. While some of these projects have been implemented by influential artists such as De La Soul or Marina Abramović, most of them have come from infamous but amazing creative people.

Kickstarter provides firms or entrepreneurs an extraordinary and powerful way to connect with individuals around the world who can truly help. When a firm launches a new product, a group of its customers are called early adopters. However, the supporters in a Kickstarter project will be so much earlier than that. These supporters are “innovators.” That means, Kickstarter not only helps bring creative projects come to life but also enables firms to have a large number of loyal and potential customers and numerous online followers at the very beginning.

Irrational Game is one of the Kickstarter projects, carried out by Dan Ariely, a Professor of Psychology and Behavioral Economics at Duke University. It is a thought provoking, an engaging, and an enjoyable way to incorporate social sciences and human behavior into a challenging and strategic game. The game aims at improving one of the most important life skills, the ability to predict how actions might unfold, and thus enhancing individuals’ decision making. In the game, players draw question cards that explain various social science experiments and win if they correctly guess the results of the experiments.

There are nine options to support the project (from $1 or more to $9,999 or more). The rewards for the supporters vary across the options. For example, the backers who select the option of “$24 or more” receive one copy of the game, while the backers who select the option of “$999 or more” receive one copy of the game and a Kickstarter exclusive “Psychology of Money” question cards deck signed by Dan Ariely and meet him for a group game and behind the scenes insights and stories. The project needed $15,000 to be funded yet ended the campaign with $280,000 pledged to the project by some 5,405 backers!

Key Takeaways

• Loyalty programs help the firm understand its customers better; increase switching costs, customer retention and share of wallet; and sell more of excess and more profitable inventory.

• Loyalty programs cocreated through coalitions are expected to become more prominent.

• Successful loyalty programs go beyond behavioral loyalty (loyalty derived from actual purchase patterns) and also induce attitudinal loyalty (loyalty derived from customer statements).

• Web 2.0 technologies provide significant opportunities for relationship marketing based on the firms’ capacity to expand marketing communication; embrace consumers’ diversity, self-expression, and involvement; and allow for open conversations in the online marketplace.

• Marketers who are seeking to build long-lasting relationships with consumers should adopt new technologies and approaches and make the best use of social media such as blogs, social networks (e.g., Twitter), content communities (e.g., YouTube), forums and bulletin boards, and content aggregators (e.g., RSS feeds).