Reward Management as a Part of Bonus Programs in B2C Markets

Table of contents

List of Abbreviations

Table of figures

Executive Summary

1 Introduction
1.1 Relevance of the topic
1.2 Structure of the assignment

2 Bonus programs and their theoretical foundations
2.1 Basics of bonus programs
2.1.1 Rebates as the basis of bonus programs and definition of bonus programs
2.1.2 The mechanism of bonus programs
2.1.3 Types of bonus programs
2.1.4 Connection to other customer retention instruments as well as to CRM
2.2 Benefits from bonus programs
2.2.1 Higher perceived (product) value
2.2.2 Customer Satisfaction
2.2.3 Loyalty
2.2.4 Customer equity and company value
2.2.5 Cost savings, additional, cross- and up-selling
2.3 Customer retention as the main target of bonus programs
2.3.1 Definition of customer retention
2.3.2 Customer retention in the customer life cycle
2.3.3 How bonus programs fit into the causes of customer retention
2.3.4 How to influence customer retention with bonus programs
2.3.5 Measuring customer retention as success indicator for bonus programs
2.4 Recent developments and examples of bonus programs in Germany

3 Successful reward managements design and it’s specifics
3.1 Basic rules on how to design a successful rewards offer
3.1.1 Rewards management as success factor of bonus programs
3.1.2 Rewards management rules based on human behaviour
3.2 The different types of rewards
3.2.1 Cash or cash equivalents
3.2.2 Product rewards
3.2.3 Mobile Content
3.2.4 Fun and Entertainment
3.2.5 Extra Services
3.2.6 Status
3.2.7 Auctions
3.3 Criteria to select the right rewards
3.3.1 Effort to participate / issuance rules
3.3.2 Attractiveness and relevance of the rewards
3.3.3 Type of customers, socio-demographics and cultural characteristics
3.3.4 Effect on customer retention
3.3.5 Industry of the company
3.3.6 Use of additional payment, part payment and self liquidating offers
3.3.7 Perceived value
3.3.8 Competing bonus programs
3.3.9 Limitation factors
3.4 Setting-up a successful and payable rewards scheme
3.4.1 Influences of the bonus program set-up on the rewards selection
3.4.2 The Reward-Selection-Criteria Matrix and additional rewards set-up rules
3.4.3 Own rewards vs. outside rewards
3.4.4 Process of sourcing
3.4.5 Licensing as a way to enlarge perceived value
3.4.6 Cooperations in rewards management

4 Market research on bonus programs and rewards management in particular
4.1 The set-up of the market research
4.1.1 Target
4.1.2 Method and implementation
4.2 Data analysis and interpretation
4.2.1 Analysis of socio-demographics data
4.2.2 Analysis and interpretation of market research results
4.3 Conclusion

5 Outlook

AppeNdix

Table of Literature

List of abbreviations

illustration not visible in this excerpt

Table of figures

Figure 1: The bonus program mechanism of a token economy reward schedule

Figure 2: CRM-Marketing Mix

Figure 3: C/D Paradigm

Figure 4: Customer retention as part of the customer life cycle

Figure 5: Psychological and actual causes of customer retention

Figure 6: How bonus programs can influence customer retention

Figure 7: Miles & More status levels as example for status as a reward

Figure 8: Customer segments and points balance matrix

Figure 9: Rewards – Selection Criteria Matrix

Figure 10: Sourcing of rewards at Esso

Figure 11: Options for organizing licensing

Figure 12: Daily responses on the online marketing research

Figure 13: Gender, age, profession and net income of participants

Figure 14: Knowledge and use of German bonus programs

Figure 15: What customers expect from good bonus programs

Figure 16: Attractiveness of different types of rewards

Figure 17: Preferences for redemption channels

executive summary

Bonus programs are at the moment – alone or in combination with other instruments - one of the most successful and most often used marketing instruments in B2C markets, to retain customers by giving them a bonus for loyal behaviour. The problem is that still there is little known about why customers participate in bonus programs and that especially the crucial aspect rewards management is the blind spot of the marketing theory on hand. On the background of high investments in bonus programs and their rewards on the one hand and unclear reasons for the different success of bonus sets on the other hand this is an unsatisfactory situation.

The target is therefore to show how bonus programs work and how rewards management is integrated in such a bonus program. Furthermore it is the target to show how rewards management can contribute to program success, how a rewards concept has to be set up and which possibilities (e.g. type of reward) there are for setting up a successful bonus set.

To reach this a compilation of the scattered but carefully selected information in marking literature, papers, articles and further sources also from non-economic ones like psychology, a systematization of the findings and drawing of conclusions from this gives a clearer picture and helps to give recommendations for setting up a successful rewards management. For backing up the findings the results of an especially therefore carried out online survey are used.

The decision to start with a bonus program must be based on the likeliness of the expected benefits that can be higher perceived product value, customer satisfaction, loyalty, from that customer equity and company value and cost savings as well as additional sales and cross and up-selling. Of course these benefits are strongly influenced by the customer retention potential of the bonus program set-up. The customer retention can be influenced through bonus programs by both psychological causes (e.g. satisfaction) as well as by rewarding the customer for certain behaviour. Because everybody can reward the customers the type of bonus / reward is decisive. The type of reward belongs to the burning mechanism of a bonus program. In a token economy rewards can be redeemed for collected points (artificial currency). Points and point issuance rules are part of the earning mechanism and are closely linked.

The rewards are the reason why customers enter and interact with a bonus program. When rewarding is a direct consequence of a specific behaviour it increases this behaviour. To attain a reward a customer has therefore to invest a strain of efforts that needs to be defined. The defined effort (e.g. purchasing) must have the potential to become an internalized behaviour of the customer.

Possible reward types are cash or cash equivalents, product rewards and rewards from the area of fun an entertainment, extra services, which should refer to the core product or service of the company but creates high organisational costs, status or the participation in auctions. The most important criterion is the target group of the bonus program. The next criterion to select the right rewards is the effort to participate. Findings are that people tend to maximize the frequency of rewarding and not the magnitude and that the interest in a bonus program will drop if a customer gets no reward after 9 – 12 months. The higher the needed effort the more luxury rewards will be redeemed. The use of additional payment, part payment or self liquidating offers will have an influence on the success of rewards as well. The higher the monetary costs for the customer the lower is the preference for luxuries. Offering part payment can reduce frustration that can be the result from high requested effort but should always be used tiered and discreet. A totally free combination of additional payment and points would destroy the motivational factor and should not be allowed.

Rewards must be attractive and relevant. The perceived value of the rewards should be high and to reduce program cost it should be higher than the real value which especially makes cash as a reward less interesting for a company. In this context it is important to say that it is better to hide the real value of the points. Different rewards have different effect on customer retention which should be an important factor in the rewards selection. Rewards related costs (especially logistics) should also always be part of the rewards decision. It is not advisable to get in open rewards competition with competing bonus programs because this results in higher program costs. It is better to offer not easy to compare rewards or to focus on other rewards types than the competition. Furthermore the industry of the company that runs the bonus program is important for the rewards selection. Limitation factors that can be for example a result from a participation in a multi partner scheme should be addressed.

Besides these criteria and the characteristics of the different rewards also some further rules need to be followed. The higher the congruity between the effort and the reward the lower is the risk of promotion reactance. On top rewards should in the best case support the products or services of a company. Furthermore the rewards fungibility should be optimal adjusted. On top it is important to note that rewards loose their value to motivate over time. Therefore the rewards offer should change from time to time.

The process of sourcing the rewards should be set-up individually according to the bonus program needs. A possible outsourcing of this function should under no circumstances only be decided under cost efficiency aspects. Especially for programs with only few rewards or that make use of own (which are internally sourced) rewards the rewards management should not be outsourced. The use of outside rewards and licensing as well as vertical and horizontal cooperation could raise the attractiveness of the bonus set and can be used to reduce the reward costs.

Key learnings from the market research are that 70% of the market research participants say that they participate in bonus programs and 50% of this 70% said that they changed their shopping behaviour in favour of the participating stores. 89,2% of this customers expect attractive rewards. 91,9% already redeemed a reward in a bonus program. Customers that collect with a specific target tend to be more loyal than customers that collect without a specific target. Targeted collecting should therefore be promoted. After cash, product rewards are highly attractive. Men can be especially attracted by status. The physical catalogue as a channel to offer rewards becomes less important. Additional payments are widely accepted.

Overall the result of this thesis is that rewards management is indeed the crucial point for successful bonus programs but that rewards management is also strongly linked to other aspect of the bonus programs like the points issuance rule that set the frame for the rewards management. Therefore the recommendations are that already in the program set-up phase the rewards management should be a strategic and program defining element and not just a function that converts the strategy into a bonus set and the findings and tools given in this thesis should be used to set up an individual bonus set. Further research on this topic is recommended as well.

1 Introduction

1.1 Relevance of the topic

Still customer retention is the hot topic in B2C marketing theory and praxis. Stagnating markets, strong and often global competition, raising transparency of the different offers on the markets, especially driven by the internet boom, and not at last the customer retention activities of the competitors make it more and more difficult and expensive to attract new customers. Business success is therefore often driven by the capability to retain current customer and enlarge the business made with them.^[1] Mostly bonus programs are the instrument that gets chosen.^[2]

But despite its success bonus programs raise still a lot of questions that are not answered until now. Especially the question why customers participate in bonus programs has not been answered sufficient until now.^[3] Questions that need to be answered are related to several issues like the decision to join the program, the necessary efforts to get rewarded and the rewarding itself. But even the empiric work by Künzel from 2003 that was set up especially to answer some of these questions does not put the focus on the bonus itself and the different reward option in particular. Rewards management just seems to be the blind spot in bonus program marketing theory.

It is very likely that this is an important gap. Many bonus programs work very well and are established with great success while other bonus programs fail. According to a study of Roland Berger in 2003 most companies do not reach their set targets.^[4] Often the reasons for failure or even success stay unclear. Furthermore it seems like many bonus programs are set up with little understanding of consumer preferences.

Bonus programs like the famous ball promotion of Aral in Germany three years ago show what an innovative and attractive rewards offer can cause. In only seven months Aral handed out over 9 million balls (soccer balls, volleyballs, basketballs, tennis balls and golf balls) to customers who had to fill up their car for 400 litres and paying a top up of 1€. Aral even had to place an advertisement saying that everybody gets a ball, because of massive out of stocks.^[5] By the way no one knows what would have happened without all the out of stocks. Possibly it would not have been half successful. However not as many people know the following promotions that had nearly no out of stock during the promotion.

This example shows that having the right rewards at the right time with the right bonus program set-up could be crucial. This assignment is to give for the first time a deeper insight into the possibly most important aspect of bonus program design which is the reward management. A deeper understanding about what is possible in rewards management, what rewards customers prefer and how a good rewards program should be set up can very likely help to reduce the risk of a failing bonus program. The underlying hypothesis of this paper is that outstanding rewards management is the key competence that is needed to set-up and run a successful bonus program.

1.2 Structure of the assignment

The assignment is structured into three main parts. After the introduction in section 1, section 2 gives an insight into the overall bonus program topic. Section 2.1 describes how bonus programs work technically and how they are based on rewarding customers with a special rebate called bonus. Section 2.2 is to show what benefits are usually connected to bonus programs before section 2.3 goes into more detail about the main target of bonus programs – customer retention. At the end of section 2, section 2.4 provides practical examples and information on recent developments around bonus programs.

After introducing rewards management as a part of bonus programs in section 2, in section 3 the focus is now on rewards management in particular, how to design it and its specifics. Section 3.1 presents basic rules on how to design a rewards offer to be successful. Section 3.2 describes all the different types of possible rewards including their advantages, disadvantages and peculiarities. After knowing which kinds of rewards are possible to use, section 3.3 informs about the different criteria that must be paid attention to, to select the right rewards. Section 3.4 at the end of section 3 closes the circle in showing how to set up a successful and payable rewards scheme as the basis of a successful bonus program.

Section 4 changes the perspective from a more theoretical approach to an empiric one, trying to validate some of the findings and information with using an online market research and providing some additional information about what customers think about bonus programs and rewards management in particular. But it is important to stress out that what customers think they want is not necessarily what they do when it comes to the decision. Nevertheless this chapter helps to give some deeper insight into customers mind on this topic. Section 4.1 describes the target of the online survey and how it has been set up. Section 4.2 provides a detailed analysis of the finding. Section 4.3 contains a short conclusion about the analysis and what has been found out.

Besides a short look back on section 1, section 5 contains an outlook on the future of rewards management and which questions need to be answered in further studies based on the findings of this thesis.

2 Bonus programs and their theoretical foundations

2.1 Basics of bonus programs

2.1.1 Rebates as the basis of bonus programs and definition of bonus programs

To understand what bonus programs are it is helpful to learn something about rebates. Rebates are discounts on prices and therefore part of the price policy of a company. Rebate policy is the systematic giving of rebates on the official and regular prices.^[6] A rebate can be a price discount or a rebate in kind. Typical rebates are bulk discounts or time rebates. Time rebates are rebates that are given at a specific time or in a specific period, to accelerate the launch of a product or the sale of a product. Especially in the B2B business the different types of rebates are countless. There is one special rebate that is of high interest for the topic of bonus programs, which is the loyalty rebate. Traditionally this rebate is a payback on the total turnover made with one customer in a specific time. This rebate is also known as bonus.^[7]

Normally a bonus is given after a specific period of time or after reaching a specific turnover.^[8] This is also typical for bonus programs in the B2C sector. As a rule a customer has to collect a specific amount of points (or another artificial currency) to redeem for example a product reward or to get money back. This also directly refers to a rebate in kind (a customer is getting a natural reward) or the price discount (a customer is getting money back). This shows that the traditional rebate scheme is the basis for the new bonus programs that are booming in many B2C markets at the moment.

Consequently bonus program is a more specific term than the term rebate program and will therefore be used in this thesis to describe a rebate program that uses a bonus as a method to enhance customer loyalty. The term rebate scheme will therefore not be used in this thesis because it can also describe a scheme that has no collecting element. A bonus program is therefore the systematic giving of special bonus points on the official and regular prices that is linked to a specific behaviour of a customer, which can be redeemed for a reward (the bonus) after reaching a defined number of points.^[9] It can be said that the term reward program can be used analogously giving that a bonus is always also a reward and vice versa, but it is not as distinctive.

2.1.2 The mechanism of bonus programs

As described in section 2.1.1 bonus programs are using the classical instrument rebate. If this is the case than the basic rules for rebate schemes should also be valid in the new bonus programs.

The most important principle known in the rebate theory is the do-ut-des principle. That means that the customer gets specific rebates for specific behaviour. If the customer changes his behaviour the rebates should change as well. Another basic rule is that a rebate scheme should be transparent and the rules of the rebate scheme should be the same for everyone. The most important basic rule that many companies that set up new bonus programs today seem to forget is that everybody can give rebates.^[10] Therefore it is not necessarily a competitive advantage just to set up a bonus program. It might be that the type of bonus is decisive. Furthermore a pure cash back system is very comparable but natural rebates or rewards are not.

These rules show that bonus programs have two different sites that need close examination. One site is the earning mechanism (how and for what to get the bonus points) and the other one is the burning mechanism (how and for what to use the bonus points). The theoretical basis of this mechanism is called token economy. This is a specific reward schedule that is the basis of all bonus programs. The clue of a token economy is that it works with an invented currency (often referred to as points / see also above) that are collected or earned for specific behaviour and that after reaching a specific number of points can be traded for specific rewards. Token economies are highly effective because they can be used to give very specific points to customers and on the other site to set up a rewards scheme that contains a variety of rewards that need different numbers of points. Therefore everybody can get a reward but based on his or her individual points balance. In contrast in a fix ratio scheme the customer gets a reward based on repetition. For example after ten purchases the customer gets one reward for free. This system is often used in the service and food sector. Collecting cards using this system are called punch cards.^[11]

A typical example for a punch card is a collecting card at the hairdresser. At many hairdressers customers get one haircut for free after ten haircuts. Because for rewards management these reward schemes are not very complex, the focus will now lay on the token economy reward schedule. The following graph shows the basic principle of the token economy in a quick overview.

illustration not visible in this excerpt

Figure 1: The bonus program mechanism of a token economy reward schedule^[12]

Although bonus programs all follow more or less the above mechanism, there are a lot of different bonus programs. Both the emitting of points and the burning of points can be used to design a specific and unique program. The following section describes the most important types of bonus programs.

2.1.3 Types of bonus programs

Bonus programs can be differentiated by several characteristics. At first there is the possibility to differentiate according to the target group between B2B and B2C programs.^[13] In this thesis only rewards management for B2C programs will be covered. This is important because in the B2B sector another program design and other rewards are needed than in the B2C business.

The second characteristic is the operator of the program. A bonus program can be installed by one (stand alone or single programs) or several companies (multi partner programs).^[14] If the program is a stand alone solution, points can only be collected at one company. For example Driver Reward points can only be collected at Esso petrol stations. A multi partner program offers the customer the possibility to collect points at various companies. The idea is to set-up a program over different industries to enlarge the incentive of a customer to collect points of a specific bonus program.^[15] The most successful multi-partner bonus program in Germany is the Payback Program. Payback points can be collected for example at Aral petrol stations, at Real, Obi, DM and many other partners. Furthermore the operator can be the company itself or a neutral service provider. Neutral service providers are for example the Loyalty Partner GmbH as operator of Payback or the Customer Advanced Program GmbH, the operator of Happy Digits.^[16] The characteristic of acceptance is often based on the operator, but the acceptance can be limited to parts of a company or on specific regions. On the other hand some programs are more or less global (Lufthansa Miles & More).^[17]

Furthermore a bonus program can be differentiated according to the type of bonus. In B2C programs and with the given definition from 2.1.1 only a differentiation between a bonus given on a specific volume of a product and a bonus given on a specific turnover makes sense because other bonus types like direct rebates are not part of the defined set (see section 2.1). For this paper it is of higher interest to differentiate between different rewarding instruments. Typical rewards are cash, cash equivalent rewards (e.g. vouchers), product rewards with or without additional payment and from the own assortment or products which are bought especially as rewards. Special further rewards can be internal or external services.^[18]

A further important differentiation can be made between open and closed bonus programs. While open programs can be entered by every customer, closed programs place conditions like a certain turnover or a fee to enter the program. Of course the biggest programs are therefore normally open programs. The big problem with such programs is that if many customers in these programs have very low turnover, they generate high program costs and therefore these programs could suffer from low or even negative profitability.^[19]

The last characteristic that can be used to differentiate bonus programs is the used channel. The channel can be online, offline and both online and offline. The more channels a customer has to collect and redeem points the more attractive is the program for the customer.^[20]

2.1.4 Connection to other customer retention instruments as well as to CRM

As said in the previous sections a bonus program is in the first step just a bonus program. That implies that it is and always should be just one part of a customer retention strategy and that it is just one possible instrument in customer relationship management (CRM).^[21] This section is to distinguish CRM and the most common customer retention strategies that could be mixed up from bonus programs.

As said earlier bonus programs are focussing on building customer satisfaction and value by giving the customer a financial benefit for loyal behaviour. Customer cards with bonus program function belong in general also to the pricing instruments of a company.^[22] They are a classical instrument for customer retention management. Through the customer card (today often plastic devices with a magnet strip or chip technology to store customer data) the customer gets an identification medium that is normally combined with a function like cashless payment or the direct granting of rebates.^[23]

In contrast to this customer clubs belong to the promotional instruments in the marketing mix.^[24] Consequently the focus of this instrument is more on delivering positive customer experiences. The customer club functions as a communication basis between supplier and customer. Extra and individualized services (often referred to as club services) are offered to influence the customer’s behaviour and to strengthen the customer retention.^[25] In contrast to pure bonus programs customer cards and clubs offer a kind of social benefits for the customer.^[26] Customer clubs and customer cards often do not get distinguished, because there is nearly no club not using a customer card as one extra service for valuable customers. On the other hand suppliers emitting customer cards add more and more extra services to there program that in the end the card schemes get a club character. Because also bonus program functionalities are often combined with both instruments, all this instruments are often referred to as customer retention or loyalty programs.^[27]

According to a study of customer retention programs in German and Austrian B2C companies (n = 82), already 61% of all companies had implemented a customer retention program in 2003. Out of this 54% were bonus programs, followed by customer card programs without bonus function and 36%. Customer clubs were set up in 28% of the cases.^[28] The study shows that bonus programs are a very popular instrument. In addition more and more customer card programs turn to be also a bonus program by adding a bonus-functionality to the program.^[29]

Customer relationship management (CRM) is not a customer retention instrument like the instruments described until now, but a customer orientation instrument. Customer relationship management (CRM) is defined as “the overall process of building and maintaining profitable customer relationships by delivering superior customer value and satisfaction”.^[30] This broad definition covers five different basic principles that have to been followed: customer orientation, profitability orientation (treating a customer according to his profitability), long term orientation over the whole customer life cycle, individualisation on customer level or at least on customer segment level and the use of IT.^[31]

CRM is not only a single marketing activity but a total new way of doing marketing. The whole marketing mix should be adapted to customer relationship oriented marketing. The integration of all marketing activities in the CRM strategy is the key driver for higher efficiency and success of the program.^[32] Through the integration of database marketing and dialogue marketing it is possible to address every single customer with his personal needs and wants.

The following figure shows the CRM marketing mix approach. This overview is very helpful because it shows that customer clubs as well as bonus programs and customer cards are only three out of a big set of possible instruments to design a CRM strategy for the marketing of a specific company. Nevertheless especially customer card based retention programs with bonus function are a perfect instrument to install a CRM system, because the customer card can be used to collect the often necessary customer data^[33]

illustration not visible in this excerpt

Figure 2: CRM-Marketing Mix^[34]

Even if bonus programs are not on the same level like an implemented CRM strategy, a well set up bonus program could be the core element of a successful customer retention strategy. The clue is to integrate the different used instruments of customer retention management in one concept, because often they are set up very isolated. A possible tool to do this is to set up an electronic platform.^[35] The benefits from bonus programs that are shown in the following section could even be higher in an integrated CRM strategy.

2.2 Benefits from bonus programs

2.2.1 Higher perceived (product) value

A good customer relation starts with value for the customer. But customers are not able to judge objectively how big the value of a product is for him as well as he is not able to see all the costs related with an offer accurately. Therefore the value noticed by the customer is called perceived value. A customer will always try to buy the product with the highest perceived value comparing all products on a same price level. Therefore it is necessary not to have the highest product value but the highest customer perceived value.^[36]

Furthermore to realize effective customer retention it is necessary to focus not only on the perceived value of one transaction but to educate the customer that ongoing transactions increase the total perceived value. The target is to create a direct value from the continuation of a relationship with a specific supplier or company.^[37]

Bonus programs are an instrument to influence the customer perceived value of a product or service not for one transaction, but for a row of transactions. This is possible, because bonus programs are a pricing tool through giving rebates on products with a payback function, only after a specific number of transactions or a defined turnover has been reached. By pushing the perceived value added of a bonus program customers will feel a higher total customer perceived value of an offer.

2.2.2 Customer Satisfaction

Customer satisfaction is at the moment one of the most important targets for companies because without satisfaction a customer will not become loyal. Especially on the background of higher competition due to the globalization, even stronger on stagnating or shrinking markets, market shares can only be gained by attracting customers of the competition.^[38] Unsatisfied customers are therefore a high risk, because it could be easy for other companies to attract them. Typical instruments to raise customer satisfaction that were implemented in the last decades are customer care programs and total quality management.^[39]

At first customer satisfaction can be seen as satisfaction with a single transaction. Customer transaction satisfaction is based on the perceived customer value of a product but it depends on the difference between the expectations of the customer and the performance that he perceived. If the perceived performance is on the expected level the customer will be satisfied. Is it below the customer will be dissatisfied even if the product could meet his expectations. Is the perceived performance of the product above the expectations the customer will feel enthusiastic.^[40] The following graph shows this connection which is known under the term “confirmation / disconfirmation paradigm”.

illustration not visible in this excerpt

Figure 3: C/D Paradigm^[41]

The traditional view is that both confirmation, which is an exact correspondence between expected and perceived performance, and positive disconfirmation lead to satisfaction. A wrong conclusion could be that positive disconfirmation is expensive and senseless. Today it often seems to be the target to make the customer enthusiastic about an offer which is only possible with positive disconfirmation. Nevertheless the target should always be to earn money and not to deliver performance that is not valued by the customers.

At second customer satisfaction can be seen as the “cognitive and affective evaluation of the total experience with a specific company and its products”.^[42] This is not a contradiction to the first view but a higher level of a satisfaction concept. Following this definition customer satisfaction is based on the experience with many transactions. Bonus programs as an integral part of transactions can therefore have an impact on customer satisfaction as well. If a customer is not satisfied with a bonus program, or has even negative experiences with a bonus program it is very likely that his total satisfaction declines. On the other hand a bonus program can influence customer satisfaction positively, because they add value to the company offer as described in the previous section.

On top it should be said that customer satisfaction is a multidimensional construct. Noriaki Kano found out that there are different factors that influence customer satisfaction. These factors can be clustered in three different groups. According to the Kano Model it is necessary to distinguish between basic factors, one-dimensional factors and enthusiasm factors. Basic factors are attributes of the offer that if not fulfilled will directly lead to dissatisfaction. Therefore they can be defined as the core value of a product or service that needs to be offered. They are the basic precondition that a customer is satisfied.^[43] One-dimensional factors are factors that are widely known by the customers but they are not belonging to the core value of a product or service. The higher the achievement of these factors the higher is the customer satisfaction.^[44] Factors that are belonging to the group of enthusiasm factors are based on hidden wishes of the customers and are not part of the customer expectations. Offering these factors has a very positive effect on customer satisfaction while not fulfilling them does not lead to dissatisfaction. Therefore these factors can be used to differentiate an offer from the offers of the competition.^[45]

To what category of factors a bonus program belongs is certainly depending on the competitive environment, the rules of the specific market and the product itself. For example it can be suspected that if all leading suppliers on a market have a bonus program, offering a bonus program would not lead to enthusiastic customers but would be just an expected part of the offer.

The consequences of customer satisfaction are still under discussion in the scientific discourse but the following findings are widely accepted. While unsatisfied customers tent to in the best case complain and in the worst case to move away from a company a satisfied customer will normally buy again. Consequently it is proofed by many studies that a rising customer satisfaction tends to increase customer loyalty, but the strength of this connection can vary depending on the type of market and the intensity of competition. On highly competitive markets customers that are highly satisfied and sometimes even enthusiastic about an offer are often much more loyal. Only “satisfied” customers show in comparison not such a high loyalty.^[46] This is a clear sign that customer satisfaction is of course a necessary but not always sufficient precondition for customer loyalty. At least the absence of customer satisfaction will not allow loyalty.

2.2.3 Loyalty

As described in section 2.3.2 satisfied customers are a precondition for loyalty. Loyalty can be loyalty to a specific product, to a brand or even to a whole company. Loyalty can be defined as the customer related perspective of customer retention. A loyal customer has a lower willingness to change the supplier. Customer retention in contrast can be seen both from a customer as well as from the supplier’s perspective.^[47] Therefore the term loyalty program is sometimes misleading.

Loyal customers purchase more and for a higher value. Furthermore they need lower caring, have a higher tolerance against mistakes and they make word-of-mouth influence.^[48] Especially word-of-mouth influence can be an important value for the company depending on the branch. Customers that had good experiences over some time are likely to communicate this. Other customers who have to chose a supplier can reduce the uncertainty that comes with a purchasing decision by following the advice.^[49]

Unfortunately for many years now there is a strong trend towards decreasing customer loyalty.^[50] This is a chance for companies to attract new customers as a first step and to make them loyal as a second step. The final target is that a customer is loyal voluntarily and that he feels emotionally bound to the company. To reach this the offer needs to exceed customer expectations.^[51]

If customer satisfaction is as result of a bonus program and if customer satisfaction is a precondition for loyalty, than bonus programs can increase loyalty as well. Section 2.3.3 gives more insight into the causes of customer loyalty and shows that bonus programs indeed have a direct impact on customer loyalty. If this is the case the benefits that come from customer loyalty can be equal the benefits coming from using a bonus program as a marketing instrument.

2.2.4 Customer equity and company value

Learning from section 2.2.3 that customers who are loyal will purchase more and for higher value and that loyalty will increase customer retention it becomes clear that the single customer becomes of higher value to the company. This is because customer value is not only defined by the profit that can be made with a customer in one year but also by the duration of the relationship.^[52] Looking at the customer value of a customer over his customer lifetime and combining the lifetime value of all the customers the result is the total customer equity of a company.^[53] Customer equity is nothing more than the future profits of the company. Raising customer equity leads therefore to a higher company value.

All in all a good bonus program can therefore be a source for a higher company value by pushing the (perceived) customer value of the products and services of a company. It is only important that a bonus program is not designed to generate quick wins but as a customer-retention-program that contributes to the satisfaction of the customers over a long time. Section 2.3 puts the focus on this specific topic and on how a bonus program can help to retain customers.

2.2.5 Cost savings, additional, cross- and up-selling

On the cost side customer retention leads to learning effects both on side of the customer and the side of the company and with this to lower costs during the customer lifetime.^[54] Therefore customers that are bound by a bonus program costs less money over there lifetime. Furthermore of course bonus programs cost money, but attracting new customers is normally far more expensive. In general active customer retention needs only between 15 and 20% of the investment that the attraction of new customer would cost.^[55] Additionally loosing a customer means to loose all investments that were made on this customer. In general one can say that reaching high customer retention rates leads to a lower intensity of customer acquisition measures. The overall costs of customer acquisition consequently decline with better customer retention management.^[56] Therefore a well set-up bonus-program could not only cost money but could be a very attractive tool to save money.

But there are direct impacts from customer retention on the profit as well. There are two mechanisms that have an effect in successful bonus programs which are the “points pressure” mechanism and the “rewarded behaviour” mechanism. To earn the reward customers increase their purchases, which is a short term effect (“points pressure”). If customers are going on with their behaviour (purchasing more) after being rewarded, this is a long term effect called “rewarded behaviour. Both effects increase the turnover.^[57] Furthermore customer retention results in cross selling (selling other products) and up-selling (selling products of higher value) first of all because customers try out new offers but especially because the company knows retained customers better in general and what the individual customer needs in particular.^[58] In addition recent customers have lower price sensitivity. Therefore it is possible to have a higher price level if the customer retention rate is high.^[59]

2.3 Customer retention as the main target of bonus programs

2.3.1 Definition of customer retention

According to a study in 2003 61% of the companies in the B2C sector think that customer retention is the most important success factor in their business, even before product quality or lower costs.^[60] The question coming from this is what customer retention really is, what loyalty is on the other hand and why customer retention is so important for so many companies.

Customer retention is at first a construct to define the business relationship between a supplier and a customer. Therefore it is both possible to look at the perspective of the supplier or the one of the customer. As stated in section 2.2.3, loyalty can be defined as the customer related perspective of customer retention. Looking at customer retention from a supplier related perspective customer retention (management) includes all activities that are targeted to retain or intensify the retention of existing customers.^[61] Furthermore customer retention can be seen in two dimensions. The first dimension is the customer’s behaviour up to now and the second dimension is the intended future behaviour.^[62]

Customer retention can therefore be defined as all activities of a company that are targeted on positively effecting the actual customer behaviour and also the intended behaviour with regard to a specific supplier or it’s products and services, to stabilize and enlarge the relationship with this customer for the future.^[63] Customer retention needs therefore an active management. Customer retention management is in consequence defined as the systematic analysis, planning, implementation and controlling of measure that are focused on existing customers with the target to maintain and even enlarge the relationship with these customers.^[64]

The customer retention management needs strategic planning. Questions that need to be answered are the object of customer retention (retention to what?), the subject of customer retention (which customers?), the type of customer retention (how?), the instrument of customer retention (with what?), the intensity and timing (how often and when?) and cooperation strategies (if yes, with whom?).^[65] The question how is here already answered: with a bonus program.

2.3.2 Customer retention in the customer life cycle

The time a customer has contact with a company is defined as customer life cycle. There are three main phases called customer acquisition, customer retention and customer restraining phase. A further phase that can be added is the customer recovery phase that is not necessarily the case for every customer, because this phase covers the reactivation of an already ended customer relationship.^[66]

The customer acquisition phase contains all company activities that are focused on acquiring new customers. Customer retention is the phase where a customer relationship already exists. All activities to enlarge a customer relationship or keeping it on a certain level are part of this phase. The intensity of the customer relationship is therefore growing. The next phase is the customer restraining phase. In this phase the intensity of the customer relationship is declining. Customers that are in this phase need special treatment. Nevertheless in some models the customer restraining phase is also part of the customer retention phase. In this case the authors distinguish customer relations that are stable and customer relations that are endangered. The last phase is the customer recovery as already mentioned.^[67] The following graph gives a short overview over the different phases.

[...]

^[1] Cf. Gerdes (2005); p. 381

^[2] Cf. Roland Berger (2003); p. 5

^[3] Cf. Künzel (2003); p. 3

^[4] Cf. Roland Berger (2003); p. 5

^[5] Cf. Steiger (2006); p. 34

^[6] Cf. Scharf / Schubert (2001); p. 194

^[7] Cf. Koppelmann (1999); p. 136

^[8] Cf. Scharf / Schubert (2001); p. 195

^[9] Cf. Lauer (2003); p. 4

^[10] Cf. Koppelmann (1999); p. 136

^[11] Cf. Aaronson (2005a); p. 2

^[12] own graph

^[13] Cf. Loyalty Hamburg (2005); in the source without pages

^[14] Cf. Tomczak / Reineke / Dittrich (2005); p. 282

^[15] Cf. Wießmeier / Lischka (2005); p. 712

^[16] Cf. n.n. (2004); p. 48

^[17] Cf. Wießmeier / Lischka (2005); p. 712

^[18] Cf. Loyalty Hamburg (2005); in the source without pages

^[19] Cf. Tomczak / Reineke / Dittrich (2005); p. 280

^[20] Cf. Loyalty Hamburg (2005); in the source without pages

^[21] Cf. Homburg / Bruhn (2005); p. 8

^[22] Cf. Gerdes (2005); p. 387

^[23] Cf. Wießmeier / Lischka (2005); p. 708

^[24] Cf. Gerdes (2005); p. 387

^[25] Cf. Wießmeier / Lischka (2005); p. 708

^[26] Cf. Kotler / Armstrong (2004); p. 21

^[27] Cf. Tomczak / Reinecke / Dittrich (2005); p. 277

^[28] Cf. Roland Berger (2003); p. 7

^[29] Cf. Roland Berger (2003); p. 8

^[30] Kotler / Armstrong (2004); p. 16

^[31] Cf. Homburg / Sieben (2005); p. 438

^[32] Cf. Hippner / Wilde (2004); p. 466

^[33] Cf. Wießmeier / Lischka (2005); p. 708

^[34] own figure based on Gerdes (2005); p. 387

^[35] Cf. Homburg / Bruhn (2005); p. 8

^[36] Cf. Kotler / Armstrong (2004); p. 17

^[37] Cf. Zentes / Swoboda / Morschett (2005); p. 173

^[38] Cf. Scharf / Schubert (2001); p. 26

^[39] Cf. Homburg / Becker / Hentschel (2005); p. 95

^[40] Cf. Kotler / Armstrong (2004); p. 17

^[41] Cf. Homburg / Becker / Hentschel (2005); p. 97

^[42] Homburg / Becker / Hentschel (2005); p. 98

^[43] Cf. Matzler / Stahl / Hinterhuber (2004); p. 19

^[44] Cf. Glusac (2005); p. 28

^[45] Cf. Matzler / Stahl / Hinterhuber (2004); p. 19

^[46] Cf. Kotler / Armstrong (2004); p. 16

^[47] Cf. Homburg / Bruhn (2005); p. 8

^[48] Cf. Scharf / Schubert (2001); p. 26

^[49] Cf. Kuss / Tomczak (1998); p. 149

^[50] Cf. Zentes / Swoboda / Morschett (2005); p. 173

^[51] Cf. Schüller / Fuchs (2004); p. 17

^[52] Cf. Homburg / Sieben (2005); p. 443

^[53] Cf. Kotler / Armstrong (2004); p. 16

^[54] Cf. Georgi (2005); p. 211

^[55] Cf. Zentes / Swoboda / Morschett (2005); p. 173

^[56] Cf. Kuss / Tomczak (1998); p. 149

^[57] Cf. Taylor / Neslin (2004); p. 1

^[58] Cf. Georgi (2005); p. 211

^[59] Cf. Kuss / Tomczak (1998); p. 149

^[60] Cf Roland Berger (2003); p. 5

^[61] Cf Homburg / Becker / Hentschel (2005); p. 100

^[62] Cf. Homburg / Becker / Hentschel (2005); p. 101

^[63] Cf. Homburg / Bruhn (2005); p. 8

^[64] Cf. Homburg / Bruhn (2005); p. 8

^[65] Cf. Homburg / Bruhn (2005); p. 19

^[66] Cf. Bruhn / Michalski (2005); p.253

^[67] Cf. Bruhn / Michalski (2005); p.253