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The loyalty business model is a business model used in strategic management in which company resources are employed so as to increase the loyalty of customers and other stakeholders in the expectation that corporate objectives will be met or surpassed. A typical example of this type of model is: quality of product or service leads to customer satisfaction, which leads to customer loyalty, which leads to profitability. A business model (also called a business design) is the mechanism by which a business intends to generate revenue and profits. ...
Strategic management is the process of specifying an organizations objectives, developing policies and plans to achieve these objectives, and allocating resources so as to implement the plans. ...
In economics and marketing, a service is the non-material equivalent of a good. ...
The service quality model A model by Kay Storbacka, Tore Strandvik, and Christian Gronroos (1994) is more detailed but arrives at the same conclusion. In it, customer satisfaction is first based on a recent experience of the product or service. This assessment depends on prior expectations of overall quality compared to the actual performance received. If the recent experience exceeds prior expectations, customer satisfaction is likely to be high. Customer satisfaction can also be high even with mediocre performance quality if the customer's expectations are low, or if the performance provides value (that is, it is priced low to reflect the mediocre quality). Likewise, a customer can be dissatisfied with the service encounter and still perceive the overall quality to be good. This occurs when a quality service is priced very high and the transaction provides little value. Quality refers to the distinctive characteristics or properties of a person, object, process or other thing. ...
This model then looks at the strength of the business relationship; it proposes that this strength is determined by the level of satisfaction with recent experience, overall perceptions of quality, customer commitment to the relationship, and bonds between the parties. Customers are said to have a "zone of tolerance" corresponding to a range of service quality between "barely adequate" and "exceptional." A single disappointing experience may not significantly reduce the strength of the business relationship if the customer's overall perception of quality remains high, if switching costs are high, if there are few satisfactory alternatives, if they are committed to the relationship, and if there are bonds keeping them in the relationship. The existence of these bonds acts as an exit barrier. There are several types of bonds, including: legal bonds (contracts), technological bonds (shared technology), economic bonds (dependence), knowledge bonds, social bonds, cultural or ethnic bonds, idiological bonds, psychological bonds, geographical bonds, time bonds, and planning bonds. Switching barriers or switching costs are terms used in microeconomics, strategic management, and marketing to describe any impediment to a customers changing of suppliers. ...
This model then examines the link between relationship strength and customer loyalty. Customer loyalty is determined by three factors: relationship strength, perceived alternatives and critical episodes. The relationship can terminate if: 1) the customer moves away from the company's service area, 2) the customer no longer has a need for the company's products or services, 3) more suitable alternative providers become available, 4) the relationship strength has weakened, or 5) the company handles a critical episode poorly.
The final link in the model is the effect of customer loyalty on profitability. The fundamental assumption of all the loyalty models is that keeping existing customers is less expensive than acquiring new ones. It is claimed by Reichheld and Sasser (1990) that a 5% improvement in customer retention can cause an increase in profitability between 25% and 85% (in terms of net present value) depending upon the industry. However, Carrol and Reichheld (1992) dispute these calculations, claiming that they result from faulty cross-sectional analysis. Fred Reichheld (undated photograph) Frederick F. Reichheld is a business author and business strategist best known for his research and writing on the loyalty business model. ...
Net present value is a valuation method based on discounted cash flows. ...
According to Buchanan and Gilles (1990), the increased profitability associated with customer retention efforts occurs beceause:
- The cost of acquisition occurs only at the beginning of a relationship: the longer the relationship, the lower the amortized cost.
- Account maintenance costs decline as a percentage of total costs (or as a percentage of revenue).
- Long term customers tend to be less inclined to switch and also tend to be less price sensitive. This can result in stable unit sales volume and increases in dollar-sales volume.
- Long term customers may initiate free word of mouth promotions and referrals.
- Long term customers are more likely to purchase ancillary products and high-margin supplemental products.
- Long term customers tend to be satisfied with their relationship with the company and are less likely to switch to competitors, making market entry or competitors' market share gains difficult.
- Regular customers tend to be less expensive to service because they are familiar with the processes involved, require less "education," and are consistent in their order placement.
- Increased customer retention and loyalty makes the employees' jobs easier and more satisfying. In turn, happy employees feed back into higher customer satisfaction in a virtuous circle.
For this final link to hold, the relationship must be profitable. Striving to maintain the loyalty of unprofitable customers is not a viable business model. That is why it is important to for marketers to assess the profitability of each of its clients (or types of clients), and terminate those relationships that are not profitable. In order to do this, each customer's "relationship costs" are compared to their "relationship revenue." A useful calculation for this is the patronage concentration ratio. This calculation is hindered by the difficulty in allocating costs to individual relationships and the ambiguity regarding relationship cost drivers. For other uses of Amortization, see the Amortization disambiguation page. ...
Word of mouth is the passing of information by verbal means, especially recommendations, but also general information, in an informal, person-to-person manner, rather than by mass media, advertising, organized publication, or traditional marketing. ...
Profit margin is a measure of profitability. ...
In many parts of economics there is an assumption that a complex system of determinants will tend to lead to a state of equilibrium. ...
Patronage concentration is a term used in marketing. ...
Expanded models
 Virtuous Circle Schlesinger and Heskett (1991) added employee loyalty to the basic customer loyalty model. They developed the concepts of "cycle of success" and "cycle of failure". In the cycle of success, an investment in your employees’ ability to provide superior service to customers can be seen as a virtuous circle. Effort spent in selecting and training employees and creating a corporate culture in which they are empowered can lead to increased employee satisfaction and employee competence. This will likely result in superior service delivery and customer satisfaction. This in turn will create customer loyalty, improved sales levels, and higher profit margins. Some of these profits can be reinvested in employee development thereby initiating another iteration of a virtuous cycle. File links The following pages link to this file: Virtuous circle and vicious circle Loyalty business model Categories: GFDL images ...
Fredrick Reichheld (1996) expanded the loyalty business model beyond customers and employees. He looked at the benefits of obtaining the loyalty of suppliers, employees, bankers, customers, distributors, shareholders, and the board of directors.
The loyalty business model assumes the philosophical validity of pursuit of self-interest. However, much work in ethics assumes the validity of altruism (seeking the best interest of others). "Clearing Up the Egoist Difficulty with Loyalty" (Stieb 2006), attempts to show that when interests are shared there becomes no difference between seeking one's interest and that of others. This is also called the "Aristotelian" model based on Aristotle's related analysis of friendship in his Nicomachean Ethics. Egoism may refer to any of the following: psychological egoism - the doctrine that holds that individuals are motivated by self-interest. ...
Altruism is the practice of placing others before oneself. ...
Aristotle (Ancient Greek: Aristotélēs 384 – March 7, 322 BCE) was an ancient Greek philosopher, a student of Plato and teacher of Alexander the Great. ...
Nicomachean Ethics (sometimes spelled Nichomachean), is a work by Aristotle on virtue and character and plays a prominent role in defining Aristotelian ethics. ...
See also A business model (also called a business design) is the mechanism by which a business intends to generate revenue and profits. ...
Strategic management is the process of specifying an organizations objectives, developing policies and plans to achieve these objectives, and allocating resources so as to implement the plans. ...
Relationship marketing is a form of marketing that evolved from direct response marketing in the 1960s and emerged in the 1980s, in which emphasis is placed on building longer term relationships with customers rather than on individual transactions. ...
References - Buchanan, R. and Gilles, C. (1990) "Value managed relationship: The key to customer retention and profitability", European Management Journal, vol 8, no 4, 1990.
- Carrol, P. and Reichheld, F. (1992) "The fallacy of customer retention", Journal of Retail Banking, vol 13, no 4, 1992.
- Dawkins, P. and Reichheld, F. (1990) "Customer retention as a competitive weapon", Directors and Boards, vol 14, no 4, 1990.
- Fornell, C. and Wernerfet, B. (1987) "Defensive marketing strategy by customer complaint management : a theoretical analysis", Journal of Marketing
- Reichheld, F. (1996) The Loyalty Effect, Harvard Business School Press, Boston, 1996.
- Reichheld, F. and Sasser, W. (1990)"Zero defects: quality comes to services", Harvard Business Review, Sept-Oct, 1990, pp 105-111.
- Schlesinger, L. and Heskett, J. (1991) "Breaking the cycle of failure in service", Sloan Management Review, spring, 1991, pp. 17-28.
- Stieb, James A. (2006) "Clearing Up the Egoist Difficulty with Loyalty", Journal of Business Ethics, vol 63, no 1.
- Storbacka, K. Strandvik, T. and Gronroos, C. (1994) "Managing customer relationships for profit", International Journal of Service Industry Management, vol 5, no 5, 1994, pp 21-28.
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