Lezioni Loyalty Marketing

Loyalty marketing – Prof. Ziliani

Course content

• The evolution of marketing
• Big Data, the digital revolution, artificial intelligence and their impact on marketing
• The relevance of loyalty
• Loyalty programs design and management
• The use of customer insight in marketing and retailing decision

Companies need to conquer customers with value. Loyalty programs today exist in every industry and very often they are the first stop to take information about customers. The case of Starbucks is important because it uses a loyalty program. The last part of the course is devoted to how the data about customers can be used to improve the decisions that we take in everyday marketing activities.

Evolution of marketing paradigms

This course is about the importance of customer loyalty. Is loyalty important for marketing? Marketing has been the same over the years? What is marketing? Marketing is two things at the same time: on the one side marketing is a set of activities (evolved over the time) done by the companies, marketing activities change during the time. On the other side marketing is also the theory of the activities, conceptualization of what the company does. The activities and the theory change because society evolves. Marketing is a social science; social sciences evolve with time.

We look at how marketing evolves and we understand why today loyalty is an important goal for marketing. Today in a very competitive world, customer satisfaction is important, we invest money to create experience, we subtract money from the maximization of profit. We must use money for CRM, for marketing communication. In order to understand how the goal of marketing has changed over time, we need to take a historical point of view. We need to go to the beginning of marketing.

Marketing is both:

• An activity
• A discipline/field of study, i.e. thinking and conceptualization on the same activity

“Market” is at the core. What is a market? People meeting to exchange something → set of subjects sharing the same need that exchange can satisfy. Scarcity prevailed in history until the industrial revolution: production was not as important as merchants and trading companies. So... the activity has always been crucial. But when did the conceptualization begin?

1910: we talk about studies that can be seen as the beginning of marketing. This word is used by academics who work in U.S. Midwest states. The economy of these places was based on trading companies. In 1910 these scholars define marketing for the first time. Marketing is “the social and economic process that makes goods move from production to consumption”.

The early days of marketing

• 1910 U.S. Midwest Universities... farmland and crops... Economists studied commodity markets.
• Marketing was seen as a set of economic and social processes
• Marketing is “the social and economic process that makes goods move from production to consumption”

1948: American Marketing Association defines marketing as “the performance of business activities directed towards the management of the flow of goods and services from producer to consumer, or user”. The difference is the presence of business activities, service, and management. If I manage the flow of goods, it means that someone is in charge. The company decides, I don’t need the cooperation because I am the leader of the channel. The world changes, economists observe a different reality, theory about reality changes as the reality and society change. Marketing is doing a list of things which are managed by someone. In 1948 the American economy has changed; the American industrial sector has grown. The social and economic factors have changed over time.

Evolution of marketing paradigms (continued)

The picture shows a car manufacturing company. In those days the sector was growing, the market was expanding. If you can count the growth, if you know the cost, you can make a good plan. You produce huge quantities, you reduce cost, in this way you can sell at an affordable price. This makes the product affordable for the masses. Nothing unpredictable happens. The theory of what marketing is (conceptualization of marketing) is called marketing management.

• Marketing Management paradigm
• Marketing is a set of activities, not a social process.
• It is performed by the industrial firm (manufacturer).
• It takes the form of scientific solutions to specific problems.
• Attention is on problem solving, planning, control.
• Goal: to maximise profit (neoclassical economic approach).
• Success is measured by sales volume.
• The relevant viewpoint is “the transaction”.
• The marketing department is born.

Marketing in the ’50s started to collect scientific approaches from other fields. Today markets are saturated, customers move from one brand to another, and the company tries to do something different, cutting the price of the product, for example. All these incentives cost something to the company. The money is taken by the profit, so today the goal isn’t to maximise profit. These activities are done in order to be better than the competitors.

A very important point is: if you focus only on the single transaction, you don’t take care of future projects, and this is dangerous. Today the relationship with the customer is the most important point. In the ’50s the most important thing was to maximise the number of transactions. Functionalists and the marketing management paradigm took the scene. The analytical frameworks of the new managerial approach were drawn from economics, behavioral sciences, and quantitative methods. The incorporation of behavioral and quantitative sciences gave important legitimacy to marketing as a separate academic discipline.

Relevance of market research, centralised marketing decisions, and huge production facilities designed for maximum economies of scale to produce highly standardized products. The task of the marketing function was first to develop a thorough understanding of the marketplace to ensure that the firm was producing goods and services required and desired by the consumer.

With an optimal product mix in place, the marketing function (through its sales, advertising, promotion, and distribution subfunctions) was responsible for generating demand for these standardized products, for creating consumer preference through mass and personal communications, and for managing the channel of distribution through which products flowed to the consumer.

Sound marketing research and analysis provided support for conducting these activities most efficiently and effectively for testing alternative courses of action in each and every area. Marketing practice and theory are based on the context at constantly: economy, politics, society, technology, law.

Years ’70-’80: the crisis of the “giant American corporation”

Due to:

• Oil shock
• Flexible technology
• Advances in transport and communication
• Globalisation

The larger the organization, the larger the number of managers, analysts, and planners who were not directly involved in making or selling products. The burden of administrative costs, mostly in the form of salaries for these middle layers of management, became an increasing handicap in the competitive races that shaped up in the global marketplace of the 1970s and 1980s.

New forms of relationships among companies (partnerships, JV, alliances, networks) → transaction (marketing) costs. Marketing changes too. A very famous and successful model was the Italian district: small or medium companies in the same geography, with the same philosophy of work, connected by many bonds. The interest in the relationships and partnerships was increasing.

A clear evolution takes place away from arm's-length transactions and traditional hierarchical, bureaucratic forms of organization toward more flexible types of partnerships, alliances, and networks. Within these new types of organizations, traditional ways of organizing the marketing function and of thinking about the purpose of marketing activity must be re-examined, with focus on long-term customer relationships, partnerships, and strategic alliances.

Success cases

Industrial districts: “geographically defined, productive systems, characterized by a large number of small firms that are involved at various stages, and in various ways, in the production of a homogeneous product”

Keiretsu: “in Japan, complex groupings of firms with interlinked ownership and trading relationships”. They are bound together in long-term relationships based on reciprocity.

The “Relationship Marketing” paradigm

The Nordic School of the ’80s: a new view of how companies should operate to be successful was developed. The economies of these countries were characterized by strong B2B industries and service sectors. Gronroos, 1990: Marketing is to establish, maintain and enhance relationships with customers and other partners, at a profit, so that the objectives of the parties involved are met. This is achieved by a mutual exchange and fulfillment of promises.

Takala and Uusitalo, 1996: Relationship marketing thus differs from the traditional marketing since: “it does not seek a temporary increase in sales, but it attempts to create involvement and product loyalty by building a permanent bond with the customer”. The language is changed, here we talk about social things, human bonds, promises. In the second sentence, we can notice the use of the word loyalty, intended as a permanent bond.

• Marketing is responsible not only for sales and profits but also for making sure that every aspect of the business is focused on delivering superior value to customers in the competitive marketplace
• The business is likely to be a network of strategic partnerships
• Marketing as a distinct management function is responsible for being the expert on the customer and for keeping the rest of the network organization informed about the customer.
• Everyone in the organization is a “part-time marketer”
• The new paradigm criticizes:
  • Profit maximisation
  • Rigidity of the “marketing mix”
  • The marketing department
  • The transactional “focus”
• While it stresses the importance of:
  • Customer loyalty/retention
  • Information technologies (have changed marketing so much)

In the ‘90s, even more emphasis on loyalty and relationships. Barney’s “resource-based view of the firm” theory in 1991. Reichheld’s “Zero defection thesis” in 1990. The managerial focus on intangible resources. Barney's 1991 article "Firm Resources and Sustained Competitive Advantage" is widely cited as a pivotal work in the emergence of the resource-based view.

The theory focuses attention on an organisation's internal resources as a means of organising processes and obtaining a competitive advantage. Intangible resources such as Brand image, Customer loyalty, Relationships:

• Create differentiation
• Loosen oligopolistic interdependence
• Allow for brand stretching → halo effect
• Create value for demand too because the purchasing process is made simpler

Towards a new paradigm

Marketing evolves due to interaction with the many aspects of information revolution. We will see that it is much more than “adding a new channel or a new media”. With social media:

• People and organisations are constantly connected with their social groups of interest,
• Value creation and cocreation take place anywhere and anytime
• The interaction with the brand is continuous
• The discourse about the brand is ubiquitous

No more online/offline distinction: mixed realities. Digital information is part of physical reality. With portable devices that have increasing processing power and are connected to the Internet, the impact of social media has been enhanced – mobile media and social media merge: ubiquitous social media. Ubiquitous social media mean that we no longer “go on the Internet”, but we “carry the internet with us” anytime. This leads Boyd to speaking of “context collapse”.

No longer “social presence on the Internet” but “social presence in space”, i.e. living and acting knowing at any time what our contacts are doing, what they suggest and think. The new mobile technologies shift attention to the centrality of the user, his experiences, and connections.

• Multiscreen ecosystems
• People’s sense of autonomy is enhanced
• Single channel experiences become exceptions

Scholars started to talk about a new marketing paradigm: the “Social Mobile Marketing” paradigm (Mandelli e Accoto, 2014). A few years ago, these authors studied the conceptualization of marketing and how it changed over time with the information revolution. They analysed social media, we can always stay in contact, in touch with people we care about, this influences our decisions. Mobile, smartphones, devices have internet and with internet we carry with us a reality with more information. Our life today is mixed between offline and online reality. We are living a “collapse of contexts”. The scholars looked at the changes, they said that probably companies today cannot ignore the social media effects. So, we need to think to a new paradigm, the Social Mobile paradigm. This is a very new development in marketing theory. We should reflect on the impact of information revolution. How marketing can adapt?

Three paradigms... so far

1. Marketing Management
2. Relationship Marketing
3. Social Mobile Marketing

Some authors are today talking of a 4^th paradigm: Big Data Marketing

The information revolution, big data and artificial intelligence

Having a mobile phone today is very common, but the density in the population is different, the intensity of connection is different from country to country. The integration of microprocessors in everyday objects such as computers, telephone, wearable devices for individuals is common. They connect to the internet, so that they can send data, track product for example. The car which drives itself is controlled by computer systems and there is a processor inside the object. Robots are faster than human. The typical advantage of automation is to bring more efficiency and efficacy. The growth of connected devices across 6 years is high, especially for the Internet of things. Today the number of connected devices is really growing, while the world population remains more or less the same.

The Internet of Things (IoT), according to scholars De Nardis and Raymond, is an expression designed to characterize a major transformation in the evolution of the internet: its expansion beyond communication between people, or between people and information content, and into billions of everyday objects.

The IoT is the interconnection via the internet of computing devices embedded in everyday objects, enabling them to send and receive data. Therefore, IoT refers to the ever-growing network of physical objects that feature an IP address for internet connectivity, and the communication that occurs between these objects and other Internet-enabled devices and systems.

Examples of cyber-physical systems in our daily life

1. Smart grid (energy grid made of smart meters, smart appliances and renewable resources that automatically and efficiently controls the production and the distribution of energy)
2. Autonomous automobile systems (cars capable of sensing the environment and navigate without human input)
3. Medical monitoring (measuring vital signs and performing tests at a distance without human activity)
4. Industrial process control systems
5. Robotic systems
6. Automatic pilot avionics (control the trajectory of an aircraft without the constant “hands on” control of a human operator)

Cyber-physical systems underlie almost all industrial sectors. A cyber-physical system involves the acquisition of sensor data from, and the delivery of instructions to, devices that interface with or are part of the real world.

Big Data

• In finance, 7 billion shares are traded every day on the US markets, 2/3 are traded by algorithms
• Google processes 24 petabytes of data per day, 1000 times the content of the Library of Congress
• On Facebook 10 million new photos are uploaded every hour
• On YouTube one hour of video is uploaded every second

In recent years the phrase information revolution has been substituted by “big data revolution” an expression that signifies the important role of data in the transformation of business and society as the product or by-product of ICTs.

What is Big Data? Big data is “an intentionally subjective definition that refers to datasets whose size is beyond the ability of typical database software tools to capture, store, manage and analyse” (Manyika, 2011). In incorporating a moving definition of how big a dataset needs to be in order to be considered big data, the expression captures how technology is continuously advancing. Processor becomes faster with time, today a device is faster than one which was available 2 years ago. The amount of data that are sent and created today is so big. There is more data than we can store and process. Why? Because humans are connected with their smartphones and we have a lot of devices connected in the modern world.

That’s why today we need data science, which can reduce the complexity of big data. The data is growing continuously and it’s becoming more complex than in the past, so we need new methods.

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