Loyalty Marketing

Loyalty marketing 2020/2021 (Modulo con CRM and customer analytics)

Prof.ssa Ziliani

Trade e consumer marketing – UNIPR

Appunti di Michela Dalla Casa

Course content

• The evolution of marketing paradigms
• The information revolution, big data and A.I.
• The relevance of loyalty and the management of customer loyalty
• Loyalty programs design and management
• The use of customer data to improve decisions in retailing

The evolution of marketing paradigms

Marketing (and loyalty) was not as relevant in the past as it is today because as society changed over time, companies and their activities evolved as well. Marketing, as a discipline, is a social science, so it needs to reflect the changes in the society.

What are the origins of marketing?

It was used for the very first time in 1910 in the Midwest USA states because, in this period, it was a very rural area, with a local economy based on agriculture, so the market was mainly based on commodities (= goods that are very similar to each other and the price is usually set by the market). Economics and scholars observed how market of commodities worked and they discovered that:

• There were thousands of small producers and mostly of them are "price takers"
• They often sold in a big quantity to companies in other areas of USA
• Different players had to cooperate

There were a set of economic and social processes! That’s why academics created a new word "marketing" and it was defined as "the social and economic process that makes goods move from production to consumption". The word "social" is very important because there were several institutions, organizations and individuals who needed to come in agreement, so the whole system was based on trust.

What happened next?

In 1948, the American Marketing Association defined 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 most differences between the first and the second definitions are:

• No mention of "social process"
• The presence of "services" and not only goods
• The presence of "management" - marketing becomes a management stuff, where all the different steps and aspects are controlled: there’s no need to trust other intermediaries.

The concept of marketing has changed because scholars, in 1948, were looking at a reality that was completely different from the reality in 1910:

• We have had two world wars (men went to fight the war and women went to work out of the home)
• A lot of technological development
• The market of consumer goods was expanding and the demand was booming
• The rise of totally new industries (like car industry) and the rise of big American Corporations as Ford, General Motors, Standard Oil, etc.

In this period, the economy was dominated by American Corporations that were controlling and managing every single step of the process: they were fully integrated. They produced huge quantities in order to reduce fixed cost (= economies of scale) → companies were able to make predictions (about costs, demand, revenue, etc.) and they adopted a scientific approach in order to produce the optimal marketing mix. In other words, the paradigm changed and it became the "marketing management paradigm", where marketing is no longer a "social process" but a "set of activities for giving scientific solutions to specific problems". The marketing department was born in companies and it was formed by a multidisciplinary team of professionals in order to take optimal decisions. In this economic model, the goal was to maximize profits in the short term: the focus of the companies was on a single transaction because the measure of success was the sales volume (or market share).

In the 70s-80s, the situation in the world changed because in 1973 there was the "oil shock". People lost their jobs, reduced their spending, there was a crisis of demand, and the price of goods went up. All the calculations that companies had made became inaccurate and production costs became unpredictable. In this context, American Corporations couldn’t afford their fixed costs, so managers started looking for other business models: companies started focusing on the important role of long-term partnerships, relationships, and trust because, in hard times, if people can cooperate, they can survive.

What kind of successful examples existed in the world in the 70s, in times of crisis?

A very successful model was the industrial district, defined as "a productive system consisting of a large number of small companies that are involved in the same type of production, often bonded by familiar relationships and geographically close to each other". Industrial districts were found in Europe (in particular Italy, Germany, and UK) and they were able to withstand the crisis thanks to mutual trust and cooperation by small companies of the district.

Another new type of organization founded in Japan is called keiretsu, "a group of traditional and independent companies that very often have interlinked ownership and trading relationships". They were bound together in long-term relationships based on reciprocity. In both cases (the Italian district and the Japanese keiretsu), you can see the relevance of long-term repeating economic exchanges between the same companies. Repeated transactions build a relationship, → relationship builds trust and trust builds mutual support!

In the 80s, the world also changed due to the:

• Revolution in transport (costs of transport went down over the world) → buying and selling from remote places was economically affordable!
• Revolution in communication (it was possible to communicate at low costs)
• Globalization - people demanded goods and services in completely different areas of the planet and the competition increased

A new approach was born not in USA but in Europe because in Norway, Sweden, and Denmark, a group of scholars discovered that B2B industries were very much aware of the importance of the relationship with the customer. Only if you maintain customers over time, you are able to survive in a world. So, the new concept of marketing is called "relationship marketing paradigm", where marketing is "to establish, to maintain and to 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". No more maximizing profits but the focus is on cooperation and trust. Here comes again the social element of marketing. → The point is not the single transaction, a temporary increase of sales, but it’s all about the centrality of the customers, creating a permanent bond with the customers by loyalty. If you push a sale against the customer’s will, maybe you make a sale now but you make an enemy tomorrow. On the contrary, if you sacrifice a sale today to support your customer and be available when the customer wants to buy from you, you can build a long-term relationship. Everybody in the organization should focus on what is best for customers, not only people in the marketing department → every single worker should think with a marketing mentality!

Barney and Reichheld’s thesis

At the same time, there were other studies that led to the same result, the importance of relationships:

1. The first of them is "the resource-based view of the company" and it is based on one question: "Why, in the same industry, do some companies enjoy more profit than others?" M. Porter, with his "Five Forces Model", explains what are the drivers of profitability within an industry (competition, power of customers, power suppliers, etc.) are external to the company but other scholars, like Barney, are focused on different aspects. The factors that influence the company profitability can be internal too. For example, if my name is Apple, the name of my brand is a resource that belongs only to me and it explains my profits and the advantage over other competitors. So, internal resources of a company are sources of competitive advantage that explain why one company is more productive, profitable than another.
2. The second very interesting thesis was about the quality of the product and the elimination of defects in the product because if you are able to control the quality of what you produce (before the product reaches the market), you avoid a lot of unnecessary costs. So, the Reichheld’s thesis, called "zero defection idea", tries to be so good at managing all processes and make no mistakes. In 1990, an article appeared in the Harvard Business Review, saying that if the company had put the same amount of effort in avoiding that the customers left the company, the problem of keeping your profits would have been solved. Instead of focusing 100% of your attention on product defects, we have to focus on defections (= the fact that customers stop buying from you)!! If they are able to keep their customers loyal, they will see superior profits.

In the 90s, and especially in the new century, the information revolution disrupted the world as we know it and new marketing paradigms emerged: the social mobile marketing paradigm. This revolution has changed not only business (with the introduction of new channels and new media), but also our minds, our attention capacity. Humans and relationships have changed and so, marketing changed as well. → In particular, the information revolution has changed the way companies and customers interact with each other. There were two main changes:

• Social media - people and organizations are constantly connected with their social groups of interest so the interaction with the brand is continuous! Companies can create value for their customers and people can talk and create content about companies.
• Mobile technologies - not only do we have a lot of new media but we can access all these media on the go; by carrying the Internet always with us, we live both online and offline, at the same time! This is called context collapse, a context where digital is part of our physical reality.

The problem of this new paradigm is that technological advancement is so fast! In fact, today there are some authors who are talking about even a fourth paradigm and this is called "big data marketing" because it was caused by the evolution of big data.

Information revolution

We can say that today the world is becoming interconnected because objects are becoming connected. Forty percent of the world’s population has no access to the Internet today, but this is changing, not so much because people are getting computers connected, but there is an increasing number of objects connected (connected cars, trucks, electric appliances, industrial machinery, etc.). In 2020 we have an average of 3.9 devices that are connected per person, and the projection is: in 5 years, a very close time, we’ll have 9.27 connected objects per person.

Fostered by the Internet, a set of new technologies have spread all over the world. Half of the world population today owns a mobile phone. Having a mobile phone is common. The Internet of Things (IoT) is a good example of this and consists of an ever-growing network where physical objects (TVs, watches, fridges, washing machines, etc.) are connected (with a unique IP address) to the net and send the data they collect. It is the extension of the Internet to physical objects or places. For example, a smart watch like Fitbit collects data on your lifestyle. Even cars are connected to the net now. With the rise of self-driving cars, cars sense the environment, collect and send data to their servers, which will send back instructions. Even companies are employing robots and connected machines in their operations to get the automation advantage, deriving from a decrease of costs and increase of efficiency. Right now, the IoT market is growing fast. Today we speak of Cyber Physical System = it is the acquisition of sensor data through sensors and the delivery of instructions to devices that belong to the real world (like smartphones) that are connected to the net. So, more physical processes that used to be controlled by humans are run by systems that run by computer algorithms. For example, driving a driverless car or a car with a parking assistant. Today we are getting used to human working with devices that get data, receive data and we don’t know any longer where the human ends and the machine takes up. Human-machine interaction is becoming the norm in the reality we live, → for example in the Amazon warehouse there are robots which go under the shelves, they lift the shelves and they take the shelves to the human.

Definitions of information revolution

The first definition was around the 1980s when scholars started writing about the information revolution. Peter Drucker described what was happening to the world economy and he said: "The world economy was moving from being organized around goods and money flows, to an organization based on information flows" → since the beginning of history, the economy was made by goods changing hands, but if we consider financial markets it does not move physical money but moves stocks and information. Nicholas Negroponte used a metaphor to describe the phenomenon of the information revolution, and said: "Mankind used to live in the atom society, that is a human society based on the production of tangible goods. But today we live in a 'bit society' (n.b: bit is the smallest unit of a digital information) based on the production of information and knowledge, and on products and services that are derived from information and knowledge". For example, 40 years ago Silicon Valley companies in California (IBM, Apple, Microsoft) produced hardware and software. Today the big giant corporations of Silicon Valley (Google, FB, Twitter) don’t produce hardware and software BUT THEY SELL INFORMATION, their ability to show us content that captures.

In 1994, marketing scholars in the United States defined the information revolution as: "the explosion of the variety and quantity of information available to a growing number of individuals and organizations (companies, buyers, sellers) across the globe, no matter where it (and they) is (and are) located" SO, WE CALL IT A "REVOLUTION" BECAUSE TODAY INDIVIDUALS AND ORGANIZATIONS CAN HAVE ACCESS TO AN UNPRECEDENTED QUANTITY AND VARIETY OF INFORMATION. THE INFORMATION ARE MADE AVAILABLE BY ICT (information and communication technologies) and HAS TO DO WITH ANYTHING THAT CAN BE TRANSLATED INTO BYTES (so, that can be digitized). We define as ICT any product that will store, retrieve, manipulate, transmit or receive information electronically in a digital form" -(smartphones, pc, digital TV, router). We define "bite" as the basic unit with which to measure digital information. This is why we can call it the digital revolution. In recent years, the expression "information revolution" has been substituted by 'BIG DATA REVOLUTION' = the leading role of data in the transformation of business and society as the product, or by-product, of ICTs. So, big data are the by-product of the IT.

What is Big Data?

An intentionally subjective definition that refers to datasets whose size is beyond the ability of typical database software tools to capture, store, manage and analyze. What is considered "big" today will not be big tomorrow. → "BIG" it’s not quantified with a unit of measure because it’s relative. Data are intangible, even though they occupy space, because they need hardware to be stored, machines to be processed. How do we produce data? Every time we do something online we leave a trace measured in bits. These activities get stored in data centers, and these data centers need a lot of energy to work. Data centers are not the only hardware buildings that let us use the Internet → For example, there’s Facebook’s Aquila or Google’s Loon. These two moving structures can bring access to the Internet to places where there are not enough people or infrastructure!

• Facebook’s Aquila → it’s a drone very thin and very large. This technology was created and developed by FB to do what to bring internet connection to those regions in the world on the planet where the population is too sparse and the geography is too rough to have the possibility to lay cables on the ground or to have transmission towers for telecommunication companies. In the middle of Africa there’s no way of running cables, there’s no way of building towers for telecommunications. So, people living in places without access to the Internet with a system that helps them get connected to the Internet without cable and Aquila is one example.
• Google’s Loon (baloni aerostatici) → LOONS that run with solar cells and they are inflated with hot air and sent in atmosphere. They have processors and they float above certain countries like for example Ghana in Africa or Peru and they help these countries connect with satellites and get a signal for transmitting internet connection.

What is the Internet? The Internet is today a "collection of independent systems operated by mostly private companies, including large telecommunications providers like AT&T and giant content companies such as Google and Facebook. The Internet is an infrastructure if millions of telecommunication networks made of wires, telecommunication towers, satellites. It’s thousands of these private networks made of steel, made of copper, plastic. Telecommunication networks belong to private companies allowing circulation of data among their networks by having invented a system for the networks to communicate with each other → this is what we call the "Internet Protocol" and it allows exchanging information between separate companies. They make the Internet function through private economic agreements that govern the transmission of data among their respective networks.

In order to understand the advances in information revolution, we need to look at the advances in the creation of hardware and software technology.