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Membership Clubs as a Tool for Enhancing Buyers' Patronage
Membership Clubs as a Tool for Enhancing Buyers’ Patronage Yehoshua Liebermann BAR-ILAN UNIVERSITY, ISRAEL
One of the central tools for enhancing brand/outlet loyalty both in durables and nondurables consumer markets is membership clubs. The present study examines effects of several membership behavior variables on three loyalty dimensions of members in such clubs. Empirical results are reported and discussed. J BUSN RES 1999. 45.291–297. 1999 Elsevier Science Inc. All rights reserved.
B
oth brand and outlet loyalty are key elements in sustaining stable demand and sales flows over time. This is the reason why so much research is directed at reaching a better understanding of consumers’ loyalty behavior (e.g., Dick and Basu, 1994). Moreover, brand/outlet loyalty not only assures steady receipts and revenues but also facilitates reduced advertising and marketing budgets without giving up effectiveness. The overall result of these advantages is increased marketing efficiency. No wonder that under these conditions enhancing brand/ outlet loyalty becomes a central goal to marketers. Yet, whereas in the recent past loyalty behavior has been traditionally related mainly (and perhaps exclusively) to consecutive purchases of nondurables, this picture has changed. The innovative computerized ability to trace individuals’ extended purchase histories and the updated focus on relationship marketing create a basis for stimulating loyalty in durable markets as well. One of the main tools for strengthening loyalty rates in both types of markets is membership clubs (MCs). It is the purpose of this study to investigate the last statement by means of a systematic analysis. Three dimensions of loyalty are defined that can be referred to as potential outcomes of belonging to an MC. Effects of several independent (consumer) membership behavior variables on the various loyalty dimensions are then examined both theoretically and empirically. All measurements pertain to clubs operating in Israel.
Address correspondence to Yehoshua Liebermann, School of Business Administration, Bar-Ilan University, Ramat-Gan, Israel. Journal of Business Research 45, 291–297 (1999) 1999 Elsevier Science Inc. All rights reserved. 655 Avenue of the Americas, New York, NY 10010
Relationship Marketing and Membership Clubs Historically, market segmentation was considered a major strategy for improving market positions by marketers (Wind, 1978). One of the traditional conditions for turning to a market segment was a minimum size that justifies a specific marketing treatment in terms of cost-benefit relationships (Dunne and Walk, 1977). However, the continuing computerbased revolution in data handling and processing renders the minimum size condition obsolete. The scope of this revolution can be illustrated by one of the recent META Group reports (1995), which predicts that the ratio $K/MIPS for one of IBM’s processors will drop from $21 to approximately $1 during the period 1/95 to 2/98. From a marketing management point of view, this development means a potential to cater to market segments as small as single consumers, even in mass markets. As a matter of fact, relationship marketing (RM) puts the focus for marketing efforts on the individual consumer. Simultaneously, buyers become more sophisticated as well. According to Fulmer and Goodwin (1988), a dominant feature of this process is the interest of customers in the utility derived from a product/service rather than the product/service itself. Moreover, they claim that an important dimension of the utility derived by a customer is the relationship with the provider of the product/service. According to Brierly (1994), to make customers satisfied, marketers must make them feel that they appreciate doing business with them. Viewing the consumer-marketer interaction from a slightly different perspective, Shani and Chalasani (1992) claim that factors such as competitively saturated markets, soaring costs of promotional tools, and changes in social norms necessitate new and creative marketing approaches. RM is one of the most effective responses in this recommended direction. Maintaining a longitudinal relationships system with customers reduces marketing costs, increases effectiveness, and enables customers to experience lower levels of subjective uncertainty levels while facing competing offers. The main contribution of RM to the firm is fivefold. First, ISSN 0148-2963/99/$–see front matter PII S0148-2963(97)00241-5
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it builds up loyalty. Second, it enhances profits from existing customers (Abramson and Telford, 1993). Third, it helps reducing marketing expenditures (Shani and Chalasani, 1992), mainly because the cost of attracting a new customer may be as large as five times that incurred for retaining an old customer (Abramson and Telford, 1993). Fourth, it facilitates a direct dialogue with customers that in turn increases the attentiveness level of the organization to its clients’ needs (Shani and Chalasani, 1992). Finally, it strengthens the position of the firm within the marketing channel vis-a`-vis its distributors (Shani and Chalasani, 1992). These contributions are not just theoretical. RM treatment is intended, and is likely, to increase consumer satisfaction. Anderson, Fornell, and Lehman (1994) have found that Swedish companies with higher satisfaction ratings enjoy increased economic returns. According to Shani and Chalasani (1992), RM is most appropriate for firms operating in specific market niches. RM helps such firms to protect themselves against risks of new entries and of changing preferences. By using RM, loyalty to the veteran competitor is augmented, thereby deterring prospect competitors. In addition, the direct interaction with customers refines the firm’s sensitivity to its customers’ changing needs. Shani and Chalasani (1992) claim further that RM does not necessarily fit all categories of consumer goods. On the contrary, RM features make it relevant especially for specific categories. In particular, RM is more applicable to prestige items that enjoy high profit margins, to items characterized by short interpurchase time intervals generating high volume and large profits, to services that are often based on some degree of personal interaction, and to items that cannot be advertised either because of legal restrictions or because of tight profitability rates. Furthermore, Perrien, Filiatrault, and Ricard (1993) point out that switching to RM is a significant strategic decision that depends on the fulfillment of several preconditions: management commitment, redefinition of profit centers, and reselection of target segments. In addition, RM can be operated only if it fits specific consumer profiles vis-a`-vis appropriate product categories (Ganesan, 1994). These features of RM indicate that MCs are likely to prove an effective tool within an RM framework. An MC has a potential of maintaining long-term interaction with customers. Such an interaction is expected to increase customer retention rates. According to Abramson and Telford (1993), efficient business interaction with customers is composed of three components, namely motivation, purchase, and customer retention. As a matter of fact, they document a specific MC—that of General Motors—and show how it was utilized along the tricomponent paradigm. To summarize, the dominant attribute of MCs is their long lasting effect. From a marketing perspective, this type of extended effect has a considerably wider influence as compared with short-term promotional activities (Cohen and Hunt, 1994).
Y. Liebermann
Central Features of MCs MCs—or as they are sometimes called customer clubs— started to become an active ingredient of marketing strategy in about the last decade (Peppers and Rogers, 1993). The background that facilitated this process can be described as combined of three developments: first, an increasing number of advertisers in mass media; second, dense competition in consumer markets that requests differentiation by contributing added-value to buyers; third, the growing importance of buyer share as compared to just market share. Higher levels of buyer share contribute to larger profits because the cost of preserving an already existing customer is considerably lower than that of recruiting a new buyer. Because the empirical observations for this study were made in Israel, it is worthwhile to outline some features of MCs as they are understood by several MC directors in that country. In Israel, MCs started to operate only at the beginning of the 1990s. Some of them recorded impressive performances. To illustrate, one of them reports that over 30% of overall sales are accounted for by loyal members. Generally, it is maintained by the various directors that per capita volume of members exceeds that of nonmembers by a significant percentage. The specific data are confidential so that no more details can be supplied. Due to business confidentiality reasons, the identity of the MCs investigated cannot be disclosed. Some central features of Israeli MCs were identified in a series of personal interviews with directors of six clubs in given companies and with a key executive in a company that specializes in managing MCs. According to this executive, every program of customer retention should be based on the following tenets: 1. Simple procedures. Turing occasional buyers into permanent customers requires friendly and simple access to membership. In addition, the operational activity plan has to rest on a consistent long-run relationship framework rather than on sporadic offers. 2. Efficient data management. Managing an MC requires a comprehensive, detailed, and updated database. A full base of this type facilitates tracing of purchases and accurate measurement of purchase frequencies, amounts spent, and preferred items. 3. Effective communications channels. Communicating with members is expected to be easy, relevant, and interactive. Contact with customers should be intensive, at least once in a quarter. In this regard, Stacey (1994) claims that a periodical newsletter is the most effective communications channel. 4. Special benefits to customers. Benefits have to represent a true added value to members, in a way that prevents nonmembers from enjoying it. Benefits that require members’ cooperation over extended periods of time are most suitable of creating long-run relationships. Distinct customers deserve a VIP benefit program.
Membership Clubs
5. Additional services. An MC provides an excellent opportunity for reinforcing service quality. Typical examples are: a club credit card, a magnetic card, or a special customer service telephone line. 6. Club added value. Beyond the added value associated with particular benefits an overall added value is warranted as well. Club added value can be provided by awarding members with access to other organizations where additional benefits are available. 7. Strategically integrated approach. To make an MC a success, its management has to view all the departments and entities involved from an integrated strategic viewpoint, i.e., working according to an annual plan that brings together various business elements into one integrated framework. The six MCs studied include approximately 92,000 members (about 15,300 members on the average per club). They belong to three business categories. Two of them are in the leisure industry, two belong to manufacturers of nondurable consumption goods, and the remaining two are an operation of two retailing chains selling both durables and nondurables. Several questions were addressed to the club directors. For the purposes of the present section, three questions are the focus of attention: the reasons for establishing the club, what does it contribute to the company, and what is the future outlook of the directors. Several motives for establishing a club were mentioned. First and foremost is the interest in developing customers’ loyalty. Other motives mentioned are increasing sales, closer relationships with customers, retaining good customers and providing prestige and status. All directors claimed that their clubs make significant contributions to the operating companies. The contributions take the form of increased sales to members (in one case it was reported that members spend twice as much as nonmembers), higher levels of customer share, higher rates of brand/outlet loyalty, and expanded circles of customers (by veteran members bringing in new candidates for membership). In most interviews, the future outlook suggested is positive. Directors estimate that more clubs will be set-up in the market in the near future. They expect their own clubs to grow quite rapidly. Only one director expressed concern about club congestion in his industry. According to this director, overcrowding of clubs may threaten their perceived added value and lead customers to make purchases only in response to special offers.
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terms refer to three types of outcomes that can be attributed to the build-up of loyalty. Image-oriented loyalty represents the fact that a member prefers the product of the company operating the club over alternative offers made by competitors. The preference is due, at least partially, to the sense of affiliation that members develop as a result of their membership. Marketing-oriented loyalty is defined as customers’ tendency to minimize social risk of membership by recommending either various products carried by the club operator, or membership, to relatives and friends. Finally, and probably most importantly, sales-oriented loyalty stands for the larger amounts spent by members on products provided by the MC operator. Note that although the vendor is interested in increasing sales to members, sales-oriented loyalty is last to develop through this multistage process. Furthermore, the process evolves gradually, and it is highly likely that image-oriented loyalty will precede marketing-oriented loyalty, which will in turn precede sales-oriented loyalty. In a sense, this hierarchical order resembles the concept of hierarchy of effects as expressed in models like the one phrased by Vaughn (1980). Effects considered are: think, feel, act, representing each a possible predominant reaction to advertising stimuli. Different orders of the three potential reactions comprise varying hierarchies with changing implications to message strategy per product category. The specific hierarchy cited above is known as the learning hierarchy. It matches quite well the three-stage loyalty build-up process as described above—namely, image (due to preferences, a derivative of learning), marketing (directed at potential members in order to reduce psychological risk i.e., an emotional response level), and sales (5 act). Based on the distinction among the different loyalty types associated with an MC’s affiliation, several testable hypotheses can be formulated. In particular: H1: Image-oriented loyalty, which means higher preference rates for the club’s products/services, is positively associated with variables that reflect mainly the experience of members with their clubs. Examples of such variables are: membership in the specific club only, duration of membership period.
Theoretical Framework
H2: Marketing-oriented loyalty that conveys readiness of club members to convince potential candidates to join the same club is positively associated with variables that reflect active involvement with club activities. Examples of such variables are: use of membership card, way of joining (active or passive).
It was stressed in the previous sections that the major role of MCs is to enhance brand/outlet loyalty. Nevertheless, loyalty can be defined at different levels. In particular, it will be proposed now to distinguish among three types of loyalty: image oriented, marketing oriented, and sales oriented. These
H3: Sales-oriented loyalty that takes the form of a larger customer share is positively associated with variables that reflect buyer behavior dimensions. Examples of such variables are: response to club promotions, time intervals between consecutive purchases of club products.
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Table 1. List of Variables Variable Membership Time Joining Participation Overall participation Reason Activity Club Products Image Marketing Sales Interval Mix Demographic
Description Single or multi-membership Duration of membership period Passive/active (answers classified into these two categories) Participation in specific club activities (12 rating questions) Overall level of participation (rating) Rating of reasons for joining the club (three questions) Rating of specific activities (12 questions) Overall rating of club Overall rating of club products/services Tendency to buy club products/services over competing offers (image loyalty) Does recommend club products/services to friends? (marketing loyalty) Change in expenditures on club products/services (sales loyalty) Interpurchase time interval Perceived importance of marketing mix variables in making a decision to purchase club products/services (five questions) Age, gender, relative income, education, family status, number of children, employment
Methodology Data were collected by means of telephone interviews with 240 club members sampled randomly from membership lists supplied by the six different clubs studied. Each club is represented by 40 respondents. Response level exceeded 80%. The data were obtained from answers to a questionnaire including 45 questions as well as seven demographic traits. Questions were derived both from the theoretical framework and interviews with club executives. Questions pertaining to specific activities of given clubs differed by club. To calibrate the questions, a pretest was conducted over 24 respondents (four per club). Some questions stand directly for given variables. Other
variables are based on series of questions, where each series is centered around a particular variable. A list of variables is presented in Table 1. Data were analyzed along a three-level scheme: basic frequencies, x2 tests for associations between loyalty rates (image, marketing, sales) and other membership variables, and regression models.
Empirical Findings To provide an overall picture of membership behavior, frequencies pertaining to major membership variables are presented in Table 2. The data reflect both membership characteristics (as single vis-a`-vis multiple membership, length of
Table 2. Frequencies of Major Membership Variables Variable Membership Time Joining Overall participation Reason Price discounts to members Social events Feeling that company cares Club Products Imagea Marketinga Salesa Mix Price Quality Design Image Advertising a
Frequency 79% 73% 66% 11%
members in the specific club only members over a year passive; 34% active always; 49% sometimes; 40% do not participate
36% 24% 52% 29% 42% 1.92 2.90 1.76
very important; 51% important; 13% unimportant very important; 46% important; 30% unimportant very important; 39% important; 9% unimportant excellent; 51% very good; 18% good; 2% bad excellent; 42% very good; 16% good
54% 84% 52% 34% 33%
very important; 38% important very important; 16% important very important; 42% important very important; 45% important important; 48% unimportant
Weighted average index calculated from a three-level scale where 1 5 no relations, 2 5 sometimes, 3 5 always.
Membership Clubs
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Table 3. Mean Ratings of Specific Club Activitiesa Activity Membership card Letters to members Promotions Birthday presents Gifts and bonuses Discounts in other firms Club magazine Domestic outings Trips abroad Newsletter Member conferences
Excellent
Rating (%) Very Good
43 35 42 100 36 10 29 36 48 32 43
34 45 28 — 33 49 40 50 36 50 37
Good
Participation Rates (%) Rangeb
22 19 24 — 29 38 29 14 12 18 17
35–70c 44–84d 2–42e 82f 30–58g 7–8h 50–52i 38j — 80k 42l
a
Answers given by participants only. Participation rates vary by club. Rates pertain to members that participate always. 3 clubs only. d 5 clubs only. e 5 clubs only. f A single club only. g 2 clubs only. h 2 clubs only. i 2 clubs only. j A single club only. k A single club only. l A single club only. b c
membership period) and attitudes toward club and benefits associated with membership (as price discounts or quality of products/services offered). Complementary information is provided by Table 3, which outlines ratings of specific club activities. Both tables reveal some notable features of membership behavior and club evaluation. There are two indications to the stability of membership. First, 79% are members of a single club rather than of multiple clubs. This observation signifies that respondents in the sample are regular customers as opposed to club prones. In addition, 73% are members over a year, a sufficiently long period to facilitate quitting in case of disappointment. Also, this length of membership time is sufficient to regard respondents as quite experienced, a factor that contributes to the validation of data. At the same time, members do not typically join on their own initiative: 66% were made members by the club. Possibly, this rate is due to the initial stage of MC’s development in Israel. yet, although joining is mostly passive, a substantial proportion (60%) feel that they participate at some level in club activities, which can be interpreted as a marketing success of the club. Furthermore, 80% grade their club as either excellent or very good, a rating showing that members’ expectations are matched by the different clubs. Similarly, 84% are pleased with the products/services offered by the club. This encouraging proportion supports one of the most important reasons for retaining membership. Not less interesting is the way members evaluate components of clubs’ marketing mix. From the ratings it can be seen that quality of product/service is the most important
component. Price and design rank second with similar ratings and image and advertising rank third with similar ratings as well. The gap among the three groups of components are substantial (in terms of “very important” 84%, 54%, and 34%, respectively). Seemingly, these relationships reflect members’ interest in qualitative products/services even if they may necessitate an increased expense. Furthermore, members feel sufficiently sophisticated to evaluate offers on a quality/price basis without considering too heavily image and advertising appeals. The overall impression that is rendered by this profile is that MCs are indeed a tool with high marketing potential. Companies who are able to establish and operate organized clubs are likely to do better business with their customers. The 52% who claim that the most important reason for joining a MC is the feeling that the company cares about them serve as an additional indication to the importance of relationship marketing. As maintained in the theoretical analysis, the purpose of MCs is to enhance three loyalty types: image, sales, and marketing. The empirical results show that MCs contribute to all three elements. The weighted ratings show that consumers are literally enthusiastic about recommending club products/ services to friends (marketing loyalty) and that they tend to prefer club offers over competing offers (image loyalty). At the same time, there seems no strong effect of membership on expenditures (sales loyalty). In more detail, concerning image loyalty 25% claim to always prefer club’s products over those offered by competitors (whereas 42% claim to sometimes prefer company’s products). Furthermore, 95% report that they are always recommending club products to
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Table 4. Statistical Significance Levels for x2 Tests of Associations between Loyalty Types and Independent Membership Variables by Type of Loyaltya Loyalty Type/ Independent Variable Membership Joining Overall participation Price discounts Club Interpurchase time interval Membership card Gifts and bonuses a
Image
Marketing
Sales
0.005 0.002 0.002 0.036
0.006 0.046 0.036 0.000 0.009
0.009
p values below 0.05 only.
friends (marketing loyalty). Finally, 20% report that they significantly buy more due to their membership, whereas 36% report that they buy only slightly more (sales loyalty). The conclusion that is manifested by these preliminary observations is that membership appears to enhance loyalty of all types. In Table 3, the way members evaluate club activities can be seen. Because not all clubs run the same activities, some items are ranked by subsets of the sample. The most common activities are issuing a membership card, sending letters to members, and offering promotions. Focusing on these three activities, it can be judged that membership cards and promotions are highly appreciated, whereas letters to members are considered slightly less attractive. Because the other activities are offered mostly by given single clubs, it is difficult to assess their relative utility to members. Let us now turn to an examination of some associations between dependent and independent variables. The dependent variables are the three types of loyalty: image, marketing, and sales. The independent variables are listed in Tables 2 and 3. An additional variable is the interpurchase time interval for club products/services. x2 tests applied to paired associations between respective loyalty types and given independent variables reveal the picture presented in Table 4. In the table, only significant associations are listed. In general terms it can be seen that eight independent variables are identified that may potentially affect the success of MCs in enhancing loyalty. Mostly, such independent variables are associated with a single loyalty type. Nevertheless, two of them are associated with both image and
sales loyalty. This relationship may signify that membership per se and price discounts are the strongest tools to obtain goals of clubs. Specifically, Table 4 shows some interesting associations that in part correspond to the predictions made in the theoretical analysis. For example, image loyalty is significantly associated with membership (in a given club only) as predicted. Similarly, marketing loyalty is associated with use of membership card and way of joining. Along the same lines, sales loyalty is associated with price discounts offered to members and with interpurchase time interval. These associations support the theoretical analysis to some extent. Yet, to identify the direction of the various relationships and in an attempt to assess the effect of independent variables on the three loyalty types, an additional analysis has been performed. More specifically, a stepwise regression model was used first. During this stage, significant independent variables were identified. However, because most variables were not measured on continuous scales and due to the mixed nature of the variables (scaled versus dichotomous), the significant independent variables were put to an additional evaluation by a probit model. The results are reported in Table 5, which presents significant (p , 0.05) effects only. The probit results document some interesting effects of membership variables on three loyalty types, supporting part of the hypotheses outlined above. In particular, it is claimed in the first hypothesis that image loyalty is expected to be positively affected by experience of members with their clubs. Membership in a club and overall participation are both specific dimensions of experience, and they both affect positively and significantly image loyalty. The second hypothesis states that marketing loyalty is expected to be positively associated with variables reflecting involvement with club activities. Joining a club actively is a form of involvement and is indeed affecting positively and significantly marketing loyalty. As recalled, the third hypothesis establishes a theoretical effect of buyer behavior variables on sales loyalty. This hypothesis is not confirmed by the probit analysis. Instead, the analysis documents an effect of an involvement rather than a behavior variable on sales loyalty.
Discussion Presumably, the present research is one of the first studies that examines systematically the phenomenon of MCs. Under-
Table 5. Probit Model Results by Loyalty Typea Independent Variable Intercept Membership Joining Overall participation a
Figures in parentheses are p values.
Image
Marketing
Sales
23.600 (0.0013) 0.825 (0.0368) 2.153 (0.0025) 0.6146 (0.008)
0.4429 (0.0336)
Membership Clubs
standing that MCs operators are interested in nurturing members’ loyalty, and distinguishing among three loyalty levels, or types, the study shows that three variables have a positive effect on loyalty: membership in a single MC, joining the MC actively (i.e., on the initiative of members themselves), and overall participation rate in club activities. Identified relationships fit most of the theoretical predictions. One prediction was not confirmed. For a preliminary study, the results seem quite satisfactory. Possibly, wider samples (both in terms of number of clubs included and number of respondents interviewed) will facilitate improved results. Also, in light of the distinction made earlier between three different categories of clubs, it might be the case that within different MC categories, different relationships prevail that have different effects on members’ loyalty levels. Possibly, members in specific club categories (e.g., products vis-a`-vis services) may prove more responsive to given activities that are more attractive to them as compared with alternative MC incentives. It is recommended for future research to explore more methodically potentially different loyalty patterns by club category. If such differences are identified, they may have important ramifications on the efficient operating of MCs. Even though the empirical results are somewhat limited, the study as a whole makes some seemingly important contributions. It is probably the first academic research that discusses systematically the role of MCs within the context of RM. Furthermore, it identifies specific relationships between a set of membership variables and members’ responses to them. Consequently, it is shown that MCs have a concrete potential of enhancing members’ patronage. Nonetheless, perhaps the most important contribution is the strategic dimension of the study. This dimension is twofold. First, the analysis outlines several principles of efficient MC management as related theoretically to the RM concept. Second, the study provides a strategic approach to MC goal setting. Specifically, patronage build-up should be obtained via a tri-stage move attempting to enhance first image loyalty, then marketing loyalty, and only then to traditional types of loyalty, i.e., sales loyalty.
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The author acknowledges the contribution of Siegal (Gali) Eisenberg and Galit Bar-Tal who undertook this project as an MBA seminar at Bar-Ilan University’s School of Business Administration. The author is also thankful to two anonymous referees for helpful comments.
References Abramson, F., and Telford, G.: Customer Retention. Direct Response (1993): p 45–47. Anderson, E. W., Fornell, C., and Lehman, D. R.: Customer Satisfaction, Market Share, and Profitability: Findings from Sweden. Journal of Marketing (July 1994): 53–66. Brierley, H. M.: The Art of Relationship Marketing. Direct Marketing (May 1994): 25–26. Cohen, R., and Hunt, E.: Seeking a Faithful Attraction. Precision Marketing (1994): 21–22. Dick, A. S., and Basu, K.: Customer Loyalty: Toward an Integrated Conceptual Framework. Journal of the Academy of Marketing Science 22 (Spring 1994): 99–113. Dunne, P. M., and Walk, H. L.: Marketing Cost Analysis: A Modularized Contribution Approach. Journal of Marketing (July 1977): 83–94. Fulmer, W. E., and Goodwin, J.: Differentiation: Begin with Customer. Business Horizons 31 (1988): 55–63. Ganesan, M.: Lesson from the Recession. Direct Response 7 (1994): 26–27. Hawkes, A.: Is It Customer Loyalty or Sales Promotion? Direct Response 7 (1994): 23–25. Meta Group: Residual Value Report, 5/390 Processors, 1995, p. 40. Peppers, D., and Rogers, M.: The One to One Future: Building Relationships One Customer at a Time, Currency Doubleday, New York. 1993. Perrien, J., Filiatrault, C., and Ricard, L.: The Implementation of Relationship Marketing in Commercial Banks. Industrial Marketing Management 22 (May 1993): 141–148. Shani, D., and Chalasani, S.: Exploiting Niches Using Relationship Marketing. Journal of Consumer Marketing 9 (Summer 1992): 330– 342. Stacey, R.: How Not to do Relation Marketing. Direct Marketing 56 (February 1994): 67–68. Vaughn, R.: How Advertising Works: A Planning Model. Journal of Advertising Research 20 (1980): 27–33. Wind, Y.: Issues and Advances in Segmentation Research. Journal of Marketing Research (August 1978): 317–337.
One of the central tools for enhancing brand/outlet loyalty both in durables and nondurables consumer markets is membership clubs. The present study examines effects of several membership behavior variables on three loyalty dimensions of members in such clubs. Empirical results are reported and discussed. J BUSN RES 1999. 45.291–297. 1999 Elsevier Science Inc. All rights reserved.
B
oth brand and outlet loyalty are key elements in sustaining stable demand and sales flows over time. This is the reason why so much research is directed at reaching a better understanding of consumers’ loyalty behavior (e.g., Dick and Basu, 1994). Moreover, brand/outlet loyalty not only assures steady receipts and revenues but also facilitates reduced advertising and marketing budgets without giving up effectiveness. The overall result of these advantages is increased marketing efficiency. No wonder that under these conditions enhancing brand/ outlet loyalty becomes a central goal to marketers. Yet, whereas in the recent past loyalty behavior has been traditionally related mainly (and perhaps exclusively) to consecutive purchases of nondurables, this picture has changed. The innovative computerized ability to trace individuals’ extended purchase histories and the updated focus on relationship marketing create a basis for stimulating loyalty in durable markets as well. One of the main tools for strengthening loyalty rates in both types of markets is membership clubs (MCs). It is the purpose of this study to investigate the last statement by means of a systematic analysis. Three dimensions of loyalty are defined that can be referred to as potential outcomes of belonging to an MC. Effects of several independent (consumer) membership behavior variables on the various loyalty dimensions are then examined both theoretically and empirically. All measurements pertain to clubs operating in Israel.
Address correspondence to Yehoshua Liebermann, School of Business Administration, Bar-Ilan University, Ramat-Gan, Israel. Journal of Business Research 45, 291–297 (1999) 1999 Elsevier Science Inc. All rights reserved. 655 Avenue of the Americas, New York, NY 10010
Relationship Marketing and Membership Clubs Historically, market segmentation was considered a major strategy for improving market positions by marketers (Wind, 1978). One of the traditional conditions for turning to a market segment was a minimum size that justifies a specific marketing treatment in terms of cost-benefit relationships (Dunne and Walk, 1977). However, the continuing computerbased revolution in data handling and processing renders the minimum size condition obsolete. The scope of this revolution can be illustrated by one of the recent META Group reports (1995), which predicts that the ratio $K/MIPS for one of IBM’s processors will drop from $21 to approximately $1 during the period 1/95 to 2/98. From a marketing management point of view, this development means a potential to cater to market segments as small as single consumers, even in mass markets. As a matter of fact, relationship marketing (RM) puts the focus for marketing efforts on the individual consumer. Simultaneously, buyers become more sophisticated as well. According to Fulmer and Goodwin (1988), a dominant feature of this process is the interest of customers in the utility derived from a product/service rather than the product/service itself. Moreover, they claim that an important dimension of the utility derived by a customer is the relationship with the provider of the product/service. According to Brierly (1994), to make customers satisfied, marketers must make them feel that they appreciate doing business with them. Viewing the consumer-marketer interaction from a slightly different perspective, Shani and Chalasani (1992) claim that factors such as competitively saturated markets, soaring costs of promotional tools, and changes in social norms necessitate new and creative marketing approaches. RM is one of the most effective responses in this recommended direction. Maintaining a longitudinal relationships system with customers reduces marketing costs, increases effectiveness, and enables customers to experience lower levels of subjective uncertainty levels while facing competing offers. The main contribution of RM to the firm is fivefold. First, ISSN 0148-2963/99/$–see front matter PII S0148-2963(97)00241-5
292
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it builds up loyalty. Second, it enhances profits from existing customers (Abramson and Telford, 1993). Third, it helps reducing marketing expenditures (Shani and Chalasani, 1992), mainly because the cost of attracting a new customer may be as large as five times that incurred for retaining an old customer (Abramson and Telford, 1993). Fourth, it facilitates a direct dialogue with customers that in turn increases the attentiveness level of the organization to its clients’ needs (Shani and Chalasani, 1992). Finally, it strengthens the position of the firm within the marketing channel vis-a`-vis its distributors (Shani and Chalasani, 1992). These contributions are not just theoretical. RM treatment is intended, and is likely, to increase consumer satisfaction. Anderson, Fornell, and Lehman (1994) have found that Swedish companies with higher satisfaction ratings enjoy increased economic returns. According to Shani and Chalasani (1992), RM is most appropriate for firms operating in specific market niches. RM helps such firms to protect themselves against risks of new entries and of changing preferences. By using RM, loyalty to the veteran competitor is augmented, thereby deterring prospect competitors. In addition, the direct interaction with customers refines the firm’s sensitivity to its customers’ changing needs. Shani and Chalasani (1992) claim further that RM does not necessarily fit all categories of consumer goods. On the contrary, RM features make it relevant especially for specific categories. In particular, RM is more applicable to prestige items that enjoy high profit margins, to items characterized by short interpurchase time intervals generating high volume and large profits, to services that are often based on some degree of personal interaction, and to items that cannot be advertised either because of legal restrictions or because of tight profitability rates. Furthermore, Perrien, Filiatrault, and Ricard (1993) point out that switching to RM is a significant strategic decision that depends on the fulfillment of several preconditions: management commitment, redefinition of profit centers, and reselection of target segments. In addition, RM can be operated only if it fits specific consumer profiles vis-a`-vis appropriate product categories (Ganesan, 1994). These features of RM indicate that MCs are likely to prove an effective tool within an RM framework. An MC has a potential of maintaining long-term interaction with customers. Such an interaction is expected to increase customer retention rates. According to Abramson and Telford (1993), efficient business interaction with customers is composed of three components, namely motivation, purchase, and customer retention. As a matter of fact, they document a specific MC—that of General Motors—and show how it was utilized along the tricomponent paradigm. To summarize, the dominant attribute of MCs is their long lasting effect. From a marketing perspective, this type of extended effect has a considerably wider influence as compared with short-term promotional activities (Cohen and Hunt, 1994).
Y. Liebermann
Central Features of MCs MCs—or as they are sometimes called customer clubs— started to become an active ingredient of marketing strategy in about the last decade (Peppers and Rogers, 1993). The background that facilitated this process can be described as combined of three developments: first, an increasing number of advertisers in mass media; second, dense competition in consumer markets that requests differentiation by contributing added-value to buyers; third, the growing importance of buyer share as compared to just market share. Higher levels of buyer share contribute to larger profits because the cost of preserving an already existing customer is considerably lower than that of recruiting a new buyer. Because the empirical observations for this study were made in Israel, it is worthwhile to outline some features of MCs as they are understood by several MC directors in that country. In Israel, MCs started to operate only at the beginning of the 1990s. Some of them recorded impressive performances. To illustrate, one of them reports that over 30% of overall sales are accounted for by loyal members. Generally, it is maintained by the various directors that per capita volume of members exceeds that of nonmembers by a significant percentage. The specific data are confidential so that no more details can be supplied. Due to business confidentiality reasons, the identity of the MCs investigated cannot be disclosed. Some central features of Israeli MCs were identified in a series of personal interviews with directors of six clubs in given companies and with a key executive in a company that specializes in managing MCs. According to this executive, every program of customer retention should be based on the following tenets: 1. Simple procedures. Turing occasional buyers into permanent customers requires friendly and simple access to membership. In addition, the operational activity plan has to rest on a consistent long-run relationship framework rather than on sporadic offers. 2. Efficient data management. Managing an MC requires a comprehensive, detailed, and updated database. A full base of this type facilitates tracing of purchases and accurate measurement of purchase frequencies, amounts spent, and preferred items. 3. Effective communications channels. Communicating with members is expected to be easy, relevant, and interactive. Contact with customers should be intensive, at least once in a quarter. In this regard, Stacey (1994) claims that a periodical newsletter is the most effective communications channel. 4. Special benefits to customers. Benefits have to represent a true added value to members, in a way that prevents nonmembers from enjoying it. Benefits that require members’ cooperation over extended periods of time are most suitable of creating long-run relationships. Distinct customers deserve a VIP benefit program.
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5. Additional services. An MC provides an excellent opportunity for reinforcing service quality. Typical examples are: a club credit card, a magnetic card, or a special customer service telephone line. 6. Club added value. Beyond the added value associated with particular benefits an overall added value is warranted as well. Club added value can be provided by awarding members with access to other organizations where additional benefits are available. 7. Strategically integrated approach. To make an MC a success, its management has to view all the departments and entities involved from an integrated strategic viewpoint, i.e., working according to an annual plan that brings together various business elements into one integrated framework. The six MCs studied include approximately 92,000 members (about 15,300 members on the average per club). They belong to three business categories. Two of them are in the leisure industry, two belong to manufacturers of nondurable consumption goods, and the remaining two are an operation of two retailing chains selling both durables and nondurables. Several questions were addressed to the club directors. For the purposes of the present section, three questions are the focus of attention: the reasons for establishing the club, what does it contribute to the company, and what is the future outlook of the directors. Several motives for establishing a club were mentioned. First and foremost is the interest in developing customers’ loyalty. Other motives mentioned are increasing sales, closer relationships with customers, retaining good customers and providing prestige and status. All directors claimed that their clubs make significant contributions to the operating companies. The contributions take the form of increased sales to members (in one case it was reported that members spend twice as much as nonmembers), higher levels of customer share, higher rates of brand/outlet loyalty, and expanded circles of customers (by veteran members bringing in new candidates for membership). In most interviews, the future outlook suggested is positive. Directors estimate that more clubs will be set-up in the market in the near future. They expect their own clubs to grow quite rapidly. Only one director expressed concern about club congestion in his industry. According to this director, overcrowding of clubs may threaten their perceived added value and lead customers to make purchases only in response to special offers.
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terms refer to three types of outcomes that can be attributed to the build-up of loyalty. Image-oriented loyalty represents the fact that a member prefers the product of the company operating the club over alternative offers made by competitors. The preference is due, at least partially, to the sense of affiliation that members develop as a result of their membership. Marketing-oriented loyalty is defined as customers’ tendency to minimize social risk of membership by recommending either various products carried by the club operator, or membership, to relatives and friends. Finally, and probably most importantly, sales-oriented loyalty stands for the larger amounts spent by members on products provided by the MC operator. Note that although the vendor is interested in increasing sales to members, sales-oriented loyalty is last to develop through this multistage process. Furthermore, the process evolves gradually, and it is highly likely that image-oriented loyalty will precede marketing-oriented loyalty, which will in turn precede sales-oriented loyalty. In a sense, this hierarchical order resembles the concept of hierarchy of effects as expressed in models like the one phrased by Vaughn (1980). Effects considered are: think, feel, act, representing each a possible predominant reaction to advertising stimuli. Different orders of the three potential reactions comprise varying hierarchies with changing implications to message strategy per product category. The specific hierarchy cited above is known as the learning hierarchy. It matches quite well the three-stage loyalty build-up process as described above—namely, image (due to preferences, a derivative of learning), marketing (directed at potential members in order to reduce psychological risk i.e., an emotional response level), and sales (5 act). Based on the distinction among the different loyalty types associated with an MC’s affiliation, several testable hypotheses can be formulated. In particular: H1: Image-oriented loyalty, which means higher preference rates for the club’s products/services, is positively associated with variables that reflect mainly the experience of members with their clubs. Examples of such variables are: membership in the specific club only, duration of membership period.
Theoretical Framework
H2: Marketing-oriented loyalty that conveys readiness of club members to convince potential candidates to join the same club is positively associated with variables that reflect active involvement with club activities. Examples of such variables are: use of membership card, way of joining (active or passive).
It was stressed in the previous sections that the major role of MCs is to enhance brand/outlet loyalty. Nevertheless, loyalty can be defined at different levels. In particular, it will be proposed now to distinguish among three types of loyalty: image oriented, marketing oriented, and sales oriented. These
H3: Sales-oriented loyalty that takes the form of a larger customer share is positively associated with variables that reflect buyer behavior dimensions. Examples of such variables are: response to club promotions, time intervals between consecutive purchases of club products.
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Table 1. List of Variables Variable Membership Time Joining Participation Overall participation Reason Activity Club Products Image Marketing Sales Interval Mix Demographic
Description Single or multi-membership Duration of membership period Passive/active (answers classified into these two categories) Participation in specific club activities (12 rating questions) Overall level of participation (rating) Rating of reasons for joining the club (three questions) Rating of specific activities (12 questions) Overall rating of club Overall rating of club products/services Tendency to buy club products/services over competing offers (image loyalty) Does recommend club products/services to friends? (marketing loyalty) Change in expenditures on club products/services (sales loyalty) Interpurchase time interval Perceived importance of marketing mix variables in making a decision to purchase club products/services (five questions) Age, gender, relative income, education, family status, number of children, employment
Methodology Data were collected by means of telephone interviews with 240 club members sampled randomly from membership lists supplied by the six different clubs studied. Each club is represented by 40 respondents. Response level exceeded 80%. The data were obtained from answers to a questionnaire including 45 questions as well as seven demographic traits. Questions were derived both from the theoretical framework and interviews with club executives. Questions pertaining to specific activities of given clubs differed by club. To calibrate the questions, a pretest was conducted over 24 respondents (four per club). Some questions stand directly for given variables. Other
variables are based on series of questions, where each series is centered around a particular variable. A list of variables is presented in Table 1. Data were analyzed along a three-level scheme: basic frequencies, x2 tests for associations between loyalty rates (image, marketing, sales) and other membership variables, and regression models.
Empirical Findings To provide an overall picture of membership behavior, frequencies pertaining to major membership variables are presented in Table 2. The data reflect both membership characteristics (as single vis-a`-vis multiple membership, length of
Table 2. Frequencies of Major Membership Variables Variable Membership Time Joining Overall participation Reason Price discounts to members Social events Feeling that company cares Club Products Imagea Marketinga Salesa Mix Price Quality Design Image Advertising a
Frequency 79% 73% 66% 11%
members in the specific club only members over a year passive; 34% active always; 49% sometimes; 40% do not participate
36% 24% 52% 29% 42% 1.92 2.90 1.76
very important; 51% important; 13% unimportant very important; 46% important; 30% unimportant very important; 39% important; 9% unimportant excellent; 51% very good; 18% good; 2% bad excellent; 42% very good; 16% good
54% 84% 52% 34% 33%
very important; 38% important very important; 16% important very important; 42% important very important; 45% important important; 48% unimportant
Weighted average index calculated from a three-level scale where 1 5 no relations, 2 5 sometimes, 3 5 always.
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Table 3. Mean Ratings of Specific Club Activitiesa Activity Membership card Letters to members Promotions Birthday presents Gifts and bonuses Discounts in other firms Club magazine Domestic outings Trips abroad Newsletter Member conferences
Excellent
Rating (%) Very Good
43 35 42 100 36 10 29 36 48 32 43
34 45 28 — 33 49 40 50 36 50 37
Good
Participation Rates (%) Rangeb
22 19 24 — 29 38 29 14 12 18 17
35–70c 44–84d 2–42e 82f 30–58g 7–8h 50–52i 38j — 80k 42l
a
Answers given by participants only. Participation rates vary by club. Rates pertain to members that participate always. 3 clubs only. d 5 clubs only. e 5 clubs only. f A single club only. g 2 clubs only. h 2 clubs only. i 2 clubs only. j A single club only. k A single club only. l A single club only. b c
membership period) and attitudes toward club and benefits associated with membership (as price discounts or quality of products/services offered). Complementary information is provided by Table 3, which outlines ratings of specific club activities. Both tables reveal some notable features of membership behavior and club evaluation. There are two indications to the stability of membership. First, 79% are members of a single club rather than of multiple clubs. This observation signifies that respondents in the sample are regular customers as opposed to club prones. In addition, 73% are members over a year, a sufficiently long period to facilitate quitting in case of disappointment. Also, this length of membership time is sufficient to regard respondents as quite experienced, a factor that contributes to the validation of data. At the same time, members do not typically join on their own initiative: 66% were made members by the club. Possibly, this rate is due to the initial stage of MC’s development in Israel. yet, although joining is mostly passive, a substantial proportion (60%) feel that they participate at some level in club activities, which can be interpreted as a marketing success of the club. Furthermore, 80% grade their club as either excellent or very good, a rating showing that members’ expectations are matched by the different clubs. Similarly, 84% are pleased with the products/services offered by the club. This encouraging proportion supports one of the most important reasons for retaining membership. Not less interesting is the way members evaluate components of clubs’ marketing mix. From the ratings it can be seen that quality of product/service is the most important
component. Price and design rank second with similar ratings and image and advertising rank third with similar ratings as well. The gap among the three groups of components are substantial (in terms of “very important” 84%, 54%, and 34%, respectively). Seemingly, these relationships reflect members’ interest in qualitative products/services even if they may necessitate an increased expense. Furthermore, members feel sufficiently sophisticated to evaluate offers on a quality/price basis without considering too heavily image and advertising appeals. The overall impression that is rendered by this profile is that MCs are indeed a tool with high marketing potential. Companies who are able to establish and operate organized clubs are likely to do better business with their customers. The 52% who claim that the most important reason for joining a MC is the feeling that the company cares about them serve as an additional indication to the importance of relationship marketing. As maintained in the theoretical analysis, the purpose of MCs is to enhance three loyalty types: image, sales, and marketing. The empirical results show that MCs contribute to all three elements. The weighted ratings show that consumers are literally enthusiastic about recommending club products/ services to friends (marketing loyalty) and that they tend to prefer club offers over competing offers (image loyalty). At the same time, there seems no strong effect of membership on expenditures (sales loyalty). In more detail, concerning image loyalty 25% claim to always prefer club’s products over those offered by competitors (whereas 42% claim to sometimes prefer company’s products). Furthermore, 95% report that they are always recommending club products to
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Table 4. Statistical Significance Levels for x2 Tests of Associations between Loyalty Types and Independent Membership Variables by Type of Loyaltya Loyalty Type/ Independent Variable Membership Joining Overall participation Price discounts Club Interpurchase time interval Membership card Gifts and bonuses a
Image
Marketing
Sales
0.005 0.002 0.002 0.036
0.006 0.046 0.036 0.000 0.009
0.009
p values below 0.05 only.
friends (marketing loyalty). Finally, 20% report that they significantly buy more due to their membership, whereas 36% report that they buy only slightly more (sales loyalty). The conclusion that is manifested by these preliminary observations is that membership appears to enhance loyalty of all types. In Table 3, the way members evaluate club activities can be seen. Because not all clubs run the same activities, some items are ranked by subsets of the sample. The most common activities are issuing a membership card, sending letters to members, and offering promotions. Focusing on these three activities, it can be judged that membership cards and promotions are highly appreciated, whereas letters to members are considered slightly less attractive. Because the other activities are offered mostly by given single clubs, it is difficult to assess their relative utility to members. Let us now turn to an examination of some associations between dependent and independent variables. The dependent variables are the three types of loyalty: image, marketing, and sales. The independent variables are listed in Tables 2 and 3. An additional variable is the interpurchase time interval for club products/services. x2 tests applied to paired associations between respective loyalty types and given independent variables reveal the picture presented in Table 4. In the table, only significant associations are listed. In general terms it can be seen that eight independent variables are identified that may potentially affect the success of MCs in enhancing loyalty. Mostly, such independent variables are associated with a single loyalty type. Nevertheless, two of them are associated with both image and
sales loyalty. This relationship may signify that membership per se and price discounts are the strongest tools to obtain goals of clubs. Specifically, Table 4 shows some interesting associations that in part correspond to the predictions made in the theoretical analysis. For example, image loyalty is significantly associated with membership (in a given club only) as predicted. Similarly, marketing loyalty is associated with use of membership card and way of joining. Along the same lines, sales loyalty is associated with price discounts offered to members and with interpurchase time interval. These associations support the theoretical analysis to some extent. Yet, to identify the direction of the various relationships and in an attempt to assess the effect of independent variables on the three loyalty types, an additional analysis has been performed. More specifically, a stepwise regression model was used first. During this stage, significant independent variables were identified. However, because most variables were not measured on continuous scales and due to the mixed nature of the variables (scaled versus dichotomous), the significant independent variables were put to an additional evaluation by a probit model. The results are reported in Table 5, which presents significant (p , 0.05) effects only. The probit results document some interesting effects of membership variables on three loyalty types, supporting part of the hypotheses outlined above. In particular, it is claimed in the first hypothesis that image loyalty is expected to be positively affected by experience of members with their clubs. Membership in a club and overall participation are both specific dimensions of experience, and they both affect positively and significantly image loyalty. The second hypothesis states that marketing loyalty is expected to be positively associated with variables reflecting involvement with club activities. Joining a club actively is a form of involvement and is indeed affecting positively and significantly marketing loyalty. As recalled, the third hypothesis establishes a theoretical effect of buyer behavior variables on sales loyalty. This hypothesis is not confirmed by the probit analysis. Instead, the analysis documents an effect of an involvement rather than a behavior variable on sales loyalty.
Discussion Presumably, the present research is one of the first studies that examines systematically the phenomenon of MCs. Under-
Table 5. Probit Model Results by Loyalty Typea Independent Variable Intercept Membership Joining Overall participation a
Figures in parentheses are p values.
Image
Marketing
Sales
23.600 (0.0013) 0.825 (0.0368) 2.153 (0.0025) 0.6146 (0.008)
0.4429 (0.0336)
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standing that MCs operators are interested in nurturing members’ loyalty, and distinguishing among three loyalty levels, or types, the study shows that three variables have a positive effect on loyalty: membership in a single MC, joining the MC actively (i.e., on the initiative of members themselves), and overall participation rate in club activities. Identified relationships fit most of the theoretical predictions. One prediction was not confirmed. For a preliminary study, the results seem quite satisfactory. Possibly, wider samples (both in terms of number of clubs included and number of respondents interviewed) will facilitate improved results. Also, in light of the distinction made earlier between three different categories of clubs, it might be the case that within different MC categories, different relationships prevail that have different effects on members’ loyalty levels. Possibly, members in specific club categories (e.g., products vis-a`-vis services) may prove more responsive to given activities that are more attractive to them as compared with alternative MC incentives. It is recommended for future research to explore more methodically potentially different loyalty patterns by club category. If such differences are identified, they may have important ramifications on the efficient operating of MCs. Even though the empirical results are somewhat limited, the study as a whole makes some seemingly important contributions. It is probably the first academic research that discusses systematically the role of MCs within the context of RM. Furthermore, it identifies specific relationships between a set of membership variables and members’ responses to them. Consequently, it is shown that MCs have a concrete potential of enhancing members’ patronage. Nonetheless, perhaps the most important contribution is the strategic dimension of the study. This dimension is twofold. First, the analysis outlines several principles of efficient MC management as related theoretically to the RM concept. Second, the study provides a strategic approach to MC goal setting. Specifically, patronage build-up should be obtained via a tri-stage move attempting to enhance first image loyalty, then marketing loyalty, and only then to traditional types of loyalty, i.e., sales loyalty.
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The author acknowledges the contribution of Siegal (Gali) Eisenberg and Galit Bar-Tal who undertook this project as an MBA seminar at Bar-Ilan University’s School of Business Administration. The author is also thankful to two anonymous referees for helpful comments.
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