Soone

DIFFERENTIATING FOR LOYALTY
Tallinn Technical University In the globalizing world, where boundaries are blurring, where goods and services are becoming more and more alike with the passage of time, where markets are saturated with increasing number of sellers chasing the same customers, and where having distinctive functional benefits is therefore no longer enough to retain customers over long period of time as such benefits can be easily imitated, maintaining the company's growth and sustainability through unique value offering to its customers has become more topical than ever before. It has become even more desirable than the thick wallet or high market share – for the very same reason, that often the bigger chunk of consumers a company holds, the more vulnerable it becomes if it cannot offer its customers a unique differentiated value. For instance, take Microsoft, over 90% of the value of which lies in its consumers, being totally out of control of the software producer, or Bayer, the pharmaceutical giant, who suffers considerable losses every time its patented drug goes off protection. The risk of losses is enormous, but at the same time, both lock in their customers by different means of involving them with the company as doing so should lower the unnecessarily high customer risk – while Microsoft allows its business partners and Business-to-Business (B2B) customers to benefit from the open standard, which Microsoft itself has set on the market many years ago, Bayer enjoys higher profits from its Aspirin®, the same acetylsalicylic acid others cannot squeeze so high margins out of. Controversially, Apple, Unix, Linux and many others are struggling altogether with much smaller shares than Microsoft alone, and Glaxo SmithKline, Merck and Johnson&Johnson together with a whole lot of producers can only dream about the status Aspirin® has held in the minds of consumers for centuries. Both, Microsoft and Bayer, have managed to differentiate themselves from others and create the sustainable competitive advantage to a large extent based on this differentiation. The main goal of this article is to analyze the retention of customers by differentiating the value offering from company's competitors' and to show the links between loyalty and other emotional and behavioral categories and reactions of consumer behavior as well as the outcomes of these reactions in form of profitability of the company to analyze the links between these factors based on research of different authors and most suitable ground laying theoretical material. This goal will be achieved by combining together several disciplines such as marketing, psychology, economics and several others to increase the validity of the viewpoints suggested in the article and give it more diverse and multidisciplinary background as well as broader basis for analysis. All the statements provided in the article belong to its author unless indicated otherwise. All important statements from whichever sources are quoted.

The Aspirin® Story – What is There to Learn from

The main goal of marketing from the company's prospective is improving its
competitiveness in short term and of course, ensuring its sustainability over the
longer period of time. To do that, the company needs resources to innovate, grow and
promote its products. Thus, marketing has to be profitable to provide these resources.
What allows a company to become more profitable than others selling the same
goods and services, and do it way more efficiently than its competitors do?
Those, who have managed to please their customers continuously over the long
period of time, like Bayer and Microsoft in the aforementioned example did and still
do, have enjoyed either more rapid growth, higher profits, more stable income
streams, higher customer satisfaction or even loyalty and healthier retention rates
derived from that. The risk associated with vulnerability has paid off. Those who
have failed to do so, have been pushed into the niches, left behind or even driven out
of the market. What is the general rule the successful ones have followed over and
over again?
The solution to withstand the turbulence of changes is to change as well or deliver
the unique value offering to the customers in another way. Just like Microsoft and
Bayer have done – the former one with constant change and rapid evolution through
innovation and formation of new and better products for its customers, and the latter
one through keeping the product stable and static, by just changing its status and
image in the minds of consumers: if at the early beginning of its widely known history it was perceived as a new and innovative miraculous relief, until it traveled from the category of new and innovative medication to the category of the good old trustable and reliable pharmaceutical product, that granny and her mother used already long time ago. By doing that, both have successfully managed to differentiate themselves from their competitors. The status change of the constant product is well traceable throughout the history of Aspirin®: although the documented experiments with salicin and creation of salicylic acid begun in 1932 and way before, when the Greek physician Hippocrates prescribed the bark and leaves of the willow tree rich in a substance called salicin to relieve pain and fever already 400 years B.C., only when Felix Hoffmann, a chemist at Bayer in Germany, chemically synthesized a stable form of acetylsalicylic acid powder that relieved his father's rheumatism, it became popular and found a good reception in the minds of consumers. Later, Bayer distributed Aspirin® powder to physicians to give to their patients since 1899 and Aspirin® soon became the number one drug worldwide. The whole series of innovations followed: in 1900 Bayer introduced the first Aspirin® in water-soluble tablets that where the first medication to be sold in this form. In 1915 Aspirin® became available without a prescription. In 1948, Dr. Lawrence Craven, a California general practitioner, noticed that the 400 men he prescribed Aspirin® to hadn't suffered any heart attacks. He regularly recommended to all patients and colleagues that "an Aspirin® a day" could dramatically reduce the risk of heart attack. Further Aspirin® traveled to the moon, was introduced as chewable medication for kids, etc. until the moment, when in 1999 it was inducted into the Smithsonian Institution's National Museum of American History in recognition of its contributions in easing aches and pains, reducing fevers, fighting inflammation and saving the lives of thousands of heart attack patients each year. (Bayer, 2003) The chemical formula throughout The formula of Aspirin®, the these years, of course, remained the same. The attitude and perception changed. Excitement was although it looks different, it is the same replaced by trust and Aspirin® that was widely competitors' below – exactly the known to its consumers, was perceived to be very same difference that exists much better product than its no-name competitors. between the atual value of the product and its perception. The secret is simple: Bayer has managed to "de-average" its relations with its consumers. It has higher margins although it is not enjoying as much market power as Microsoft does. But definitely it is perceived to be a special high-quality product, and although one may argue that it has been forced to the niche by its generic competitors, who may dominate the market, if one of them disappears, nobody notices. They will never become Aspirin® although they are Aspirin® by their formula. To generalize, Aspirin® offers its patients much more than just some physical pain relief – it gives a psychological support, belief that it cures better than no-name drugs and gives a satisfaction derived from its brand. Yes, not the chemical formula, which pharma giants usually try to protect either through technological secrets or patents, gives the strength to Aspirin®. Its protected name does. There is the one and only original Aspirin® and that's all that matters. Its strength lies outside its chemical formula, i.e. its product – it is somewhere else. The specialists from McKinsey & Company, one Another way to present Aspirin® of the most respected consulting firms in the world, David Court, Thomas D. French, Tim I. McGuire and Michael Partington have reached the same conclusion, discovering the secret of uniqueness and profitability through the customer-centric marketing mix. They call it a specialization, which in terms of balancing the marketing mix is exactly the same unique value offering created through the unique balance of exactly the same marketing mix elements. As they state, "Specialist competitors get their opportunities because many companies still attempt to serve a range of customer segments with a common functional offering that leaves out benefits important to each segment while charging all customers for costly benefits valued only by some." (Court et al., 1999) Customization and Innovation as Value and Cost – Two Sides of the Same Coin

The idea of offering customization is good and simple, but quite difficult to
implement due to its high cost of actual product customization. To give a very
extreme example to illustrate this statement, the product should be tailored to every
customer and thus the wheel has to be re-invented many times, making this product
innovation or even simple customization costly. And the closer the customization is
to the end of the value chain, the more costly it often becomes and even if this is not
the case, customization – often carried out by including additional features, only one
or few of which are usually used over the lifetime of the product – involves
tremendous waste of resources – like in case of HP printers that come with dual
voltage adapter although 99,9% of HP customers will never travel with their printer
from Europe to North America and back.
One may say that this kind of customization is done, for example, in automotive
industry, where every customer can select its own set of additional "bells and
whistles" he or she wants to add to the basic model that is rarely sold to customers
"as is". But the secret in this case lies in the same basic model, serving as a platform
for further customizations. And very often this platform is not favored by customers,
who, having not found the opportunity to customize the platform itself, switch to the
competitor's product, whose platform suits this client's needs better, giving him/her
the satisfaction competitor could not deliver through his/her marginal adjustments or
even incremental innovation.
It is easier with services, where we re-model the service at no cost to every customer
according to his/her needs or wants. A good example in this case is insurance, where
everybody can tailor the coverage to suit his or her specific needs. Extension and
terms of coverage, amounts, etc. – all can be chosen by customer without any
additional customization costs occurring neither to service provider nor to customer.
Of course, additional tangible benefit costs excluded.
But what to do in case the customization is costly and inefficient?
Benefits (value) are these what products offer to consumers and represent the
reasons, why these products are wanted. Thus, consumers do not want the products
per se but rather for the benefits that satisfy these wants. (Hanna, 1980)
Therefore leveraging these benefits is the real challenge, meaning not only the price
discrimination – optimal price for every customer – but rather the mirror image of
that: the real customization of all benefits. This is often very well done on the
business markets, where there are not so many customers and usually these few who
exist on the market, represent a big enough chunk of turnover or profit of a seller, to
justify customization expenses. Of course, there are also many other reasons for this
customization: business customer buys with higher probability as the process is
usually more rational and well weighted, also the business market products are more
expensive, specific and therefore need to be customized more (Bly, 2003), on small
changes in B2B products depend large changes in profits of customers – take for
instance even small savings due to the technological difference of production
equipment – etc. In that case the customer is willing to pay the high price of
individual customization. But what to do in case the Business-to-Consumer
customization of the product proves too time consuming and costly?
Customization through Value – the Economics' Prospective

The whole idea of customization and of readiness to pay for the customized benefits
can be described in economic theory by the combined Figure A:
Readiness to pay Readiness to pay for the benefit A for the benefit B Benefit A importance index Benefit B importance index or the quantity of A needed or the quantity of B needed Composite readiness to pay for the product's benefits* Composite importance index of all benefits or the quantity of benefits needed* * Given that both benefits are of equal importance for the consumers and carry the same weight. Figure A:Cost/benefit analysis in consumer's mind and the saturation effect.
Original figure by the author.
Thus, a consumer is willing to pay more for the bundle of benefits he or she needs as opposed to the combination that is not desired as much. This can easily be described by the following example: consider a customer buying a town car. He or she values the small size that makes the car easier to park on the overcrowded streets, the ability of the car to maneuver, and also whether it is economical or not as the differences in gas consumption – as inputs or costs in most of the cases – increase more in inefficient conditions, which the city driving in this case actually is. Thus, an allroad won't do – all classes except "A" will be left out of consideration due to the fact that they do not satisfy the requirements in given conditions although they might satisfy different needs better under other
circumstances. Class "C" is certainly more expensive than class "A", giving
customer more weight, security, space, prestige, luxury etc. for higher price, but it is
not desired as much as the town car although it might be desired more as the vehicle
to travel across long distances. To simplify, we may even assume that our customer
gets the same price/benefit proportion in every class. This may be characterized by
Value Equation Line (VEL) in the pricing theory.
Customization through Value – the Pricing Prospective

According to the theory of pricing, consumers should be indifferent towards the
classes "A", "B" and "C". (Leszinski and Marn, 1997) In reality this rarely happens:
consumers want specific benefits in specific quantities at specific time and they will buy the offer with bundle of benefits as close to their wants, as possible – i.e. they will buy as customized value offering as possible. Thus, adding the value in some dimension, i.e. leveraging a specific benefit, will increase the overall value of the offering to some extent, and later Perceived benefits decrease it. In the case with the town car, the engine will really add value to the car Figure B:The Value Equasion Line
to a certain limit – for example, a car with as perceived by consumers.
(Leszinski and Marn, 1997)
1 400 cm3 engine definitely costs more and is also valued more, than the same model with 1 100 cm3 engine. But after a certain saturation point is passed, further increase in one benefit will raise the price, but lower the total value perceived by customer. Thus, comparing the prices of Volkswagen Golf Comfortline, we get the following pattern: if the price for 1 400 cm3 engine equipped car equals 100%, the price for the same car equally equipped but with 1 600 cm3 engine is already 7,85% higher. The price for the same car equipped with 2 000 cm3 engine is already 11,43% higher than the price for 1 400 cm3 engine equipped car. And on 2,0 liters the Comfortline series end, offering 2,3 and 2,8 liter engines only for Higline cars. (Saksa Auto, 2003) This price and benefit ratio has a very specific reason – the demands and value perception of the cluster of consumers, who value the car for its ability to transport people and goods from point "X" to point "Y", decreases sharply past a certain point due to the higher costs and disproportional weight of that benefit. They do not value more power in a town car after a certain point is passed, but they definitely count extra expenses related to this extra power. Thus, only few would dream about a small, maneuverable and reliable town car with 2,8 liter or even higher capacity engine although this does not mean, that this feature is not valued by some other consumers in another cluster – there is nothing new about Mercedes Benz with over 5,0 liter engine, for example. (Silberauto, 2003) Even the same Volkswagen Golf comes with 2,8 liter engines only for these customers, who highly value comfort and find the money, either in form of costs of usage of the car or the price that has to be made as downward payment in advance, to be not such a big factor to consider. To satisfy the needs of customers who still value comfort but do not want to buy a fully equipped Highline car or just need some but not all of the features provided in the highest package, Volkswagen has left a door open for individual customization: every customer has the option to add either only additional headlights or only velour seat covers without upgrading to the next level, although past some extent of adding the features this proves to be way cheaper option. Again, we deal with platforms and their marginal changes. The readiness to pay for a certain added benefit within a certain cluster may be characterized by Figure C: Once the price/benefit ratio has reached a certain point, which means, once the amount of benefit has reached the desirable level – due to the fact that price plays important role as one of the strongest delimiters for making purchasing decisions – the readiness to pay for the further increase in that benefit's amount Figure C: Readiness of customers
to pay extra price for
lowers dramatically. extra unit of benefit.
Original figure by author.
This happens mainly for the same two aforementioned reasons: first, past a certain power numbers the impact of the engine power and capacity on acceleration of the car lowers, thus also the efficiency in terms of gasoline usage, a "bang for the buck" so to say, lowers. For more inefficient products, which either consume more inputs to produce the same output volume as in the case with the car, or are bigger, or less easy to use, or noisier, etc., consumers wish to pay lower prices as they want the compensation for this inefficiency, which will either increase their costs in the future or carry some other alternative costs. At the same time, they have to make a bigger downward payment, which is controversial to their desires. Due to this cognitive dissonance consumers' readiness to pay the extra price for an extra unit of benefit lowers past a certain point. To illustrate this, consumers may want to pay some extra premium for Sony's products, which they would not pay to the same extent if they were buying similar Daewoo or LG product. Thus, if we combine all the benefits of a taken product together, increase in the amount of one benefit will influence the perceived value of the whole product as a bundle of benefits, giving the curve the shape of "head and shoulders", as described on Figure D on the next page. First, this holds due to the disproportion effect, which is described in economic theory by the same Figure C shown above (with the only difference that on the axes there should be represented two products instead of price and benefits), but second, despite the willingness of manufacturer to hold the price down as much as possible, past a certain point the extra added benefit will inevitably start driving the price up together with costs. And when approaching the technological limits or the very end of the S-curve, the price will rocket sky high. Therefore, the graph of the value of a Value of the whole product product as a composite value bundle relative to change in one component may be characterized by the Figure D as shown on the left. To avoid the loss of customers, companies act accordingly: if the change from 1 400 Figure D: AmA
to 1 600 cm3 or 14,28% in engine's related to the value of the
working capacity in case of Volkswagen is whole offering.
accompanied by 7,85% increase in price, Original figure by author.
giving for the ratio roughly 1,82, the increase from 1 600 cm3 to 2 000 cm3, which is 25%, allows only for 11,43% price increase, giving for the ratio 2,19. (Saksa
Auto, 2003) Reversing the ratios we get 0,55 and 0,46 that give us the same
exponentially falling graph if continued further, as shown on the Figure C.
"Customers do not necessarily want more choices, they usually want a specific
product or service that is customized to their needs," write Martha Rogers, Joseph
Pine II and Don Peppers in their article "Do you want to keep your customers
forever?" (Peppers, Pine and Rogers, 1995) This argument is difficult not to agree
with, all the more that this holds in all other economic activities as well: Philip
Kotler, Stewart Adam, Linden Brown and Gary Armstrong, for example, reach
principally the same conclusion about the managers in their book "Principles of
Marketing", where they claim that managers do not need more information, they
need better information. (Kotler et al., 2003) The question is in nothing else than in
efficiency and quality of marketing from consumers' as well as marketers'
prospective.
Customization through Value – Leveraging Benefits

Leveraging the material and tangible value offering gives marketers some very
limited efficiency and flexibility to a certain extent. To understand what consumers
really value and how to exceed the barrier of uniqueness beyond the product
differentiation it is beneficial to take a look at the whole bundle of attributes that
customers may look at when making a purchasing decision. To get out of expensive
product-based materialistic competition, the specialists of McKinsey & Company
propose to look at the benefits from consumer point of view – what he or she gets out
of purchasing a product vs. what manufacturer provides or intends to provide. Thus,
they divide overall benefits to functional, process and relationship benefits (Court et
al., 1999), of which only functional benefits are directly associated with functionality
of the product although these often do not constitute the major part of all benefits
perceived by consumer. The remaining process and relationship benefits cover all
other aspects somehow indirectly related to the functionality of the product. This is
shown on the Figure E below, where these three types of benefits perceived by
consumers are divided equally for the sake of clarity and for simplification.
Functional benefits, that usually lay the
ground for the purchase, arise from the product itself: a car gets you from point "A" to point "B", electric drill drills, stove cooks, etc. These benefits are connected to the functionality of the product and derive their name from that fact. Although functional component of all the value offering i.e. Figure E: Cost-benefit analysis in
benefits perceived by consumer in the past, consumer's mind to assess
their importance is declining fast. Coming the value of the offering.
back to what was said at the beginning of Original figure by author based on
current article, this importance is declining various sources.
the faster, the more similar the products become and the more the market is saturated. Process benefits make transactions
between buyers easier, quicker, cheaper and more pleasant. Thus, one does not have
to drive out of town to buy milk, he or she can do this in the store nearby, that makes
the purchase much easier and allows the convenience store to charge some premium
derived from that benefit. These benefits are related mainly to purchasing process,
which involves providing the information about the product or service, help in
making the purchasing decision, professional assistance in customization of the
product, delivering goods, payments, etc. These are the ones that were emphasized
extremely heavily just few decades ago. Relationship benefits, which have gained
most of their status during these past few decades, reward the willingness of
consumers to identify themselves and reveal their purchasing behavior. As McKinsey
& Co. consultants conclude, "… the basis for creating successful marketing strategies
has expanded to three dimensions, from one," and "… The solution is to emphasize
process benefits … and relationship benefits … ." (Court et al., 1999)
To illustrate the findings of McKinsey & Co. staff one has to agree – over time
indeed, many product categories have shifted their importance totally away from
functional benefits to other categories. For instance, if five centuries ago perfume
was mainly used to hide the unpleasant odors, then today Chanel and Giorgio Armani
are more symbols of status, than simply bactericide fragrances. At the same time the
new category fulfilling the old goals has emerged – the deodorant sticks, for
example, still carry the same purpose. Thus viewing the value offering with
consumer's eyes can enrich the experience of both sides of the value transaction –
consumers as well as value providers – and create new and profitable niches or even
whole segments and industries by just slightly shifting the understanding of what the
product category once used to be – i.e. by playing around with the three dimensions
of marketing in a way, which would have been inaccessible if they would have been
replaced with a traditional and typical provider-based view.
The Psychological Aspect of Customization

The king is dead. Long live the king. The very same holds in relation to
differentiation and customization. The old good differentiation principles based on
purely making distinction on the basis of functional benefits do not work, they have expanded to several – for example, three in case of McKinsey & Co. – dimensions from one. And the further away from deficit to market saturation, the more important the new differentiation becomes. Jill Griffin unites this idea of differentiation with preference, mixing endogenous and exogenous factors together, if looked from the point of view of a marketer, to show customers' relative attachment types towards a product. (Griffin, 1995) Relative attachment should serve as a warrant of repeat purchases, filling in the blank in achieving sustainability of a company, while differentiation creates the suitable competitive advantage, both together helping to achieve the long-term goals of marketing as described before. Figure F illustrates these four relative attachments. Product Differentiation As aforementioned, differentiation basis of purely func- Low attachment
Highest attachment
tional benefits is vanishing as pace of Lowest attachment
High attachment
innovation increases and information is Figure F:Four Relative Attachments (Griffin, 1995).
becoming more and more widely avail- able. This all leads to the situation, where competitors use the same suppliers (as in case with cars) or even team up to unite some specific functions to avoid waste of resources (for example, in case of banks with "outsourced" payment processing and cash transportation systems). Only few, like Sony, manage to hold their positions, differentiated on the basis of product only, for a short time, but these are usually hi-tech producers. All others have to orient otherwise. And even for those few pioneers, the time, during what they can enjoy their leadership status, shortens constantly and forces them for faster and more radical R&D policy. Process benefits are more easily differentiated than the functional ones, but they are often quite and even more easily imitated at the same time – as soon as one builds a new store on the free spot, for example, there are competitors around in no time. Again, only few, like Dell, have been able to differentiate themselves successfully only on process benefits over long period of time. Relationship benefits include tangible benefits, which are usually fairly easily imitated as well – if one retailer implements the loyal customer card, which gives discount of 5%, another one copy him/her fast and beat the pioneer by offering -10%. The other part – intangible relationship benefits, also often resulting in loyalty, satisfaction, etc. – offers sustainable competitive advantage more easily, with lower expenses and higher returns. These benefits are not as easily imitated. One representation of these benefits, for example, are brands. This all can be compared and explained through Being needs
Self-actualization represented on Figure G. The higher the marketer aims with his or her differentiation strategy, the more difficult it is for competitors to imitate. At the same time, it is widely known, that the higher needs are satisfied by the goods offered by marketer, the higher premium the consumer is ready to pay for this satisfaction. Thus, the payoff while moving upwards is double: first, companies Physiological needs create a sustainable competitive advantage which Deficit needs
is difficult to imitate, second, they increase their profitability and do this for a long period of time. Figure G: Abraham Maslow's
As the aim of marketing is improving company's hierarchy of needs
(Boeree, 2003).
competitiveness in short term and ensuring its sustainability over the longer period of time, this helps to achieve both and address the needs of a company in short as well as long time period, while doing it more efficiently, better satisfying customer needs and collecting necessary market information at once. At the same time it is known, that "deficit needs" do not have as strong binding power for consumers on saturated markets, as so-called "being needs" do. And these markets that are not saturated yet are moving fast towards saturation. A good proof for that is the movement of goods in the FCB Matrix (Bachmann, 1994) that got its name from its creators Foote, Cone and Belding and which is illustrated on Figure H. According to this matrix, the further Involvment Level away from deficit towards saturation, the less functional its products and the more Figure H:FCB Matrix (Bachmann, 1994)
intangible benefits become – the very same conclusion that has been discussed more or less openly since the beginning of this paper. Therefore, with market saturation, as functional benefits become less important, involvement level lowers and its type changes from rational to emotional. Take, for instance, the same cars – if they were sold by using mainly rational arguments in past, they are becoming more and more emotionally charged. So, the idea of saturation of different needs and differentiation on basis of these, conveyed already decades ago by Abraham Maslow in his hierarchy of needs, holds up very well also in current market conditions – the contemporary consumer is moving "up" and the "higher" the marketers get, following the consumer in terms of his/her needs, the more efficient they become and the more value they deliver to customers and
themselves.
"Superiority", higher efficiency, or dominance – however one may call this
distinction – of "being needs" over "deficit needs" in Maslow's hierarchy and
changing nature of goods in competition are also the reasons why consumers are
ready to pay higher prices for goods that satisfy their "being needs" compared to ones
that address only the lower, "deficit needs". In other words, working with "being
needs" is more efficient technique in generating customer attachment as the binding
readiness of staying with the company over longer period of time and sometimes of
paying premium prices, than working solely with "deficit needs". From this, one may
conclude, that customer retention, i.e. attachment, is one of the aims of achieving the
ultimate goal of marketing: improving competitiveness and guaranteeing sustainabi-
lity. At the same time, attachment can be built only on suitable grounds, one of which
could be, for example, customer satisfaction. The same with Maslow's hierarchy of
needs: higher needs can only be satisfied if lower ones are satisfied as well. At the
same time, a reasonable question arises – should attachment be the ultimate goal of a
marketer or there is something more serious behind, which allows for even greater
efficiency of marketing efforts?
The Four Types of Loyalty

Attachment per se cannot and should not be the ultimate goal of a marketer, vice
versa – attachment often does not generate any revenues as it does not have direct
behavioral output and may be restricted by budget, location, habits, etc. For example,
someone who likes a certain whisky brand, may collect posters, ads and souvenirs
with its models, thus being emotionally attached to the brand, but never drink a single
drop of the beverage, as he or she never drinks any alcohol at all. This behavior
influences the company only indirectly – through word-of-mouth, for example – but
difference here is attitude Premium Loyalty
Latent Loyalty
action. As the goal in Inertia Loyalty
No Loyalty
some profits as well, Figure I:Four Relative Attachments (Griffin, 1995).
mainly through the buying actions of customers, this attachment can be combined with buying to determine the profitability of each emerged cluster as shown on the Figure I. The strength of attachment combined with the frequency of purchase gives us the four types of loyalty. Some authors view loyalty as the highest stage of marketer's interaction with customer, some argue that also loyalty itself should not be the ultimate goal of a marketer (Kumar and Reinartz, 2002) but rather should customers be managed profitably either through loyalty or non-related purchases. The secret lies
in diverse nature of loyalty: every subtype of it makes the customers behaving
differently. And of course, loyalty does not equal customer satisfaction, as many
claim, these are totally different things. But still, loyalty can drive up the profits of
the company, if managed wisely, by up to 85%. (Reichheld and Sasser, 1990)
Dennis R. Howard and Mark P. Pritchard find similarly with Kunal Basu and Alan S.
Dick (Basu and Dick, 1994) in their article "The Loyal Traveler: Examining a
Typology of Service Patronage" that there are four types of loyalty: (1) true, (2)
spurious, (3) latent, and (4) low. (Howard and Pritchard, 1997) These types are very
similar to ones offered by Jill Griffin (Griffin, 1995). According to them, "true"
loyalty traveler – as this research concerns mainly traveling – is a type of traveler
who exhibits a high degree of attitudinal attachment and behavioral patronage with a
service provider. "Spurious" loyalty travelers are those who exhibit a high level of
behavioral patronage yet have a weak sense of attitudinal attachment. "Latent"
loyalty travelers are those who, despite having a strong attitudinal attachment to the
travel service, exhibit low usage. And finally, "low" loyalty traveler refers to those
individuals exhibiting both low attitudinal loyalty and behavioral usage with a travel
service. (Howard and Pritchard, 1997) The two important distinctions here are the
references to attitudinal and behavioral types of loyalty that were separated already
in case of attachment and which were distinguished also by many loyalty researchers
of whom Marnik Dekimpe (Dekimpe et al., 1997) and Jacob Jacoby (Jacoby and
Chestnut, 1978) could be mentioned.
In their research "Exploring the Dimensions of Loyalty" Sharyn Rundle-Thiele and
Larry Lockshin expanded the traditional bi-dimensional definitions of loyalty again
to incorporate additional dimensions specific to service industry, proving the four
dimensions of loyalty existing for sure to be (1) propensity to be loyal, (2)
situational loyalty, (3) resistance to competing offers and (4) attitudinal loyalty.
The empirical results of their research also suggest that there may be other
dimensions of loyalty. (Rundle-Thiele and Lockshin, 2001) Again, the attitudinal and
behavioral distinction here is important to mention.
The Impacts of Differentiation

The secret is simple: all these different attachments resulting in whichever type of
loyalty when combined with the basis of diffe- rentiation result through repeat purchases in different profitability of different customers. Figure J:Attachment and differentiation as profit drivers.
To conclude and genera- Original figure by author under supervision of Ülo Tartu.
lize the aforementio- ned, the following scheme illustrated on the Figure J can be offered. If differentiation is based on the product, meaning, on its quality only, 1% perceived
increase in quality drives 10% increase in profits. This quality may be technical
quality – what the consumer receives, the technical outcome of the process, or
functional quality – how the consumer receives the technical outcome, what
Grönroos calls the "expressive performance of a service". (Grönroos, 1984) The
same distinction is made by McKinsey & Co. researchers between functional vs.
process and relationship benefits. (Court et al., 1999) Ideally, if managed correctly,
the quality should result in satisfaction.
As the satisfaction is derived from the product but carries some of the attributes of
loyalty at the same time, it is the next category worth looking into. But satisfaction
itself is often not so exact instrument to forecast profitability. As loyalty guru
Frederick Reichheld from Bain & Co.'s presents it: "I've given up on satisfaction
surveys. They don't work." After all, as he points out, 60% to 80% of customers who
left a firm still said they were satisfied before they left. (Mazur, 2003) The average
satisfaction/profit ratio is about 1/13. (Upshaw and Taylor, 2000) And ideally again,
satisfaction should result in next link of the chain – loyalty. It is important to note
that partial satisfaction usually does not transfer into loyalty, but full satisfaction
usually does.
Further comes loyalty itself. In its research Bain & Co. found out, that companies can
boost revenues by as much as 85 per cent if they can retain only 5 per cent more of
their best customers. (Vethakumar, 2003) If we equalize the retention rate with
behavioral loyalty, we get the loyalty leverage or multiplier. This gives the lever
effect of 5/85 or 1/17, if we divide both sides by 5. Of course, one cannot say that
every dollar spent on the customer retention gives back 17 dollars, as the efficiency
of retention programs and amounts of money spent on them are unknown as well as
"best" customers with their higher returns are undefined. Also one cannot compare
"meters to kilograms" so to say, and this proportion is, of course, industry specific as
well. Nevertheless, it shows a strong positive correlation between the loyalty of
customers and the profit of a company. This is also supported by research of Light,
who claims that 5% decrease in loyalty results in 25% decrease in profit. One may
argue about exact figures, but overall these two researchers give a good idea about
how loyalty can influence profitability of a company.
To elaborate on loyalty, it is important to note that loyalty effects on profit may vary
to a very large extent depending on the type of loyalty a customer expresses. To
generalize this even further, even to making an over-generalization, one could say,
that two types of loyalty together are about 1/3 to 1/5 more important and efficient in
influencing profit of a company positively than behavioral loyalty alone. Together
they have a cumulative result, explaining, why those customers, who score high both
on behavioral and attitudinal loyalty influence the company much more, than those
who score high on one loyalty type alone. (Kumar and Reinartz, 2002) The least
profitable in these terms is attitudinal loyalty as it does not necessarily result in
purchasing behavior.
It is not even as important to calculate the exact profits resulting from the current state of the customer in terms of attachment and involvement, rather than to understand that customer needs (i.e. requires) to be guided through these different stages by differentiating the value offering specific to a given consumer at a given time in given conditions in order to expect the higher profits in return. Kumar and Reinartz reach the same conclusions in their article, when offering their own view on different loyalty groups: butterflies, true friends, strangers and barnacles. (Kumar and Reinartz, 2002) Never mind how one calls the different loyalty groups. The important thing is, that a customer needs (i.e. requires) to be guided through different stages to the satisfaction of higher and more binding needs/wants, resulting in higher loyalty and new benefits for the company as well as and customer himself. Thus, ideally, every customer should pass through the stages illustrated on the Figure K and to guide them through these is the job of the future marketer. Figure K:Customer evolution stages from marketer's perspective.
Original figure by author.

Conclusion

To conclude, one may say that marketers in globalizing world cannot compete
successfully in the long run and guarantee the competitiveness and sustainability of
their companies by differentiating and competing only on the basis of tangible
product attributes like quality, design, features, etc., as these can be easily imitated,
but rather on higher and higher differentiation levels giving customers more
intangible value that is easier to differentiate, resulting in more efficient marketing
techniques, improved financials, better competitiveness and higher stability of the
company, granting the sustainability of the business in the future.
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Singapore, 28 April 2003. DIFERENTSEERIMINE LOJAALSUSE NIMEL Tallinna Tehnikaülikool Kiiresti muutuvas keskkonnas, kus piirid hägustuvad, tooted ja teenused muutuvad üha sarnasemaks, kus turud on küllastunud ja üha suurem hulk müüjaid ajab taga konstantset hulka ostjaid, ning kus seetõttu toote funktsionaalsete omaduste põhjal eristumisest enam ei piisa kuna taoline eristumine on väga kergesti matkitav, on firma kasvu ja jätkusuutlikkuse alalhoidmine unikaalse tarbijaväärtuse pakkumise läbi turul muutunud aktuaalsemaks kui kunagi varem. Edu saavutavad need, kes suudavad pakkuda oma tarbijaile selgelt eristuvaid väärtusi (e kasusid). Kasud on need, mida tooted pakuvad tarbijaile, ja väärtused esindavad ka neid põhjuseid, miks tooteid ostetakse. Tarbijad ei vaja tooteid nende endi pärast, vaid väärtuste pärast, mida need pakuvad. Seega muutub unikaalse väärtuspaketi pakkumine aina olulisemaks – täpselt samuti, nagu tootja suudab võtta maksimaalse kasumi läbi täiuslikuma hinnadiskriminatsiooni, otsib ka klient maksimaalset tarbimisväärtust läbi toote/teenuse maksimaalse individualiseerituse. Seejuures "mida rohkem, seda uhkem" reegel siin ei toimi: rohkem ühte toote komponentväärtust ei tähenda veel kogu toote kui komponentide agregaatkogumi väärtuse tõusu. Olulised on balanss, kokkusobivus (kokku terviklikkus) ja unikaalsus. Kuna matkimine on lihtne ja funktsionaalsed "buketid" kergesti jäljendatavad, kuid samas on täielik individualiseeritus eraturgudel liiga kallis ning ka tarbijad vajavad erinevate tasandite vajaduste rahuldamiseks Abraham Maslow' vajaduste hierarhia alusel erinevate tasandite erinevaid väärtusi, tuleb arendada just mittemateriaalseid ja raskesti matkitavaid kuid tarbijale olulisi väärtusi rahuldavaid tooteomadusi vastavalt sellele tasemele, millisel tarbimine valdavalt toimub. McKinsey & Co. konsultandid jagavad tootest saadavad kasud seejuures kolmeks – funktsionaalkasuks, protsessikasuks ning suhtekasuks ja soovitavad rõhuda just kahele viimasele. Arvestades toodete küllusest ja sarnasusest tuleneva ratsionaalsuse osakaalu vähenemisega tarbimisprotsessis, on see õigustatud samm. Vastavalt funktsionaal-, protsessi- ja suhtekasu alusel kujunevale ostukäitumisele tekib eelistuste ja eristumise baasil seotus toote või tootjaga. Edasi kujuneb seotusest juba lojaalsus. Mida kõrgemal tasemel seotust tekitada, seda tugevam lojaalsus kujuneb. Ideaalis peaks toimima kvaliteet
rahulolu
lojaalsus
kasum skeem. Vahet tuleb teha tunnetatud ja käitumuslikul lojaalsusel, kuna nende toimed on erinevad. Kui on suudetud tekitada seotus ja sellel põhinev lojaalsus, saab turundaja võtta kasumit seda enam, mida kõrgema astme lojaalsusega on tegemist. Selline kasumi juhtimine muutub jätkusuutlikkuse ja konkurentsieelise hoidmisel üha olulisemaks.

Source: http://www.mattimar.ee/publikatsioonid/ettevottemajandus/2004/16_Soone.pdf