BUSI 442 Week 4 Topical Paper 2 Example

Retention That Pays: Profitable Loyalty, Satisfaction and the Design of Reward Programs

Introduction

Keeping customers is usually cheaper than finding new ones, and retention has become a central goal of internet marketing. Retention marketing, in the account by Roberts and Zahay (2018), is the work of Yet retention for its own sake can be expensive: discounts that reward customers who would have stayed anyway, programs that cost more than they earn, and attention spent on customers who will never be profitable. This paper argues that retention marketing should aim at profitable loyalty, the loyalty of customers whose relationships create value for both sides. Six studies carry the argument, each applied to Northfield Garden Supply, the online garden seller from the earlier papers, as it designs its first rewards program.

Not Every Loyal Customer Is Profitable

Reinartz and Kumar (2000) tested a widely held belief, that long-life customers are the most profitable, using data from a catalog retailer, a business in which customers can stop buying without notice. Customer tenure and profit turned out to be only loosely related in their data: some customers of many years earned the retailer little, some short-lived ones earned it a great deal, and longer relationships did not reliably bring lower service costs or higher prices.

The finding warns Northfield against rewarding tenure alone. A customer who has bought one packet of seeds every spring for eight years is loyal but contributes little, while a new customer who spent heavily on raised beds and tools in a single season may be far more valuable. Retention efforts should be directed by measured profitability and potential, not by the length of the relationship. Northfield already has the data to do this, since every order records what was bought, when and at what margin.

Satisfaction and the Length of Relationships

Why do customers stay? Bolton (1998) studied customers of a cellular phone service and found that customers' cumulative satisfaction with the service was positively related to how long they remained customers. She also found that customers with longer experience weighted their prior cumulative satisfaction more heavily, so a single new disappointment mattered less to an established customer than to a new one.

Two lessons follow. First, satisfaction is the foundation of retention, which means that plant quality, packaging and delivery matter more to Northfield's retention than any program. Second, the first season is the most fragile. A new customer whose first order of seedlings arrives wilted has little accumulated satisfaction to absorb the disappointment, so Northfield should invest heavily in getting first orders right and in resolving first-season problems generously.

What Loyalty Programs Do and Do Not Change

Loyalty programs are the most visible retention tool, and the evidence about them is mixed. Sharp and Sharp (1997) studied a large multi-retailer loyalty program in Australia and compared participating brands' repeat-purchase patterns with what would be expected from their market shares. They found only modest evidence of increased loyalty among participating brands, with several showing little or no excess loyalty, suggesting that such programs did not dramatically change how customers divided their purchases.

Bolton et al. (2000) offer a more favorable view from a different angle. Studying a financial services company's loyalty program, they found that members discounted or overlooked negative evaluations of the company relative to competitors when deciding whether to continue doing business, and that being a member went along with longer retention and heavier use. A program may not transform buying patterns, but it can make customers more forgiving.

Taken together, the studies suggest that Northfield should not expect a rewards program to create loyalty on its own. It can reasonably expect the program to give satisfied customers an additional reason to return and to soften the effect of occasional problems, such as a delayed shipment.

Designing Rewards That Motivate

If Northfield launches a program, its design matters. Kivetz et al. (2006) tracked a coffee shop's stamp card and saw customers buy coffee more often as a free drink drew closer, in line with the goal-gradient idea that effort rises near a goal. They also found that the illusion of progress accelerated purchases: customers given a card requiring more stamps but with two already stamped bought faster than those with a smaller card and no stamps, though both needed the same number of purchases. Customers who had accelerated toward the reward were also more likely to join the program again.

Northfield can apply both findings. Its program should make progress visible wherever customers look, from emails to the account page, and it can give new members a small opening credit so they begin partway toward a first reward. Rewards should be reachable within a season, since a reward that requires two years of purchases offers no gradient to climb. The program should also avoid rewards that cheapen the brand, such as constant percentage discounts, in favor of rewards gardeners value, like a free flat of seedlings or a premium tool, which keep the program tied to what Northfield does best.

Building Profitable Loyalty

Kumar and Shah (2004) proposed a framework for building and sustaining profitable customer loyalty that distinguishes behavioral loyalty, repeated buying, from attitudinal loyalty, a favorable attitude and commitment, and argues that firms should reward customers in ways tied to their profitability rather than to purchases alone. They suggested a two-tier approach in which all customers can earn basic rewards, while the most profitable customers receive additional, often experiential, rewards that deepen attitudinal loyalty.

For Northfield, the first tier would be points on every purchase, redeemable for seeds and supplies. The second tier, reserved for the most valuable customers, would offer things money cannot easily buy: early access to limited plant varieties, a free consultation with the company's horticulturist and a seat at a spring greenhouse tour. Rewards like these build the attachment that the research associates with lasting relationships.

Winning Back Lapsed Customers

Retention also includes customers who have already drifted away. Many of Northfield's customers buy for one or two springs and then stop, often because a move, a busy year or a failed planting discouraged them. Reinartz and Kumar (2000) emphasize that in noncontractual businesses a company cannot see the moment a customer leaves, so it must infer from silence. Northfield should treat a customer who skips a full spring as lapsed and send a short series of win-back emails before the next season: a note acknowledging the absence, a guide matched to what the customer grew before, and a modest offer. Customers who lapsed after a complaint deserve a personal message first. Win-back efforts should be judged against a holdout group, since some lapsed customers return on their own.

Retention Across the Seasons

A garden retailer faces a retention problem many businesses do not: most of its customers need it only a few months a year. Retention therefore depends on staying useful in the off-season without becoming a nuisance. Northfield can send a fall bulb-planting guide in September, a winter seed-catalog preview in January and a February seed-starting checklist, each tied to what customers grew. These messages keep the relationship alive between springs, which is when, as Bolton (1998) found for service relationships, accumulated satisfaction does its quiet work.

Measuring Profitable Retention

Retention programs need measures that match their aim. Northfield will track the retention rate of first-season customers, the share of customers in each value tier who return, the average margin per returning customer and the cost of rewards as a share of sales. It will also compare program members with similar non-members, recognizing that members may differ from the start. The decisive question is not whether members buy more, but whether the program makes customers more profitable than they would otherwise have been.

Limits and Cautions

Retention programs can backfire. Rewards that are too generous train customers to wait for points before buying, and programs that are complicated frustrate the customers they aim to please. Customers may also resent being treated as less valuable if tiers are presented carelessly. Finally, a program creates obligations: points promised must be honored, and changes to the rules should be announced well ahead. Northfield should describe the second tier as recognition for its most active gardeners, not as a ranking of customers, and keep the basic program simple enough to explain in one sentence.

A Biblical Perspective: Knowing the Condition of the Flock

A proverb urges the owner of flocks and herds to keep close watch over them, since wealth does not endure on its own (English Standard Version Bible, 2001/2016, Proverbs 27:23-24). The proverb commends attentive care for what one has been given. Applied to customers, it calls a business to pay attention to the people already in its care, to notice when they are struggling, to resolve their problems and to serve them well, rather than chasing new customers while neglecting existing ones. The research agrees: satisfaction built over time keeps customers, and programs work best when they reward and deepen relationships that care has already earned.

Conclusion

Profitable retention rests on measurement, experience and thoughtful design. Not every loyal customer is profitable, so retention efforts should follow measured value. Satisfaction accumulated over time is what keeps customers, so the first season deserves special care. Loyalty programs have modest effects on buying patterns but can make customers more forgiving, and their design should use visible progress and reachable rewards. A two-tier program that rewards everyone modestly and the most valuable customers experientially offers Northfield a path to loyalty that pays.

References

Bolton, R. N. (1998). A dynamic model of the duration of the customer's relationship with a continuous service provider: The role of satisfaction. Marketing Science, 17(1), 45-65. https://doi.org/10.1287/mksc.17.1.45

Bolton, R. N., Kannan, P. K., & Bramlett, M. D. (2000). Implications of loyalty program membership and service experiences for customer retention and value. Journal of the Academy of Marketing Science, 28(1), 95-108. https://doi.org/10.1177/0092070300281009

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

Kivetz, R., Urminsky, O., & Zheng, Y. (2006). The goal-gradient hypothesis resurrected: Purchase acceleration, illusionary goal progress, and customer retention. Journal of Marketing Research, 43(1), 39-58. https://doi.org/10.1509/jmkr.43.1.39

Kumar, V., & Shah, D. (2004). Building and sustaining profitable customer loyalty for the 21st century. Journal of Retailing, 80(4), 317-329. https://doi.org/10.1016/j.jretai.2004.10.007

Reinartz, W. J., & Kumar, V. (2000). On the profitability of long-life customers in a noncontractual setting: An empirical investigation and implications for marketing. Journal of Marketing, 64(4), 17-35. https://doi.org/10.1509/jmkg.64.4.17.18077

Roberts, M. L., & Zahay, D. (2018). Internet marketing: Integrating online and offline strategies (4th ed.). Cengage Learning.

Sharp, B., & Sharp, A. (1997). Loyalty programs and their impact on repeat-purchase loyalty patterns. International Journal of Research in Marketing, 14(5), 473-486. https://doi.org/10.1016/S0167-8116(97)00022-0