Management Notes

Reference Notes for Management

Customer loyalty programs such as airline frequent-flyer miles are an attempt to

Customer loyalty programs such as airline frequent-flyer miles are an attempt to


A. decrease competitors’ access to distribution channels.
B. develop a cost advantage independent of scale.
C. increase customers’ switching costs.
D. overcome the perishability of the hotel “product.”

The Correct Answer Is:

C. increase customers’ switching costs.

Customer loyalty programs, such as airline frequent-flyer miles, are designed with the primary objective of increasing customers’ switching costs. This means that the program aims to make it more difficult and less appealing for customers to switch to a competitor’s product or service.

Here’s a detailed explanation of why option C is the correct answer:

C. increase customers’ switching costs.

Customer loyalty programs work by offering rewards, incentives, or benefits to customers who consistently choose a particular brand or company. These rewards often come in the form of points, miles, discounts, or exclusive access to services.

When customers accumulate these rewards, they develop a vested interest in sticking with the company, as they have invested time and effort into earning them.

The concept of “switching costs” refers to the expenses, both tangible and intangible, that a customer incurs when they decide to switch from one brand or service provider to another. Tangible costs may include things like membership fees, cancellation charges, or the cost of purchasing new equipment or products.

Intangible costs, on the other hand, could involve the time and effort required to learn how to use a new system, or the potential uncertainty or risk associated with trying a new brand.

In the context of loyalty programs, customers who have accumulated a significant number of points or miles are less likely to abandon a company’s services or products. This is because they would lose the benefits they have accrued.

For example, a frequent flyer who has accumulated a large number of miles with one airline is less likely to switch to a competitor, even if they offer slightly cheaper fares, because they would forfeit the miles they’ve earned.

Now, let’s explore why the other options are not correct:

A. Decrease competitors’ access to distribution channels:

This option does not accurately describe the primary purpose of a customer loyalty program. Loyalty programs are focused on retaining existing customers rather than directly limiting competitors’ access to distribution channels.

While a strong customer base can indirectly impact a competitor’s access to distribution channels, it’s not the primary goal.

B. Develop a cost advantage independent of scale:

Customer loyalty programs can indeed provide a competitive advantage, but it’s not primarily related to cost. The advantage stems from the retention and repeat business of loyal customers.

It doesn’t necessarily lead to a cost advantage independent of scale, as the costs associated with running a loyalty program can increase with the size of the customer base.

D. Overcome the perishability of the hotel “product”:

This option is not relevant to the concept of customer loyalty programs. Perishability typically refers to the fact that services, like hotel rooms, cannot be stored or inventoried.

Loyalty programs are not designed to address this characteristic but rather to incentivize repeat business and discourage customers from switching to competitors.

In summary, customer loyalty programs are primarily aimed at increasing customers’ switching costs by providing incentives that make it less appealing for them to switch to a competitor.

While they can indirectly impact distribution channels and provide a competitive advantage, these are not their primary objectives. They are also not designed to address the perishability of a product or service.

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