maintaining customer loyalty

3.1.1 The Role of Marketing – Maintaining Customer Loyalty (Cambridge IGCSE Business Studies)

1 Understanding Business Activity

• Purpose of business – produce goods/services to satisfy needs and wants, generate profit, create employment.
• Needs, wants & scarcity – unlimited wants, limited resources → opportunity cost.
• Classification of businesses
  • Primary (e.g., farming, mining)
  • Secondary (manufacturing, construction)
  • Tertiary (services, retail)
• Private vs. public sector – ownership, profit‑orientation, funding sources.
• Entrepreneurship
  • Characteristics: risk‑taking, innovation, vision.
  • Business plan – market research, objectives, finance, marketing mix.
• Measuring size of a business
  • Number of employees
  • Turnover (sales revenue)
  • Capital (value of assets)
  • Note: profit is a performance indicator, not a size measure.
• Objectives
  • Profit maximisation, growth, market share, quality, social & environmental goals.
  • Stakeholder objectives may conflict – e.g., shareholders want profit, community wants low pollution.

2 People in Business

• Motivation theories
  • Maslow’s hierarchy of needs – physiological → self‑actualisation.
  • Herzberg’s two‑factor theory – hygiene (salary, conditions) vs. motivators (recognition, achievement).
  • Taylor’s scientific management – work‑study, incentive pay.
• Organisation & Management
  • Organisational structure – line, staff, matrix; simple org‑chart example.
  • Span of control – narrow (many managers) vs. wide (few managers).
  • Delegation – authority, responsibility, accountability.
  • Leadership styles – autocratic, democratic, laissez‑faire; table of advantages/disadvantages.
• Recruitment & Selection
  • Steps: job analysis → advert → short‑list → interview → offer.
  • Internal vs. external recruitment; part‑time vs. full‑time.
• Training & Development
  • Induction, on‑the‑job (co‑working, mentoring), off‑the‑job (classroom, e‑learning).
  • Benefits – improved skills, higher productivity, reduced turnover.
• Communication
  • Channels – face‑to‑face, email, intranet, social media.
  • Barriers – language, noise, cultural differences.
• Legal & Ethical Controls
  • Minimum Wage, National Minimum Wage Act.
  • Unfair Dismissal legislation.
  • Health & Safety at Work Act.
  • Equality Act – no discrimination.

3 Marketing – From Market Research to Loyalty

3.1 The Marketing Mix (4 Ps)

3.2 Market Research & Segmentation

• Primary research – surveys, focus groups, observation.
• Secondary research – published statistics, company reports.
• Segmentation criteria
  • Demographic (age, gender, income)
  • Geographic (region, urban/rural)
  • Psychographic (lifestyle, values)
  • Behavioural (loyalty, usage rate)
• Targeting – select segment(s) that match the company’s strengths.
• Positioning – create a clear, distinctive place in the consumer’s mind.

3.3 Maintaining Customer Loyalty

3.3.1 Key Strategies

1. Relationship marketing – personalised contact, regular communication, trust‑building.
2. Loyalty schemes – points, tiers, membership clubs, subscription benefits.
3. Excellent customer service – prompt, helpful, consistent support at every touch‑point.
4. Consistent product/service quality – reliability, durability, performance.
5. Customer feedback loops – surveys, complaints, online reviews used for continuous improvement.
6. Digital & CRM integration – apps, portals, data‑driven personalised offers.

3.3.2 Components of an Effective Loyalty Programme

3.3.3 Legal & Ethical Considerations

• Data protection – obtain explicit consent, store data securely, comply with GDPR or local privacy laws.
• Transparent terms – clearly state how points are earned, expiry dates, and any restrictions.
• Misleading promotions – avoid false claims about reward value.
• Fair competition – loyalty schemes must not breach anti‑trust or price‑fixing rules.

3.3.4 Cost‑Benefit (ROI) of a Loyalty Scheme

Simple ROI check: If annual cost = $20 000 and the increase in Customer Lifetime Value (CLV) from participants = $30 000, net benefit = $10 000 (positive return).

3.3.5 Measuring Loyalty Success

• Repeat Purchase Rate (RPR) – % of customers buying more than once.
• Customer Lifetime Value (CLV) – total profit expected from a customer over the whole relationship.
• Net Promoter Score (NPS) – likelihood of recommending the brand (‑100 to +100).
• Redemption Rate – % of earned points/rewards actually used.
• Customer Satisfaction (CSAT) score – short‑term rating from surveys.

3.3.6 Sample Calculation – CLV

Formula (commonly used in exam answers):

$$CLV = \frac{\text{Average Purchase Value} \times \text{Purchase Frequency} \times \text{Gross Margin}}{\text{Churn Rate}}$$

Example: average purchase = $50, purchases 4 times a year, gross margin = 30 % (0.30), annual churn rate = 20 % (0.20).

$$CLV = \frac{50 \times 4 \times 0.30}{0.20} = \frac{60}{0.20} = 300$$

Interpretation: the business can expect a profit of $300 from an average loyal customer over the expected relationship period.

3.3.7 Exam‑style Application Tip (AO2 / AO3)

• When a Paper 2 case study asks you to recommend a loyalty initiative, link it to earlier analysis: “Because the company already meets customers’ need for low price (see Q1), a points‑based scheme will reinforce the value‑for‑money perception and raise the CLV from $250 to $300, covering the programme’s $20 000 cost.”
• Present a concise cost‑benefit table (as above) to demonstrate balanced judgement.

4 Operations Management

• Production methods
  • Job, batch, flow (mass) production – advantages & disadvantages table.
• Location decisions
  • Factors – transport costs, labour availability, market proximity, government incentives.
  • Use of a decision‑matrix example.
• Quality control
  • Techniques – inspection, statistical process control, ISO 9001.
  • Cost of quality: prevention, appraisal, internal & external failure costs.
• Inventory management
  • Just‑in‑Time (JIT) vs. stock‑holding.
  • Economic Order Quantity (EOQ) formula (optional for A‑Level).
• Technology & automation – impact on productivity, skill requirements, and ethical concerns.

5 Finance and Accounts

• Sources of finance
  • Internal – retained earnings, sale of assets.
  • External – bank loans, overdraft, equity (share issue), leasing, venture capital.
  • Table comparing advantages, disadvantages, and typical uses.
• Financial statements (A‑Level depth)
  • Income statement – revenue, cost of sales, gross profit, operating expenses, net profit.
  • Balance sheet – assets (fixed, current), liabilities (long‑term, current), equity.
  • Cash flow statement – operating, investing, financing activities.
• Key ratios

  Ratio	Formula	Interpretation
  Gross Profit Margin	GP ÷ Sales × 100%	Profit after direct costs.
  Net Profit Margin	Net Profit ÷ Sales × 100%	Overall profitability.
  Current Ratio	Current Assets ÷ Current Liabilities	Short‑term liquidity.
  Return on Capital Employed (ROCE)	Operating Profit ÷ Capital Employed × 100%	Efficiency of capital use.
  Break‑even point (units)	Fixed Costs ÷ (Price – Variable Cost per unit)	Sales needed to cover all costs.

• Budgeting & forecasting – cash flow forecasts, sales budgets, variance analysis (budget vs. actual).
• Ethical & legal finance issues
  • Tax avoidance vs. evasion.
  • Financial reporting standards (IFRS/GAAP).
  • Insider trading and market abuse.

6 External Influences on Business

• Economic environment
  • Growth, inflation, unemployment, exchange rates – impact on demand and costs.
  • Fiscal policy (taxation) & monetary policy (interest rates).
• Political & legal environment
  • Regulation (health & safety, consumer protection), trade agreements, Brexit‑type changes.
• Socio‑cultural factors
  • Demographic change, lifestyle trends, ethical consumerism.
• Technological change
  • Automation, e‑commerce, digital marketing, data analytics.
• Environmental sustainability
  • Carbon footprint, waste reduction, green branding – link to corporate social responsibility (CSR).

7 Integrating Loyalty into the Wider Business Strategy

• Use market research (Unit 3) to identify a segment most likely to respond to a loyalty scheme.
• Align the scheme with the 4 Ps – e.g., points redeemable for product upgrades (Product), tiered pricing discounts (Price), app‑based redemption (Place), targeted email offers (Promotion).
• Ensure operations can deliver promised rewards (Unit 4) – inventory for free gifts, reliable delivery.
• Finance team must calculate ROI, monitor CLV and ensure the scheme is financially sustainable (Unit 5).
• External influences – data‑protection law, competitive pressures, and consumer trends toward ethical loyalty programmes (Unit 6).