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Customer loyalty programs

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zaarathelab Really wants to Beat The GMAT! Default Avatar
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Customer loyalty programs Post Fri Nov 25, 2011 2:29 am
Elapsed Time: 00:00
    Customer loyalty programs are attempts to bond
    customers to a company and its products and services
    by offering incentives-such as airline frequent flyer
    programs or special credit cards with valuable
    benefits-to loyal customers. In support of loyalty
    programs, companies often invoke the “80/20”
    principle, which states that about 80 percent of
    revenue typically comes from only about 20 percent of
    customers. However, this profitable 20 percent are not
    necessarily loyal buyers, especially in the sense of
    exclusive loyalty. Studies have demonstrated that only
    about 10 percent of buyers for many types of
    frequently purchased consumer goods are 100 percent
    loyal to a particular brand over a one-year period.
    Moreover, 100-percent-loyal buyers tend to be light
    buyers of the product or service. “Divided loyalty”
    better describes actual consumer behavior, since
    customers typically vary the brands they buy. The
    reasons for this behavior are fairly straightforward:
    people buy different brands for different occasions or
    for variety, or a brand may be the only one in stock or
    may offer better value because of a special deal. Most
    buyers who change brands are not lost forever;
    usually, they are heavy consumers who simply prefer
    to buy a number of brands. Such multi-brand loyalty
    means that one company’s most profitable customers
    will probably be its competitors’ most profitable
    customers as well.
    Still, advocates of loyalty programs contend that such
    programs are beneficial because the costs of serving
    highly loyal customers are lower, and because such
    loyal customers are less price sensitive than other
    customers. It is true that when there are start-up
    costs, such as credit checks, involved in serving a new
    customer, the costs exceed those of serving a repeat
    customer. However, it is not at all clear why the costs
    of serving a highly loyal customer should in principle
    be different from those of serving any other type of
    repeat customer. The key variables driving cost are
    size and type of order, special versus standard order,
    and so on, not high-loyalty versus divided-loyalty
    customers. As for price sensitivity, highly loyal
    customers may in fact come to expect a price discount
    as a reward for their loyalty.

    The primary purpose of the passage is to
    A. question the notion that customer loyalty programs
    are beneficial
    B. examine the reasons why many customers buy
    multiple brands of products
    C. propose some possible alternatives to customer
    loyalty programs
    D. demonstrate that most customers are not
    completely loyal to any one brand of product or
    E. compare the benefits of customer loyalty programs
    with those of other types of purchase incentive

    Success = Max(Hardwork) + Min(Luck)

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    HSPA GMAT Titan
    28 Jan 2011
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    Post Fri Nov 25, 2011 2:57 am
    IMO A

    second para 1st line help me answer this..

    First take: 640 (50M, 27V) - RC needs 300% improvement
    Second take: coming soon..

    zaarathelab Really wants to Beat The GMAT! Default Avatar
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    Post Sat Nov 26, 2011 11:48 pm
    OA IS A

    Success = Max(Hardwork) + Min(Luck)

    ReyWilli Just gettin' started! Default Avatar
    20 Jul 2009
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    Post Wed Nov 30, 2011 10:32 am
    IMO A, first paragraph states "HOWEVER, this profitable 20 percent are not loyal buyers..." showing the tone of the author to contrast with the loyalty programs.


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