i

Can customer loyalty be considered an

aspect of habit formation as part of a

business strategy; and if so, how

effective is Tesco’s loyalty scheme

against competitive rivals such as Aldi.

Domas Miciulevicius

domdm321@hotmail.co.uk

ii

Acknowledgements

Firstly, I would like to convey my profound gratitude to Mr. Timothy Dee, the supervisor of my dissertation, who has been tremendously helpful and patient

throughout my research progress, and consistently leading me in the right direction throughout the course of my study.

Along with my supervisor, I would like to thank Ms. Sara Garratt for encouraging me to pursue the study of customer habit formation at the beginning of the year.

I am very thankful for the rest of the Professors at Canterbury Christ Church Business School; Dr. Federico Iannacci, Mrs Kristine Pole , Mrs Nicky

Leatherbarrow, , Dr. Qionglei Yu, Dr. Wim van Vuuren who have reinforced my study progress during the final year of my degree.

iii

Abstract

The primary aim of this study is to identify how, and whether, customer habits

can be used to generate loyalty within a supermarket environment. It is also the

aim to, secondly, analyse how Tesco’s loyalty scheme could create habit

formation through the power of the reward system, as well as to assess the

impact of competitive rivals such as Aldi, which do not have a loyalty scheme.

Thirdly, the study aims to explore to what degree habit formation in customers

influences customer loyalty and business strategy. Finally, the study will

identify the limitations of habit phenomena as a strategy, and the theoretical

strategic considerations open to Tesco when embracing customers’ purchasing

habits. This study will draw upon past research to review important findings

related to customer loyalty in the context of habitual behaviour.

iv

Content

INTRODUCTION ........................................................................................................................ 1

DEFINING HABIT AND CUSTOMER LOYALTY ...................................................... 1

HABITS AND LOYALTY IN BUSINESS .................................................................. 1

HOW ARE HABITS BUILT IN A CUSTOMER? ................................................................. 2

LOYAL HABIT FORMATION .................................................................................................. 4

THE POWER OF REWARD .................................................................................. 5

CASE STUDY: TESCO vs ALDI ............................................................................................... 6

WOULD TESCO’S LOYALTY SCHEME BE EFFECTIVE AS A BARRIER TO PREVENT

CUSTOMERS SWITCHING TO ALDI? ..................................................................10

BUSINESS STRATEGY CONSIDERATIONS ........................................................... 11

LIMITATIONS ........................................................................................................................... 14

CONCLUSION ........................................................................................................................... 15

REFERENCES ............................................................................................................................17

1

INTRODUCTION

DEFINING HABIT AND CUSTOMER LOYALTY

Psychologists have witnessed that the recurring experience of a stimulus surges

its attractiveness (Moreno-Okuno, 2012). There is research agreement that

‘habits’ are behavioural responses which are automatic to specific

environmental situations (cues), and which are believed to become established

through repetition of behavioural actions in consistent contexts (Lally and

Gardner, 2013). Thus, the same response – for example, purchasing a sandwich

in Tesco during lunch-time – is activated upon the perception of the cue – in

this instance, perhaps finishing one’s morning class and popping into Tesco.

Consequently, repetition in a consistent context will enable and increase the

‘automaticity’ with which the behaviour is performed when the situation is

repeatedly encountered. Bargh (1994) identified that ‘automaticity’ is evident if

the behaviour of an individual displays any, or all, of the following features:

efficiency, lack of awareness, unintentionality, and uncontrollability (Bargh,

1994; Lally and Gardner, 2013). Although consistency in repetition is needed to

form a habit in an individual, including a customer, the relationship between

repetition and automaticity is not clear, given the unspecified frequency of

repetition that is needed to result in the same increase in automaticity (Lally

and Gardner, 2013). Equally, marketing studies have frequently categorised

customers who continually purchase a brand, as ‘loyal customers’ (e.g., Che and

Seetharaman, 2009). Oliver’s (1999) model highlights that customer loyalty is

the result of active planning, beginning with positive perception towards a

product or brand and a sturdy intention towards continually purchasing the

same product, despite competitive influences and marketing efforts having the

possibility to create a switch of behaviour (Uncles, Dowling and Hammond,

2003; Oliver, 1999). Identifying the influences on customer loyalty can assist

with allocating resources among marketing tactics, and permit the creation of

customized marketing plans for full effectiveness (Seetharaman, 2004).

HABITS AND LOYALTY IN BUSINESS

The study and research of habits is important in the analysis of brand and

financial performance, for the reason that it impacts consumer behaviour;

about 45% of an individual’s daily behaviour is repeated in the same context

(Wood and Neal, 2009). For businesses, the repeated purchases and

consumptions of customers are connected with increases in their market share

of the brand, the customer’s lifetime value, and sales performance (Ehrenberg

2

and Goodhardt, 2002; Wirtz, Mattila, and Lwin, 2007). Repetition that occurs

with the customer through habit formation could be said to imply a customer is

displaying loyalty, because, from a business perspective, customer rewards

promote repetition (Wood and Neal, 2009). Theoretically, loyalty strategies

seek to shape sturdier and stronger associations with customers (Duffy, 1998).

The loyalty industry, especially in supermarkets such as Tesco, is beginning to

identify that it must make rewards much more appealing and secure if it is to

survive. However, discount retailers such as Aldi display no concern about, or

focus on, creating loyalty schemes. If mainstream supermarkets such as Tesco

are to maintain their customer bases and profit margins from customers’

shopping behaviour, they need to create ways that will cue their customers into

innovative habits of spending (Cook, 2016).

Habits portray the ways in which the certain behaviours involved in using a

particular service become gradually automated, as a result of repeated

involvement with that service (Murray and Häubl, 2007). Thus, repetition,

particularly habits, may represent a substantial aspect of consumer behaviour,

and one that is correlated with central marketing outcomes (Wood and Neal,

2009). The time taken for habit formation to evolve, however, remains

unexplored, because recent literature has tended to concentrate mostly on

recognised habits, instead of the process of habit development itself (Lally et al.,

2010).

HOW ARE HABITS BUILT IN A CUSTOMER?

According to Wood and Neal (2007), habits develop initially from pursuing a

goal – the goal, once attained, becomes the basis of a habit that is then

performed without a focus on that specific goal or outcome. The context cuing

of habits are said to develop and arise in two possible forms. One is the ‘direct’

form, where the habit response is activated by the association between context

cues and responses. For example, an individual purchasing a newspaper in the

morning on the way to work represents the actualization of a goal to, for

example, gain information, or pass the time. However, the achievement of this

process becomes less ‘compulsory’ as the purchase is repeated and becomes part

of a routine which is triggered by associated context cues (e.g. the sight of the

newspaper section in the store or others engaged in the purchasing of a

newspaper). Furthermore, repeatedly retrieving one item in a conceptual

category reduces the accessibility of alternative items in that category

(Anderson, 2003).

Findings show that goals can lead to habits by motivating repetition and by

encouraging contact with cues that trigger such habits, or which interact with

habits in ways that preserve the learned habit associations. In addition, in their

‘motivated’ form, a habit is triggered by the motivation inherent in a

3

performance context when an individual experiences a reward (Wood and Neal,

2007). Therefore, from a marketing perspective, when a customer identifies a

present context of promotional content, for example, seeing a distinctive brand

logo or a ‘50% Sale!’ sign, it ‘teaches’ the customer that, from their previous

purchasing experience, the behaviour will be rewarded when the content is

present and not rewarded when the content is absent (Nord and Peter, 1980).

Typically, there is an ‘economic reluctance’ to resist the behaviour, because the

customer feels he/she loses something by purchasing through another brand

that wasn’t the cause of the motive and past reward (Duffy, 1998). This finding

on habitual customer preference has been backed up by Moreno-Okuno (2012),

who identified competition between businesses through examining habit

formation. They concluded that if two businesses – for example, Tesco and Aldi

– were entering the same market with a very similar product, the first business

that has the ability to direct individual preferences toward the characteristics of

the product will have the habit forming advantage.

However, in their study conducted in 2009, Wood and Neal identified the

‘habitual consumer’ as that consumer who automatically repeats past

behaviours with little regard to current goals and valued outcomes. This study

highlights that in daily life, the inclination to act on habits is further fortified by

everyday demands such as time pressures, distraction, and self-control

depletion (Wood and Neal, 2009). It can be argued that, if customers have little

control themselves in changing their habits, then businesses such as Tesco can

step in and attempt to retain their customer base, and reduce the activation of

the customer’s interest in pursuing alternative brands. Findings suggest that

customers with secure habits retain anticipation about the environment that

reduces their ability to detect when it changes. With these expectations in place,

consumers may well overlook new information that presents itself about the

practiced action, and its alternatives (Verplanken and Wood, 2006). Further

investigations suggest that, although this may not appear as loyal behaviour in

the customer in the sense of a strongly held commitment to the brand, the

customer still buys the same brand again and again, because of weak

commitment, and a belief that it is not worth the time and trouble to search for

an alternative (Uncles, Dowling and Hammond, 2003). Accordingly, once

triggered, habits are performed largely because they represent the path of least

resistance in people's ongoing stream of action (Wood and Neal, 2009).

4

LOYAL HABIT FORMATION

Oliver (1999) argues that consumers go through various stages of loyalty

behaviour – in essence, loyalty from satisfaction through to loyalty in intention

– before being committed to loyal behaviour. However, the weakness of this

model is that it does not analyse customers’ loyalty behaviour when the

behaviour has been acquired, and constantly been performed, in a continuous

environment, e.g. a supermarket. Research by Ottar Olsen et al., 2013 extended

Oliver’s model by identifying habit strength as the main factor that provides a

substantial increase in loyalty behaviour, in contrast to the traditional model

which states that intention is the mediator (see Figure 1). Therefore, as a habit

forms and increases in strength through the action of the behaviour, the loyal

behaviour is much less likely to depend on loyal intentions and hinges mostly

on the automaticity of the habit (Ottar Olsen et al., 2013). Therefore, one can

argue that it is very difficult for a business to identify which customers are the

most loyal, and to distinguish the difference between their purchasing a product

simply out of habit, or because of an intention to be loyal to the overall business.

An important goal for any business is to identify how to manage these

differences between consumers (MacInnis, Park and Priester, 2009).

Figure 1. Introduction of ‘habit strength’ as a main factor impacting loyalty behaviour. (Ottar Olsen et al., 2013).

Two key strategies are:

To increase the repeated patronage of occasional customers; and,

To maintain the repeated patronage of loyal and habitual customers.

Managing habitual customers requires different programs than those that are

normally used to manage loyalty, as managing habits within a customer

involves adjusting the cue, or the response to a cue (MacInnis, Park and

Priester, 2009). Consequently, a business has to closely monitor and identify

which customers are more loyal in terms of repetitive shopping habits, in order

to implement a successful loyalty scheme. Thus, an effective way to improve

customer retention is to reward repetitive customers; and to potentially attract

5

new customers as a competitive alternative (The Marketing Donut, 2016). For

example, since Tesco is the most successful UK supermarket, with a market

share of 28.5%, one can argue that the clubcard loyalty scheme implemented at

Tesco is a successful marketing strategy (Kantar Worldpanel, 2016). This loyalty

scheme takes a customer’s data and identifies their ‘customer profile’, in

exchange for modest rewards, for the formation of a relationship (Rowley,

2005). This repetitive and progressive point/reward build-up scheme has the

potential to increase habit strength, as habits form slowly in a constant context

where the same conduct is regularly practised (perhaps even several times a

week) (Ouellette and Wood, 1998).

THE POWER OF REWARD

Research by Bolton, Kannan and Bramlett (2000) concluded that members of

loyalty programs will tend to have stronger ties to a service than non-

members. This links back to the findings of Wood and Neal (2009), in that it

indicates that Tesco customers, for example, would recognise these rewarding

outcomes and are likely to form the intention to repeat the behaviour in the

future (Wood and Neal, 2009). Traditional studies stated the belief that habits

developed when rewards were given for repeated behaviour (Hull, 1943, 1951).

However, recent research highlights that there is a distinction between

extrinsic rewards (e.g. financial incentives in the form of Tesco coupons) and

intrinsic rewards (e.g. satisfaction gained from shopping, for instance, at

Tesco) (Lally and Gardner, 2013; Deci, Koestner and Ryan, 1999). Therefore,

if, for example, Tesco’s extrinsic reward for their customers is wholly reliant

upon their clubcard loyalty scheme, this can reduce the intrinsic motivation

for a customer to continue to perform their purchasing behaviour (Deci,

Koestner and Ryan, 1999).

On the other hand, the power of loyalty reward programs may well be influenced

by customers’ habit intensities, and their valuations of their service familiarities

(Bolton, Kannan and Bramlett, 2000). Equally, Parker and Worthington

(2000) claim that customer loyalty towards a reward scheme is most likely

influenced by attitude, social factors, and situational factors. First, the strength

of a customer’s loyalty is likely to be impacted by the satisfaction they feel

regarding what they are receiving. Second, a customer’s loyalty behaviour could

be formed by what is being presented from other schemes. And third, their

behaviour may be predisposed by former consumers, the media, and social

norms (Rowley, 2005). This highlights other factors, but is consistent with the

previous arguments, in that it affirms that habits develop and gain strength

through satisfactory execution – the actions of the customer are less likely to be

due to loyal intentions than the repetitive nature of habit (Ottar Olsen et al.,

2013).

6

ARE CUSTOMERS PURPOSELY LOYAL?

It is important to distinguish between loyalty and habit-based relationships

(MacInnis, Park and Priester, 2009). Although purchase frequency is a vital

portion of habit, it alone cannot distinguish strictly habitual consumers from

loyal consumers who purchase regularly out of evaluative or sentimental forces,

as asserted by Liu-Thompkins and Tam (2013). These researchers suggest that

customer loyalty is moderately free of context and unaffected by situational

cues, in comparison to habits. The authors suggest that customer loyalty can

exist on an implicit level, meaning that consumers may be unaware of their

relative preferences. Mittal and Kamakura’s (2001) findings confirm this; they

discovered that intention is not the main driver in customer loyalty, and that

there are intention-loyal customers, who act with careful consideration and

planned commitment in their purchasing actions, and habit-loyal customers

who, in contrast, act with less planning and a more automatic mode of

purchasing. Although implicit attitudes still impact intentions and can be

revealed by a flexible orientation, habits are substantially more rigid because

they involve a standardised response on being confronted with a specific cue.

CASE STUDY: TESCO vs ALDI

Tesco’s loyalty scheme may not be as effective as it could be, if customers are

considering other purchasing options outside of their typical cues – factors such

as a competitor’s low prices, such as those offered by Aldi (see Figure 2). The

low-price end of the market has been increasingly served by Aldi, which focuses

on achieving a low price value proposition (Disney, 1999). D’Aveni’s (1994, cited

in Johnson, Whittington, and Scholes, 2010, pp.211-213) interactive strategies

on the relationship between ‘perceived quality’ and ‘price' illustrate how

organisations such as Tesco and Aldi can interact and compete, on the basis of

low prices or high quality, or a combination of the two. Aldi’s strategy is to

display lower prices than Tesco, but still to offer the same level of ‘perceived

quality’ or value for the customer (Dowling and Uncles, 1997). Therefore,

theoretically, it is clear that Aldi’s position would be placed at a lower price level

point, but in the same point of quality, on the interactive strategy graph, in line

with Tesco (D’Aveni, 1994, cited in Johnson, Whittington, and Scholes, 2010,

pp.211-213) (see Figure 2). Therefore, the essential question for Tesco to ask is,

whether their loyalty program offers a more enhanced return than the

alternative from Aldi, such as in price cuts (Dowling and Uncles, 1997).

Kumar (2006, cited in Johnson, Whittington, and Scholes, 2010, p.212)

developed a “framework for responding to low-cost rivals” and states that there

are three key responses for an organisation such as Tesco to identify: to first,

7

assess the threat; then to seek out and consider a differentiation response, and

to seek out a cost response (see Figure 3). These strategy considerations would

assist Tesco in identifying whether or not their loyalty scheme is worth

modifying – by, for instance, raising the reward levels in response to Aldi; or, if

a combination of such interactive strategies are needed in order for Tesco to

maintain competitiveness.

Figure 2. The display of ‘interactive strategies’ of ‘price’ and ‘perceived quality’ in Tesco and

Aldi. (D’Aveni, 1994, cited in Johnson, Whittington, and Scholes, 2010, pp.211-213)

Figure 3. The framework that displays how an organisation can respond to a ‘low-cost rival’

(Kumar, 2006, cited in Johnson, Whittington, and Scholes, 2010, p.212)

Tesco

Aldi

8

However, these price sensitivity models, no matter how progressive, do not

correlate to perceived customer conduct. Undeniably, social sciences may be

far more applicable to clarify retail supermarket demand activity (Rosch,

2010). Studies have shown that supermarket selection is based on key

consumer dynamic factors, including store location, which makes consumers

who are ‘locked in’ be perceived as ‘loyal’ when they are driven primarily by,

for instance, geographical proximity (Berasategi, 2014).

Additionally, repeated purchasing due to habits is maintained or changed

through the contexts that trigger consumers’ brand purchases and

consumptions (MacInnis, Park and Priester, 2009). In a highly competitive

sector such as supermarkets, businesses such as Tesco and Aldi are profoundly

attracted to marketing strategies designed to strengthen customer loyalty for a

product, or to break a customer’s loyalty habit in purchasing competing

products (Ottar Olsen et al., 2013).

As an example of the above, Aldi strategically developed an advertising TV

campaign named the ‘like brand’ campaign, which began to change the

favourability and strength of the customer relationship with purchasing and

consumption intentions (MacInnis, Park and Priester, 2009). Within this

campaign, Aldi first began to manage customer loyalty by fostering attribute

beliefs about their products as well as belief in the satisfaction gained from

purchasing the product, to create an intention-loyal customer. The campaign

advert displayed a customer broadcasting their satisfaction about a ‘cheaper’

Aldi-branded product, as opposed to the ‘well-known’ brand, implying that the

Aldi version brings the same satisfaction as the branded version (Business Case

Studies, 2016). One can argue that when a price cut is offered, for instance by

Aldi, the value of this immediate reward may be more motivating for a customer

than a promise of a potential delayed reward, for instance by Tesco’s coupon

delivery (Dowling and Uncles, 1997). The Aldi advertising campaign allowed

viewers to evaluate and balance the benefits and costs (exclusive value) of the

product, and introduced to them the idea of choice. These types of media

campaigns and product advertisements are effective in changing consumers’

attitudes and judgements (Verplanken and Wood, 2006), disrupting the

consumer’s shopping habit by implying that the customer needs to change their

shopping and purchasing behaviour. Reward research suggests that disrupting

established patterns of behavioural loyalty is difficult (Dowling and Uncles,

1997). However, when customers form plans to shop at Aldi in response to such

an environmental cue (the TV advert), they are establishing the beginning

stages of habit formation (Verplanken and Wood, 2006).

The above advertisement strategy of Aldi is an example of environmental

control, which Neal, Wood, and Quinn (2006) suggest is a motivational

intervention to initiate new habit learning, and a cue for habit change. Through

associative conditioning, environmental cues can acquire the motivational

9

power to initiate and guide action – in this case, to consider shopping at Aldi

(Verplanken and Wood, 2006). Therefore, it can be argued that Aldi’s TV

advertising campaign had the motivational power to attract customers with the

clear reward of similar but cheaper products. This ‘motivational’ aspect links

back to the first Wood and Neal study (2007), which clearly determined that a

habit is caused through the motivation of receiving a reward.

There has also been research to suggest that persuasive interventions based on

information about the benefits of an alternative product are less effective for

habitual-loyalty consumers unless there is a break in the context or the physical

surrounding link. The main question for Aldi to ask, when considering any

marketing strategy which involves ‘habit change’, is whether the target

behaviour is habitual (Verplanken and Wood, 2006), and whether customers

shopping at Aldi is, in fact a habitual behaviour. In support of this, customers

who ‘shopped around’ had lower habit strength, as revealed in previous store

patronage (Fox and Semple, 2002). Based on the previous research, it is clear

that the activity of shopping can be seen as habitual because it involves all of the

characteristics that are associated with forming a habit, such as rewards,

repetition, context, and intention (Verplanken and Wood, 2006). However, a

loyalty scheme may not necessarily be vital for encouraging habitual behaviour

and the prevention of customer switching. Keaveney’s (1995) study on customer

switching in service industries discovered that customers switch service for

numerous motives, including pricing (which is clearly emphasised by Aldi),

increased convenience, existing core service failures, and existing poor service

encounters. It is clear, therefore, from the success of low-priced stores like Aldi,

that it is not essential for a supermarket to run a customer loyalty scheme to

classify customers as loyal and achieve sales, because prices in discounters like

Aldi have taught customers to ‘shop around’ (Wallop, 2014). Thus, pricing

forms stimulus control by restricting the exposure to existing stimulus cues,

which has been theoretically affirmed as a habit change intervention (Wood,

Tam and Witt, 2005).

If a customer decides to shop at Aldi because of, for example, a TV advertising

campaign, this cumulative satisfaction that the customer may experience by

being presented with the alternative store layout, product range and pricing

would likely foster the habit formation process, and would be less guided by

loyal intention (Ottar Olsen et al., 2013). The customer would have disrupted

their previous shopping habit – for example, shopping at Tesco – and would

have formed associations with the features of the new environment, such as the

new store’s layout and its ‘cheaper’ products. If the customer continues to shop

at Aldi and repeats this actions, a new habit may develop naturally, as

environment-response associations are gradually laid down in routine memory

(Neal, Wood and Quinn, 2006). Thus, this marketing strategy creates a new

unchanging context, and has the potential to form recurrent behaviours and

10

provoke consumers to quickly form a habit in using the business’ products

(Limayem, Hirt, and Cheung, 2007).

The most recent research concludes that loyalty and habit overlap in a variety

of forms. In the most obvious scenario, loyalty creates purchase repetition. With

the presence of stable contextual cues, it eventually becomes habitual. In the

second state, aggregate customer satisfaction in business experiences evolve

into loyalty. If these experiences also occur under stable contexts, habits can

grow concurrently (Liu-Thompkins and Tam, 2013). To sustain habit-driven

repetitive purchase, companies such as Tesco, Aldi and any other relevant

business should keep mutual contextual cues (e.g., store hours) and features

that ease the performing of habit (e.g., store layout) constant. To alter habit, the

contextual cues need to be reformed (Neal et al., 2012). On the other hand, the

durability of loyalty is constructed on the strength of the attitude towards the

business and the brand. It is resilient to situational and social changes but is

vulnerable to unsatisfactory experiences (Dick and Basu, 1994; Oliver, 1999;

Liu-Thompkins and Tam, 2013).

WOULD TESCO’S LOYALTY SCHEME BE EFFECTIVE AS A

BARRIER TO PREVENT CUSTOMERS SWITCHING TO ALDI?

Given these circumstances discussed above, one can argue that the effectiveness

of Tesco’s loyalty scheme is difficult to determine. If a customer is sensitive to

price, the customer’s habitual activity of shopping at Tesco and participating in

the loyalty scheme can easily be disrupted. A competitor like Aldi can take

advantage of this sensitivity by offering lower prices, which creates a low

switching barrier for the customer. Tesco needs to identify that, no matter how

effective their loyalty scheme, there will still exist switching behaviours, even if

the consumer is satisfied with their habitual business (Amine, 1998). Therefore,

a dual focus, on disrupting existing undesirable customer habits and developing

new desirable habits, is ideal to businesses such as Tesco (Lally and Gardner,

2013).

However, studies on switching barriers conclude that habits impact economic

switching barriers (Jones, Mothersbaugh and Beatty, 2002). The more habitual

the behaviour, the more the apparent effort needing to be placed on the

customer (e.g., search and learning costs, time and psychological exertions) to

alter that behaviour (e.g., switching to lower priced competitors)

(Woisetschläger, Lentz and Evanschitzky, 2011). However, competitors that

disrupt the environmental cues that trigger and sustain habit performance,

through, for instance, price fluctuations, open up the possibility for customers’

habits to change (Wood, Tam and Witt, 2005). Therefore, the repeated stable

circumstances associated with a customer’s actions in visiting the same

11

business environment, and participating, for example, in a loyalty scheme, are

the main creations of habit formation (Verplanken and Wood, 2006). On the

other hand, Farley, Lehmann and Winer (1987, cited in MacInnis, Park and

Priester, 2009) claim that habitual customers are much less price-sensitive than

others; if the prices change, they are less likely to diminish the regularity with

which they purchase the store’s products.

"Consumers get very little value from loyalty schemes. What they

want is genuine discounts." – (Browne, 2015)

Overall, it can clearly be concluded that Tesco’s loyalty scheme may not be

secure or reliable in preventing customers from disrupting their shopping

habits and switching to Aldi, as research shows that immediate rewards are

more desirable for customers than delayed rewards (Dowling and Uncles, 1997)

– the ‘immediate reward’ in this case being the ‘low price’ at Aldi, and the same

‘perceived quality’ (D’Aveni, 1994, cited in Johnson, Whittington, and Scholes,

2010, pp.211-213). One can argue that loyalty and habit strength only connect

weakly with one another, signifying that the two are dissimilar forces and that

they do not continually harmonise within the same customer (Liu-Thompkins

and Tam, 2013). It is observable that the presence of low prices, even in the

absence of a loyalty scheme, is enough for customers to disrupt their existing

shopping habits at supermarkets such as Tesco, and consider the discounted

alternative, such as Aldi. Research has proved that price, typically, rather than

reward schemes, are much more probable to change consumer behaviour

(Browne, 2015). Further factors, such as Aldi’s rising market share, to 5.8%, and

expansion plans to open up to 1000 stores by 2022 in the UK, are further

indicators that Tesco’s loyalty scheme may not be a substantial enough barrier

for customers to remain loyal, and prevent customers from ‘shopping around’

(Kantar Worldpanel, 2016). Further research highlights that consumers who

visit stores to take advantage of the prices, may stay sensitive to discount pricing

but fail to cultivate habits regarding visiting particular stores (Wood and Neal,

2009). Alternatively, a significant proportion of purchasers fall into a repetitive

state of limited choice, in which they do not consider the possible benefits or

savings in making a change, either in products or loyalty schemes, to a

competing alternative (Limayem, Hirt, and Cheung, 2007; Verplanken and

Aarts, 1999).

BUSINESS STRATEGY CONSIDERATIONS

Consistent with the above arguments is the idea that loyalty schemes are an

opportunity for a business to strengthen the satisfactory execution of a

customer’s behaviour – to ensure the loyalty behaviours to depend less on

loyalty intentions, and more on the automaticity of habit (Ottar Olsen et al.,

12

2013). The complexity of the relationship between customer loyalty and

habitual behaviour shouldn’t undermine the ability of a business to form

innovative ideas to profitably drive customer behaviour. A tool that Tesco could

use is Fogg’s behavioural model, which clearly shows how to highlight and drive

an action through dependence on automaticity. This model defines three

elements that can drive a customer’s behaviour: motivation, ability, and a

trigger (Fogg, 2010) (see Figure 4).

Marketers at Tesco could benefit from realising that even before a customer

develops a habit and becomes loyal, those three factors need to be identified and

implemented, to influence their behaviour. Moreover, this identification would

assist Tesco with the implementation of a loyalty scheme in that it would enable

the business to ask important questions, such as:

- Are customers lacking the motivation to sign up for a loyalty scheme?

- Is the behaviour too difficult - i.e. is signing up an easy process for the customer?

- Is the business not ‘triggering’ appropriately for users to be part of a loyalty scheme?

Figure 4. The behavioural model that displays three elements that drive customer’s behaviour. (Fogg, 2010)

13

This ability for a business to influence a customer’s behaviour before it has even

become habitual, links to Wood and Neal’s (2009) findings, which state that for

a customer to act in a non-habitual way they must first make the decision to do

something new. Therefore, customers have responsibility in deciding where

they would like to shop. This forces competitors such as Tesco and Aldi to form

marketing strategies, whether loyalty schemes or low prices, in order to

influence the customer’s purchasing preference at a behavioural level.

Therefore, one can argue that Oliver’s (1999) theory, revolving around intention

as a driver of loyal behaviour, may still be relevant for today, because loyalty

intention acts as a mediator between satisfaction and loyalty behaviour (Oliver,

1999; Ottar Olsen et al., 2013). The initial customer intention is very powerful,

because consumers, who eventually become habitual, are likely to act habitually

when experiencing daily time pressures, distractions, and regulatory depletions

that reduce cognitive resources (Wood and Neal, 2009). Moreover, since both

Aldi and Tesco are organisations which offer similar products to the same

customer group, it is inevitable that competitive rivalry would exist. Porter’s

Five Force Framework (2008) states that when such competitive rivalry occurs,

there is little to stop customers switching to competitors, and the only way for

businesses to compete is on price – which is Aldi’s main strategical

consideration (Johnson, Whittington and Scholes, 2010).

Furthermore, the high fixed costs at Aldi further increases competitive rivalry

because it allows the company to offer low prices and give savings to its

customers (Business Case Studies, 2016). Therefore, to further increase rivalry,

Tesco has responded by opening, and continuing to open, cost-efficient stores

such as Tesco Express; it has become an optimal strategy to have a large number

of small, conveniently located stores (Griffith and Harmgart, 2005). This is

significant, as not only is Tesco able to increase sales through localisation, but

in relation to habit formation, this strategy has the potential to increase the cue

for customers to continue shopping with Tesco in a habitual context (Lally et

al., 2010).

14

LIMITATIONS

When competitors attempt to encourage customer switching, both loyal and

habitual consumers may remain unaffected by such efforts (Desai and Raju,

2007; Klemperer, 1987). The loyalty industry is starting to identify that it must

make rewards more attractive, and more secure, if it is to survive (Cook, 2016).

In the ‘real-world’, a customer can be both loyal and habitual, and further

research needs to present how habits interact with customer loyalty in such a

way as to make it clear for businesses how best to apply a standardised strategy,

with simple, measurable metrics (Liu-Thompkins and Tam, 2013). An

observable limitation of the current research is that the effects of loyalty and

habits may not be applicable for all contexts. A UK study of the purchasing

behaviour associated with store loyalty, identified that one sector in the UK

experienced particularly low levels of store loyalty – that of home improvement

retailing (Knox and Denison, 2000). Consumers may not be as likely to form

purchasing habits for durable goods, because of the low purchase repetition,

and less firm contexts cues pertaining to each purchase.

The specific context of Tesco alone was evaluated in the current study, and it

did not consider or identify other stores within the same operating industry –

for example, Sainsbury’s or Waitrose – and the loyalty schemes that those

organisations present to their customers, or habit formation constructs they

potentially create.

A single retailer such as Tesco derives only narrow competitive advantage from

their loyalty program, given that consumers have the ability to optimize their

loyalty program benefits by ‘cherry-picking’ between the large number on the

market (Leenheer et al., 2007). Further studies should consider a combination

of quantitative and qualitative methodologies, to capture customer habits and

loyalty in different contexts (for instance, customer engagement on social

media; or, in-home versus outside of the home). This would allow a wider

customer population to be examined (Ottar Olsen et al., 2013).

As mentioned above, the current study has only considered habitual customer

loyalty within the context of one brand (Tesco); it does not consider the evidence

that consumers’ decision-making and loyalty may vary at different levels, from

brands to concrete individual products (Nijssen et al., 2003; Pritchard, Havitz

and Howard, 1999). As an example, Waitrose’s ‘pick your own offers’ loyalty

scheme allows customers to receive a 20% discount on ten of their favourite

items, out of a range of over 1000 (Cook, 2016). These personalised offers

display attributes of habit formation, as the rewards are formed to enhance

loyalty and to raise the number of shopping visits. As diverse customers

perceive differences in value for the exact reward, multiple reward options can

assist in satisfying dissimilar customer needs (Kumar and Shah, 2004).

15

Considering and analysing the correlation between consumer loyalty and habit

formation provides a further effective opportunity for loyal behaviour change

efforts, and paves the way for future studies. There is currently insufficient

knowledge to realise individual variances in habit development, as some

customers will more eagerly form practical habits than others (DeCaro,

Thomas, and Beilock, 2008). Moreover, loyalty schemes, as revealed by the

loyalty point tracking app Loyallive, display repetitive ‘gaps’ in that the data

shows a total £6 billion worth of points remain unused by holders of the 10

largest loyalty card schemes in the UK (Cook, 2016). These and other findings

have fuelled arguments about the tendency for consumer habits being formed

as a function of memory and various customer personality characteristics

(Wood and Neal, 2009).

CONCLUSION

This study has explored how customer loyalty can be an aspect of habit

formation, and how this might be applicable in business strategy. It is certainly

clear that customer loyalty may be influenced by habitual behaviour; but despite

associations, customer loyalty and habits function at different stages. They vary,

for example, in how they proceed, what triggers them, how they become visible

in performance, and how tenacious or flexible they are (Tam, Wood and Ji,

2009). Tesco and Aldi, amongst others, could consider several habit change

strategies in order to increase competitive rivalry. These include cautious

analysis of the undesirable response (Quinn et al., 2010), adjusting the

environment cues (as discussed by Verplanken and Wood, 2006). Furthermore,

it should be mentioned that loyalty scheme effectiveness depends on the

objectives that an organisation sets out to achieve (Dowling and Uncles, 1997).

The effectiveness of Tesco’s loyalty scheme is closely associated with customer

repetition and satisfaction, price sensitivity, and the strength and perception of

the given reward; furthermore, retail store investigations highlight that loyal

shoppers can spend up to four times as much in their "first choice'' store as their

switcher counterparts (Knox and Denison, 2000).

The difficult issue is to identify how, exactly, businesses can leverage these ideas

consistently in their marketing efforts. Regardless of whether or not customers

are aware of it, purchasing power and the act of being loyal may be coherent

with customer’s goals, and variability is part of the power of goals, as they

activate a response through a variety of associative mechanisms (Förster et al.,

2007). As highlighted in this paper, habits built in customers represent a goal-

independent form of automaticity (Moors and De Houwer, 2006)

16

Marketers may be reluctant to view habit formation as a strategical variable

when ensuring customer loyalty, but it is clear, despite the numerous situational

factors, the association between habitual and loyal behaviour has been proven

to exist. Furthermore, a business should exercise caution regarding actions that

are designed to encourage more spending by inadvertently disrupting or

inhibiting habit execution, given that a designed experience crafted to change

behaviour can be seen as manipulation (Eyal, 2012; Liu-Thompkins and Tam,

2013).

This study has aimed to provide a clear and fundamental understanding of the

relationship between habitual activity and customer loyalty, given the fact that

one of the major purposes of marketing in our society is the modification of

consumer behaviour (Nord and Peter, 1980). Considering the mechanisms

motivating consumer habits delivers a tangible route for behaviour change

efforts, and correspondingly lays the path for a number of next-generation

questions (Wood and Neal, 2009).

17

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The End