At the root of customer loyalty in India

Intensifying competition, downsliding prices, shrinking margins, and increasing difficulty in winning customer loyalty: this is the context that retailers in the Western world have to contend with. The changes in consumer preferences and the rise of e-commerce make it that much more difficult for retailers to build a solid base of customers who are willing to make repeat visits to stores, to extend their purchases to premium products, and to recommend stores from retailers’ chains to other consumers. In other words, the challenge is to succeed in consolidating customer loyalty. From this standpoint, the chance to break into emerging markets can look like a logical alternative for expanding business in new directions.

One of the most promising markets is, beyond a doubt India: projections point to this economy ballooning by 1,100-1,300 billion dollars by 2025. In fact, thanks to the recent fiscal reform, the opening of the economy to direct foreign investments and the widespread habit of paying cashless, India represents great potential for Western retailers.

Internationalizing a retail business into countries culturally distant from our own is an endeavor that we shouldn’t take lightly. Whoever wants to pursue this course of action has to measure up against local competitors, but out of the starting blocks they have a deeper knowledge of the consumer preferences and behaviors in their country. In India, what’s essential to keep in mind are the intrinsic complexities of the retail market, which is still dominated by an informal sector – even though in recent years the formal sector has been seeing unbridled growth. To fully exploit market potential, retailers have to realize what dynamics form the foundations of loyalty for Indian consumers.

To try to understand the drivers of customer loyalty in India, we custom-built a theoretical model and used a questionnaire to test it; respondents were 1,561 consumers from cities all over the country. Our analysis centered on two different product categories: fast-moving consumer goods (what people would buy in supermarkets or pharmacies) and non-food products (electronics or home décor stores).

As determinants of customer loyalty, we focused on two main factors: customer satisfaction and perceived value. In other words, the trade-off that customers feel they get between the benefits deriving from the product they’ve purchased and the price they had to pay to get it. To broaden our perspective, we also considered some potential levers that could be utilized in stores to influence satisfaction and perceived value.

With regard to satisfaction, we investigated three possible drivers: perceived competence and trustworthiness of salespeople; store environment, by which we mean the affective and psychological response triggered by the atmosphere and physical layout of stores; and the merchandise assortment available in stores. As far as perceived value, instead, we measured the effect of both assortment and price promotions offered in the store.

Our study shows that satisfaction and perceived value actually do impact loyalty among Indian customers, albeit in different ways. In fact, more satisfaction corresponds to greater customer loyalty; in contrast, higher perceived value is associated with lower customer loyalty. This dynamic, which would seem counterintuitive, may be due to the fact that in the Indian context, price promotions (key determinants of perceived value) are seen more as “an investment by the retailer,” and not as “a benefit for the customer.”

Among the determinants of satisfaction, instead, respondents give high marks to competence and trustworthiness of sales personnel. In-store atmosphere also has an effect, though a weaker one, while assortment has no direct influence on customer satisfaction at all. That said, product assortment does have a powerful influence on value as perceived by customers, which in turn enhances overall satisfaction. Surprisingly, the impact of price promotions is irrelevant.

If a retailer wants to break into a foreign market, the first thing to do is to understand the specific drivers of consumer behavior and customer loyalty in that new landscape. The case of India exemplifies how automatically replicating the typical promotion-based approaches of Western markets could turn out to be an ineffective - if not counterproductive - strategy.

In contrast, the choice of sales personnel and in-store atmosphere is crucial. Both must embody the values and positioning of the retailer, positively impacting customer satisfaction. So retailers would have to invest in training programs along these lines. Equally essential is to provide a value proposition in the store that is consistent with customer expectations. In this sense, in India the key is to tailor the offering to what customers want to buy, not what retailers want to sell, as often happens in the West. Price promotions, which can easily devolve into price wars, shouldn’t be the focus of the marketing strategy, because they don’t seem to influence customer loyalty in any significant way.

Our findings are only the starting point on a path that can lead to a deeper understanding of the behavioral dynamics of Indian consumers. What’s more, our analysis could be extended to other contexts: first and foremost, the dynamics that underpin customer loyalty in digital environments, not only with an eye to developing e-commerce, but from a broader, omnichannel perspective. This would allow retailers to manage various kinds of touchpoints in a synergetic way, integrating and optimizing customer experience.