Retailer Loyalty Programs

If you are like many consumers these days, when you open your wallet or purse, you have a few of those cards retailers offer to you free of charge, the ones that are supposed to give you benefits on your future purchases. In the retail industry such cards belong to what are called loyalty programs. Whether it is a card, a small tag attached to a key chain, or some information the cashier can key into the cash register at the time of sale - like email address or cell phone number - a loyalty program is designed to entice the consumer to make more shopping trips and buy more merchandise on each trip to a specific retailer.

Since loyalty incentives are becoming a ubiquitous feature of the modern shopping experience, obvious questions arise. Are these programs a gimmick? Do they really offer a value to the consumer? As often is the case with any sort of incentive or rebate programs, the answers depend on how and where you shop as well as how often.

There is certainly good reason for the retailer to offer a loyalty program. Targeted communication to segmented markets is a benefit to the retailer. Messages can be sent directly to a consumer via email or text message. The 'ad' or 'pitch' can be based on a consumer's established purchase behavior. The special offer can be nearly custom designed to grab the shopper's attention.

From the information provided at the time the consumer signed up, marketing information can be recorded each time the customer shops. Although some demographic data would not be known - such as age or ethnicity - the customer's provided data, including zip code, can be readily associated with a product specific details. In effect, the retailer knows exactly what you purchase, when you purchase, how much you spend when you purchase, whether you use coupons, what accessories you buy with major purchases, and whether you include extended warranties with qualified purchase items. Some other information might be less obvious for anyone outside of marketing, but have huge consequences for future promotional purposes.

If a shopper buys maternity clothes, for example, it could be assumed the customer is expecting a baby in the family. Should the customer purchase baby furniture, birth of a child is imminent. Buying baby toys, clothing, bedding, formula indicates a baby in the household. Baby food as well as age specific clothing items indicate the age of the baby.

Additionally, purchases of pet items would indicate the customer owns a specific type of pet. Buying cookware, flatware, china along with bedding, curtains and furniture indicate moving into a new house or apartment. School related items might indicate the presence of school age children, especially during back-to-school. Toy purchases indicate children in the homes as well as the age group of the children. Exercise equipment purchases might indicate interest in health, fitness and diet related items.

As you can see, a lot of valuable and potentially personal information can be tracked from your regular purchases with a retailer. Based on past purchase behavior and trends, promotional information can be sent directly to the loyalty member via email or text message. For example, a customer who makes food item purchases would receive food specific advertising, brand specific coupons, special double coupon event information and volume purchase discounts on non perishable consumable items to stock up when there is a significant discount or extra rewards offered.

It is an established fact that specific marketing is much more cost effective than any broad-based approach. It is in the retailer's economic interest to pursue loyalty programs. Advertising in print and broadcast media is very expensive and produces very low return for the investment. An often-cited figure is from ninety-to- ninety five percent of all print advertising is discarded before it is ever looked at. Newspaper circulation has been declining for decades. TV viewership is becoming much more fragmented due to the variety of entertainment options. Radio programming reflects demographically segmented grouping by age group or language use.

Using retailer specific loyalty programs means the advertising efforts can be focused directly on known customers with known shopping habits, giving them a far greater return on their marketing expenses.

Clearly the benefits to retailers are significant, but what about the consumer?

Certainly consumers who frequently shop at specific retailers can receive useful information through the notification of special promotional offers, saving them both the time and the expense of shopping. Loyalty programs provide an incentive for continued patronage through some sort of a discount on future purchases, in effect giving money back on each item purchased. Belonging to a program often allows the customer to take advantage of member specific offers, saving them additional money. Retailers can look up a transaction using the loyalty program information, negating the need to keep receipts for a purchase in the event of need for a refund.

It sounds like it is a win-win situation for both the retailer and the consumer. Right?

For the frequent and faithful shopper there is usually some positive economic benefit that makes belonging to a loyalty program worthwhile. In fact, if you shop weekly or even more than once a month at a retailer, it is probably in your best interest to join a loyalty program. However, there is a cost to such membership in a loss of privacy. In exchange for receiving all the great, personalized offers, retailers require the consumer to provide contact information that will be used in specific marketing efforts. This will increase the number or emails and/or text messages received. Additional point of sale information may also result in additional information being requested, marketing surveys sent out via email and other personal data collected for future marketing purposes.

But the retailer is paying for the information, right?

Well, sort of. You see, retailers can easily restructure their pricing to accommodate the cost of administering a loyalty program. There is nothing illegal about it. Raising a retail price is necessary to cover operating costs of a store. However, retailers probably would not want consumers to know the following information about the implementation of a loyalty program. The prices throughout the store have already been increased to cover the incentives paid back to the consumer on any loyalty program. Although you are effectively getting money back each time you shop, it is money you have already paid in marginally higher product prices. Effectively, the store is returning your own money to you. You benefit by belonging to the loyalty program through a return of the additional markup designed to support the loyalty program. So you are breaking even.

Of course, those shoppers who refuse to join are penalized, always paying higher prices than before. The shopper always has the option to shop elsewhere, but with so many retailers using loyalty programs, where is the real benefit?

Retailers are essentially forcing consumers to give their personal information for marketing purchases in exchange for preferred pricing on the purchases they make. It is a way for a retail store to 'charge' a membership fee, much as wholesale clubs do.

Here's an example of how a retail loyalty program was implemented in a store. The company was preparing to launch a national loyalty program. In the first ad touting the program, all pet food and pet care items were to receive a doubling of the program's standard reward. If the customer purchased a private label 'house brand' item with higher margin over a name brand, the reward was tripled. For one month prior to the launch of the special promotion, the prices of all pet products were increased by the exact percentage amount of the loyalty incentive. Any consumer who purchased pet care items without using the loyalty program paid more. But those consumers who were participating in the loyalty program effectively paid the same price as before the launch of the program.

Can retailers do that? The answer is, yes. Although it may not be an intelligent way to treat valued customers and could backfire if the consumer has been price shopping during the period of the adjustments to shelf pricing, there is certainly nothing illegal about it. It may be an unethical business practice, but it is a common practice throughout retailing and has been used in other ways for just about as long as retailing has existed.

Retailers offer convenience to the consumer. In recognition of the retailer's expenses carrying the products on the shelf for shoppers to purchase at their leisure or when needed, the price of an item is marked up. This amount of price over the cost of the merchandise pays for the stores operating costs and profits.

A good example of a how standard retail pricing is periodically adjusted is found in the pricing of seasonally sensitive items, such as garden products. Prices on out-of-season products that are carried year round are routinely marked up to higher prices in the off period to help defray the expense of carrying the product in inventory. If a product sells at a higher price, the marginal contribution is higher, compensating the retailer for the carrying cost of the item. When the product comes back into season, the price is dropped either through a hard price change or a promotional price reduction.

Loyalty programs are merely a new wrinkle in standard retail pricing. It may appear as a diversion, since it is being presented as a way of saving money on your purchases. Retailers are not lying to the consumer, just not telling the entire truth. It really is a classic case of offering the appearance of something while giving nothing. It places the consumer in a position of being forced to comply with a special membership in order to pay previously established pricing for products. The programs are pushed on customers, adding to the time a customer stands in line at the checkout answering a variety of questions that nearly all have a direct additional sale incentive to the cashier and the store or serve to provide useful marketing information.

With loyalty programs, retailers can focus and direct marketing efforts toward specific market segments while minimizing the expenses of promotional efforts. Stores are not in business to lose money, and in the present competitive environment, retailers need any advantage they can find to remain in business. Loyalty programs have a cost associated with them. The retailer will, in some way, always pass the cost on to the consumer.