In a Saturated Market, No Retail Loyalty Program Might Be the Best Bet

In a Saturated Market, No Retail Loyalty Program Might Be the Best Bet

In a Saturated Market, No Retail Loyalty Program Might Be the Best Bet

Charles Keenan

Charles Keenan

Charles Keenan has written about payments since joining the American Banker as a staff reporter in 1997, a time when automated teller machines were appearing just about everywhere but people's living rooms thanks to the relaxation of surcharging rules.

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For all the talk about retail loyalty programs, one has to wonder if they're worth it for merchants.

Loyalty programs' economics are hard to track, since retailers don't share results. But anecdotal evidence shows that the opportunity cost is high.

That cost comes in the form of missing out on the key demographic of everyday price-sensitive shoppers. These buyers eschew rewards and instead hunt for deals to find value. They also tend to find many reward offers as disingenuous, either because they don’t justify the effort, or they aren’t valuable enough. So while retailers might save costs by not giving away too much, they miss out on a key segment of consumers.

"They have made it so difficult for price-sensitive shoppers to take advantage of deals," says Kurt Jetta, executive chairman and founder of TABS Analytics, an analytics firm serving the consumer product industry. "Even though deal-sensitive shoppers aren't as profitable, they are profitable."

And for many retailers, that is the difference between break-even and profitability.

When programs get it right

Loyalty programs do work for some retailers, mainly because they actually offer consumers value in return. With Starbucks Rewards, consumers can redeem points for a cup of coffee after spending roughly $25, about a 10-percent rebate. (Although Starbucks recently announced the program will be changing in the next few years.) But today, that kind of exchange — and how many users visit Starbucks habitually — make the program worth participating in.

When Less Might Mean More: 53% of consumers said the main reason for participating in a loyalty program was that it was "easy to use". (Source: LoyaltyOne)

Similarly, Sephora offers tailored rewards that include exclusive events, birthday gifts and free beauty classes. And customers with Amazon Prime — a loyalty program in a sense — are willing to pay $120 a year for perks such as free shipping, select deals and Prime Video streaming.

Those successful reward programs offer enough value to get consumers to buy in without breaking the bank. "Anyone can have a loyalty program," says Michael Lewis, a professor of marketing at Emory University's Goizueta Business School. Yet, the real question is whether "the program is designed in a manner that changes behavior, where it's giving some value to the consumers, at an implementation cost that’s not expensive. That is the bottom line."

With so many retailers asking consumers to sign up for their platforms, loyalty has shown signs in recent years of saturation. There were 3.8 billion memberships in loyalty programs nationwide, according to the most recent biannual census in 2017 by LoyaltyOne, a consulting firm. That was up 15 percent over 2015, representing a deceleration from a 26-percent growth rate two years earlier. Taking too long to earn points or miles was cited by 57 percent of respondents as their reason for abandoning programs.

When less is more

Despite the preponderance of loyalty programs, plenty of retailers are thriving on the concept of everyday low prices. Retailers such as Costco and Walmart are obviously doing just fine without loyalty programs.

In the grocery sector, Publix (which doesn't have a traditional loyalty program) has carved out market dominance in the Southeast by offering excellent customer service, Jetta notes. The retailer consistently ranks No. 1 in TABs surveys, in areas such as bakery, meats, selection and deals. Customers can clip out coupons from circulars or get access to digital coupons by opening an account to use its app or web-based interface. Publix also attracts customers with buy-one-get-one-free deals. "They are doing the basics of retail — not these exotic loyalty card programs that find ways to alienate everybody," Jetta says.

In fact, "everyday low price" remained the No. 1 deal tactic among consumers across 15 categories of consumables, such as beverages, cereal, frozen pizza and salty snacks, according to a survey of 1,000 respondents online last August by TABS. About 59 percent of respondents listed everyday low price as a favorite tactic, compared with 45 percent listing circulars and 42 percent mentioning in-store deals and private-label brands. Loyalty cards ranked fourth at 41 percent.

Consumers’ Favorite Deal Tactics, Ranked: 1. Everyday Low Prices (59%), 2. Circulars (45%), 3. In-store Deals (42%), 4. Loyalty Cards (41%) (Source: TABS Analytics, 2018)

Who wants to work for points?

Then there's the fatigue factor. While the marketing buzzword these days is about engagement with customers, there's only so many hoops and tricks they'll want to jump through. One credit card company asks cardholders to log in and scroll down a menu of select retailers to click a button to activate a discount. A ride share company now offers users $5 off for five rides, after they fill out a 'business profile.' 

The constant demand for consumers to engage to get an offer has its limits, Lewis notes. "It's just this fatigue of retailers continually asking consumers to do something," he says.

Short redemption times also alienate consumers, Jetta adds. "There are all of these shopper-friction aspects of these programs," he says.

About 53 percent of consumers said the main reason for participating in a loyalty program was that it was "easy to use," according to LoyaltyOne research. In this era of engagement, it's something for retailers to not lose sight of as they roll out programs or make adjustments.

The statements and opinions of the writer do not necessarily reflect those of TSYS.

Other Articles by Charles

Charles Keenan

Charles Keenan has written about payments since joining the American Banker as a staff reporter in 1997, a time when automated teller machines were appearing just about everywhere but people’s living rooms thanks to the relaxation of surcharging rules.

His work at the American Banker included writing about credit and debit cards, merchant processing, and bank stocks. He later freelanced for the Banker and industry publications such as Banking Strategies, Bank Director, Community Banker, and U.S. Banker. He also writes about investing, insurance and health care, and is based in Los Angeles.

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