Friday, September 4, 2009

Why Loyalty Programs Might be a Necessary Evil

At the start of this year I wrote a blog post on why loyalty programs offer little benefit to businesses (

This is still true, however, last night I saw a presentation by Don Peppers. Don is something of a known figure in the CRM arena. In this case I mean CRM in a marketing sense i.e. getting to know your customer better and interacting with them appropriately as opposed to CRM software. He doesn't have a wiki page to point to but you can see what he is about at his Twitter page (

Anyhow, his talk was primarily talking about loyalty programs and while he agreed they do not offer sustainable competitive advantage in themselves, he did provide a reason to have a loyalty program I had not previously considered.

If I'm in retail I have one big problem in getting to know my customer. While I know what goods leave the store and I know what money I receive for them, I have no idea who bought a specific item and why. This is a problem if I'm going to better understand the kinds of customers I have and how I can better anticipate their needs.

In comes the loyalty program. By handing over my personal details and swiping it when I buy my goods, the retailer now bridges the missing link. They know who I am and what I've bought. They can now build up a historical profile of purchases, repeat purchases, link it to my demographic data etc. etc.

Here is the thing, if the only purpose of a loyalty program is to link a customer to their purchases and to review their behaviour to better understand them, is there an alternative which may not be as costly but could also deliver sustainable competitive advantage within itself?

In my 'What is CRM?' post, I talk of the ultimate grocery store ( that knows your shopping list and puts the shopping in your car before you've even entered the store. Let's take it a step further. Here in Australia, the two major supermarkets offer home delivery. Unfortunately, they charge for the service, the range of goods is not as wide as in-store, the quality of the fresh produce is not as good as in store and in some cases they charge a premium of 10-20% on top of the in-store price. There is not much incentive to use home shopping.

However, if I register for home delivery, I provide all the details I provide for a loyalty card and the store can link it to my purchasing habits. They also have my physical address, not my postal address. No need for another card in my wallet, no need for the retailer to keep track of points and keeping money on their books to cover their value and no need to reinvent the wheel.

Delivery could be set up so that every week/fortnight/month the same goods are delivered to your house and the money automatically deducted from your bank account. It works for newspapers and public utilities, why not for groceries? Why can't groceries become another utility?

I raised this question in the talk and the response was essentially "not everyone wants home delivery". Really? People prefer to leave the house to crawl around a supermarket for 1-2 hours suffering screaming children (theirs or someone else's) and to haul a stack of shopping in and out of their car?

I asked my wife, who is in marketing. Her response was "not everyone is online, nannas wouldn't use it". Really? The elderly would prefer to haul a shopping trolley and shopping around rather than have it come to their house like the milkman used to? Sure, not everyone is online but the store could provide terminals where people could set up their shopping lists and deliveries. They could even have friendly staff to help those unfamiliar or unable to operate a computer.

What about the cost? Well the first response is how does the cost compare to a loyalty program? Even if a loyalty program is cheaper, there are considerations of improved inventory management from knowing the monthly purchasing requirements of your customers and knowing precisely which goods they want (if someone walks into your store and make a purchase, you do not know what they wanted, only what they bought from what was available). Arguably stores would not need to be as large or hold as much stock as they would only be catering to 'incidental shoppers' with the bulk shoppers taking the easy option. This provides savings in wages, rental and general store running costs.

A delivery service may not be the answer, but it should not be assumed that a loyalty program is the best fit for all businesses. Ultimately, the answer should be as close as possible to a system that captures the information a business needs, provides perceived benefit to the customer and is sustainable.