The Flipside to Loyalty Cards

Coles recently rebooted their loyalty program with a revamp of their FlyBuys card. Redeemable gifts and in-store discounts are on offer, and nearly everyone is being invited to join the program at zero cost. Woolworths’ alternative has been Everyday Rewards, offering fuel discounts and frequent flyer points. Myer and Priceline likewise host their own programs, along with numerous other retailers across Australia. Members only have to wave their loyalty card at the checkout, and wait for the benefits (like a new toaster) to roll in. Why are we being propositioned by these retailers? One might think that the purest form of appealing to their customers is to reduce margins and win the market through lowest prices. Why complicate an otherwise straightforward approach?

The most apparent function of loyalty cards is inherent in the name itself. By incentivizing patronage from a specific retailer, these businesses can nurture return-customers. Goodwill is instilled in consumers as ‘free’ rewards and discounts are handed out, reinforcing retail brand preferences. Switching costs then limit a consumer’s ability to react to price changes, as they will have an established preferred producer and will be reluctant to forgo earning points. Even if a consumer holds loyalty cards for both competitors (for example Everyday Rewards for Woolworths and FlyBuys for Coles), the opportunity cost of one set of foregone points still stands, and they must choose to split their points up between building separate pools.

Higher sales volumes and brand name promotions aren’t the most interesting element of the loyalty program, however. Price drops and marketing could just as easily achieve these outcomes. What’s differentiating about a good loyalty program is its beneath-the-surface ability to collect information on consumers. Registrations for these programs involve a significant amount of upfront personal information, ostensibly so that they have somewhere to mail you that nice toaster after a few years of committed loyalty. Behind this requirement however, the retailer is looking to clearly identify the demographic each individual card holder falls into.

This is then augmented with collected data about each card holder’s transactions. Every time a card is scanned, the products purchased, their exact quantities and prices, the location, and time are all recorded. Over time, these observation points can create a fairly comprehensive map of consumption behavior, both for the profiled individual as well as for the region and the entire market, when the data gets aggregated. This helps inform the producer on how to best advertise to individuals through their purchasing behavior. For example, a consumer who frequently purchases coffee may be interested in knowing when their favorite brand of coffee beans will be on discount, along with its complements like sugar and cream.

Such tailored advertisements are one of the prominent uses of the collected data in Australia today. Overseas, British Tesco is yet again a shining example of extending this retail tactic to the next level. Tesco is known to make discount offers exclusive to its members based on its observations of customer consumption behavior. The coffee-fiend from before may not just receive coffee-related marketing material, but an exclusive discount on coffee to use next time. This is effectively price discriminating based on the retailer’s perceptions on every individuals’ tastes and valuations. Coles is attempting to move into this area by allowing FlyBuys members to select a small sample of products to receive discounts on. One can only speculate that over time, as we get more accustomed to loyalty cards yielding direct discounts, Coles will attempt to further mimic and iterate upon the already successful Tesco model.

Those that value privacy highly when transacting with retailers may be on edge, fearing that a complete map of their valuations could give rise to some form of price discrimination. While inherently difficult to establish and maintain (and thus of questionable plausibility), this market innovation is certainly attempting bestow more power in the hands of producers. Additionally, another issue is the degree to which these loyalty programs act as a retardant to the price mechanism in a market. The producer who supplies at higher costs and lower efficiency should be punished by the market, but the introduction of ‘travel’ costs between retailers can be regarded as an insulating, inefficient distortion in the market.

Australian retailers have a lot of neat tricks up their sleeve, and it will be interesting to see how they refine their craft in the future. By the time you receive that toaster, maybe Coles will be sending you discount coupons for bread and butter to test it out with.