Loyalty programs: Mining for gold in a mountain of data

August 01, 2007

In the 1950s, stores gave customers redeemable Green Stamps based on how much they bought. It was a crude precursor to today's loyalty programs. In addition to the old stalwart frequent flier programs, now it seems as if every retailer wants customers to sign up for their loyalty programs. If your keychain bristles like a porcupine with dozens of plastic fobs, you're not alone. In 2000, Americans held 973 million loyalty program memberships. Today, according to Colloquy's 2007 Loyalty Census that number is 1.3 billion -- or about a dozen for every household.

To customers, there's not much to loyalty programs; on the surface they appear to be a simple piece of plastic and a "Here's how much you saved" line at the bottom of a receipt. But experts at the W. P. Carey School of Business say that for companies, the programs can be phenomenally more complex and important than taking a trifling percentage off a customer's bill.

Building loyalty with technology

The name -- loyalty programs -- belies the larger purpose behind them. While it's true that companies want their customers to be loyal -- to always shop in their store or fly on their airline -- there is now much more riding on these implementations. Companies don't just want you to come back and shop again (although they hope you do); instead they also want to know what you buy, when you buy it, why you buy it and what else you want to buy. Companies want you to come back tomorrow, but they want to upsell you on the artisan baguette versus the plain white bread, and while you're at it, they'd also like you to pick up the olive tapenade and the imported brie. Not only will you like them, but their margins are quite good for the store.

Technology makes this all possible -- or at least that's the hoped-for result -- says Michael Goul, professor of information systems at the W. P. Carey School. When you scan your frequent shopper card, it initiates a whole series of events which presumably help the store to somehow serve you better, thereby persuading you to spend more.

Your purchase is stored in a database which records everything you buy and have previously bought. With the resultant mountains of data that accrue over time, a company can bring data mining and analytics to bear to isolate trends and patterns. That data may be applied at a macro level where a store will, for example, see that people buying upscale bread also like fine cheeses and may, thus, conveniently place the two next to each other. On a micro level, stores send coupons to individuals for specific products based on their own personal shopping history.

In addition, tracking sales per individual lets a company see who's profitable and who isn't. Casino loyalty programs look for high-spending customers who are good losers; not surprisingly, more effort is put into attracting and retaining them versus gamblers who know when to hold and when to fold.

"Less sophisticated loyalty programs tend to extend the same discounts or benefits to everybody or might only do so on purchase volume whereas the casinos -- and Harrah's in particular -- really focus on customer profitability," says James Ward, a W. P. Carey marketing professor.

On top of all of this in-store data, companies can now easily overlay outside information, says Goul. This may be personal data that correlates your shopping with your credit report or it may be broader data. Companies may correlate your soup-buying or ice-cream-eating habits with the weather. In essence, companies now have a ton of data at their disposal.

Tesco's Clubcard

Manipulating it correctly can be a huge competitive advantage. As British retailing behemoth (and one of the world's top-three retailers) Tesco moves to compete on American shores, observers are speculating whether the company's celebrated loyalty program, Clubcard, (and the backend capabilities afforded by the collection of data from the program) will be the secret weapon that allows it to survive and thrive next to well-established American supermarkets. Tesco has gotten so specialized that rather than send a few dozen versions of its mailers to millions of customers, the company sends 5 million versions to 12 million people.

Yet, at the very moment that Tesco comes riding into America with its loyalty program held aloft, Albertson's -- a 532-store chain located throughout the western United States -- dropped its loyalty program in 46 stores in Colorado and Wyoming as well as at another 78 stores in the Southwest. Ironically, Tesco's first battleground areas of Los Angeles, San Diego, Las Vegas and Phoenix overlap with areas where Albertson's has discontinued the cards.

Considering all of the potential benefits that can result from the ability to track individual customers and their purchases, it might seem that Albertsons's move is an ominous sign for the grocery chain in the competitive food retailing space.

The move may not be such a dramatic misstep as it might seem. Creating and administering the technology behind the loyalty program likely amounts to millions of dollars in costs which need to be offset by significant gains to justify the investment.

"In IT, we're always looking at whether the investment you're making in the technology is worth what you're getting out of it in the end," says Goul who notes that Albertsons will not suddenly be in the dark with respect to data gathering. It's true that abandoning the loyalty program precludes the ability to track individuals, but every time an item is scanned at the checkout and a receipt is created, it's logged into the system. It may not create as much data as the loyalty program but it still produces an awful lot.

Using the data

Of course the quality of the data and how it's used is key. Goul says that one of the challenges of getting value from such a program is to make sure that one is working with so-called "clean" data. The Albertsons decision to discontinue the cards wasn't predicated solely on bad data, but if the system was not bringing in reliable data, it could have been a contributing factor. Data that isn't clean throws off data analysis; it can result from the typical scenario where a cashier swipes his or her own card for dozens of customers in a day, thereby eliminating the ability to find meaningful patterns for individuals. Goul says that companies can clean the data using algorithms that pick up on such instances and take them out of consideration.

Part of the reason that Albertsons may not have been getting a return on its loyalty card is that the chain was collecting data but not using it, according to an anonymous company source who spoke with eWeek. Finding insights buried in the data is important but the more difficult part of the loyalty program cycle is then altering corporate culture to adapt to the changes that may make customers more loyal.

"Are you pulling the right trends out -- the things that are important? And, after that, suppose you discover one, then you've got to go to management and say, 'We've got this new insight about our business or about our customers,' and that then has to be assimilated into the culture," says Goul.

Ward cites the example of Continental Airlines, which uses its loyalty system to identify profitable customers who log the highest level of miles. When those customers fly on Continental, the airline strives to make sure they make their connecting flights even if it means taking extraordinary measures.

Albertsons has branded the move away from its loyalty program as something that eliminates the hassle of shopping. Ward says that while consumers may say that they wouldn't want to participate in loyalty programs that track purchases, they rarely seem to act on those sentiments and not participate because of privacy fears, so the argument for anti-hassle may have some traction.

Ward notes that in the U.K., the Nectar card condenses a number of loyalty programs into one card. For consumers, it means not having to carry a half dozen cards. For merchants it means that the cost is shared to run the program and there may be greater customer loyalty because of the magnified power of including multiple stores.

What price loyalty?

But for all of the data they produce, loyalty cards can't always bring customers back. If the service is bad or the store is dirty, it may drive customers away -- trends not easily revealed by a computer program. And, says Ward, while it is a challenge to develop the technology infrastructure, another challenge is in designing a loyalty program that actually resonates with customers. If the rewards for being loyal are not significant enough, customers will not see the value in remaining loyal.

In reporting on the launch of BSkyB's SkyCard program in 2005, The Guardian reported that many of Britain's other loyalty schemes did not seem to sway customers. The paper notes that, "Some £400m of unclaimed benefits is held on loyalty cards, which consumers simply lose or abandon." A lackluster response from consumers results from the fact that they must spend huge amounts of money in order to get fairly affordable prizes which they could easily buy without having to remain loyal to one store; in one example, a customer would have to spend $18,424 at a supermarket to receive a highchair that could be purchased for $144 – a reward of less than 1 percent.

Ward says that one technique that works well is "endowing" customers with enough points to make it worthwhile for them to stick with the program; one sees this with airline affinity credit cards that endow new customers with enough miles or points to make getting a free ticket seem more feasible than starting from scratch.

Indeed, as Tesco and Albertsons prove, finding the right loyalty scheme means more than handing out discount cards. And it's not made easier by the fact that now one's competitors are also trying to cultivate loyal customers. Albertsons is swimming against the tide in discontinuing its program as Tesco increasingly relies on its Clubcard. However, Albertsons's move could be a telltale sign for the future of loyalty programs: companies that jumped on the loyalty bandwagon too quickly and without enough forethought now may be looking more closely at the costs and benefits of supporting it.

Will the Clubcard triumph and win legions of customers in America -- or will people see it as just another fob on their keychain? Tesco will soon find out.

Bottom Line:

  • Loyalty programs may seem to be just about saving a few cents, but for companies they are they key that lets them gather valuable data about customers' buying habits.
  • Implementing and running a loyalty program is largely about setting up hardware and software. However, deriving true value from it means that the larger organization must be involved and adapt to insights obtained from the program's data.
  • U.K.-based Tesco is opening up stores in the U.S. at a time and in areas where Albertsons is discontinuing its supermarket loyalty program. Tesco's Clubcard program is often cited as the reason the British company has become one of the world's largest, most successful retailers.
  • Even without individual loyalty programs, stores can draw on lots of data from transactions that still provide fertile ground for analysis.
  • Many loyalty programs don't give customers a real reason to be loyal because companies do not make prizes or rewards significant enough to keep customers' interest.
  • Unless a company truly commits to using and exploiting its loyalty program, it can be a costly and time-consuming waste of resources.