A new report by Professor Steve Worthington of Monash University and Josh Fear of The Australia Institute has observed 'the hidden side of loyalty cards' in Australia's competitive retail market.
According to Worthington and Fear, the idea behind the average Australian loyalty programme is to gain a bigger share of customer spending by rewarding individuals for shopping at a particular store or group of stores (e.g. the more money a customer spends, the greater the reward - whether that's in points, benefits, cash back, vouchers, or discounts). The aim of this is to boost customer fidelity (loyalty).
But a greater level of customer fidelity is only one benefit of setting up a loyalty programme. Such programmes can also generate a wealth of commercially valuable data about purchasing behaviour. In fact, this aspect of a loyalty programme can be just as important for a company as any increase in sales due to customers spending more to earn points. For this reason, 'loyalty programme' is something of a misnomer: a better term might be 'rewards and information exchange programme'.
In return for providing information about themselves and their spending patterns, members of a loyalty programme receive rewards in proportion to their spending. The company operating the programme can then use that information to more accurately target offers, refine its marketing approach, and also potentially sell aggregated information and insights about consumer behaviour.
There are a range of similar schemes that aim to build customer loyalty, but these do not generate data at the level of specific products. For example, credit and charge card reward programmes are tied to a specific payment card. Although these programmes reward loyalty to the card issuer, and garner information about the card holder and their spending behaviour, they usually cannot capture information about the types of products purchased. Frequent flyer programmes also collect information about an airline's highest spending customers, and reward those who fly regularly. But their points have evolved into loyalty currencies that can be redeemed for a wide range of products, and other unrelated loyalty programmes can increasingly offer their points.
But other loyalty programmes collect and store different types of data about their card holders, such as:
- Information provided by the customer upon applying for the card (e.g. age, gender, address);
- Information about purchases made using the Loyalty card at the point of sale (e.g. type and location of retail outlet, type of product, price);
- Information about redemptions made using the rewards that the loyalty programme provides (e.g. type of product redeemed, store at which vouchers are spent);
- Responses to any surveys or other information-gathering schemes conducted by the loyalty programme.
Consequently, some of the useful types of information that loyalty programmes can collect and collate include:
- Customer demographics - e.g. age and gender;
- Location - e.g. home address, most visited/highest value store;
- Products purchased - by category, brand;
- Frequency of purchase - e.g. every week, last six months;
- Transaction value - e.g. average basket size, average category purchase;
- Basket analysis - which product purchases correlate with other characteristics (such as gender/age/cross-promotions);
- Customer behaviour - response to promotional offers and other marketing.
Loyalty programme operators must abide by privacy and data protection legislation in every market, which set out how personal information can and cannot be used. Loyalty programme providers therefore use personal information about their members in various ways. First and foremost, it is used to keep track of points earned and redemptions made, and then to communicate this to members. Second, personal information is used to send marketing material to members. These two functions - communication and marketing - are in practice often carried out simultaneously.
Members might receive brochures or flyers about an upcoming sale in the same envelope as their quarterly or yearly statement of points earned. Or, since much of this activity is shifting online, they might be notified of offers in an email that also includes their points balance. Consequently, the act of joining a loyalty programme is interpreted as a signal by members to the retailer that they are interested in and willing to receive marketing materials.
Having received this 'consent' from loyalty programme members, retailers need to decide which marketing materials to send to whom. A very simple promotion might apply to all members - for example, a 10% discount during a certain period. More complex promotions are targeted, with different materials sent to different members. For example, since women are thought to be more likely than men to respond to an offer on cosmetics, such an offer might be sent to female members but not males.
A more sophisticated approach would be to use the repository of personal information to predict which kinds of members are more likely to respond to which promotions. The database might show that certain individuals spend more on a particular class of product or at a particular store; these people would then receive an offer or deal that corresponds to those habits. Or the database might show that women between 35 and 54 are more likely than others to use a discount voucher, so members that meet this criteria would be sent vouchers rather than some other kind of promotion.
Given the wealth of information available to retailers through a loyalty scheme, the extent to which promotions can be tailored is limited only by the imagination and budget of marketers.
A third way that loyalty programme operators can use the personal information supplied by their members is to convert it into commercially valuable insights to generate additional revenue. In a hypothetical scenario, a supplier of hair products could ask a loyalty programme operator to ascertain what types of customers typically buy its brand of hair shampoo. Armed with this knowledge, the supplier could devise a promotional campaign giving buyers of its shampoo a half-price offer on its conditioner. This offer would then be sent by the loyalty programme operator to members with the right characteristics. The personal details of members are not passed onto the supplier (because the loyalty card operator disseminates the offer), so privacy laws are not breached. The operator is compensated by the supplier - generating income from the loyalty card scheme - while the supplier benefits from being able to target potential customers with more precision than they would be able to achieve through other kinds of marketing.
A fourth way that loyalty card operators can use member information is to sell it in de-identified form (i.e. after removing any markers, such as name and address, which could reveal the identity of individual members). This is already being done in some markets. Anecdotal evidence suggests that this practice does occur in Australia to some degree, and it is likely to increase as databases mature and marketers realise the commercial value of that information.
The state of loyalty in Australia
In order to better understand how loyalty programmes are perceived in Australia, The Australia Institute, in collaboration with the Department of Marketing at Monash University, commissioned an online survey of 1,000 people in July 2009. The survey sample was representative of the adult Australian population by age, gender and state/territory, and respondents were sourced from an independent online panel provider.
Four out of five survey respondents (83%) reported having at least one loyalty card; this figure is probably higher than for the population as a whole because of the nature of the survey sample. The most common card was Fly Buys, held by a majority of those surveyed (59%). Some 48% said they had a Woolworths Everyday Rewards card, while about a quarter said they had a Myer One card or a Priceline Clubcard (25% and 23%). A few respondents (11%) said they had another type of loyalty card;8 these included cards issued by Franklins, Dymocks, various pharmacy chains, local coffee shops and the Qantas and Virgin Blue frequently flyer programmes.
When looking at the average number of loyalty cards held by respondents of different kinds (up to a maximum of five in this survey), it is possible to see distinct differences between men and women and between people of various ages. Women held an average of 2.02 loyalty cards, while for men this was only 1.29. Average numbers of loyalty cards increase more or less consistently with increases in age. Whereas 18-24 year olds had only 1.55 cards, those over 60 reported having 1.76 cards.
The frequency with which loyalty cards are used depends on which type of card it is - that is, how often people are shopping at a particular store. Cards associated with supermarkets are used very often, 67% of respondents with a Fly Buys card, and 73% of those with a Woolworths Everyday Rewards card, reported using it at least once a week. By contrast, only 6% of Myer One card holders and 7% of those with a Priceline Club card used it at least once a week. Nevertheless, very few of those with a loyalty card said they never used it - less than 5% in all cases.
The majority of loyalty card holders said they still carry their cards with them. Indeed, 93% of those with a Fly Buys or Woolworths Everyday Rewards card said they always or usually carried their card with them. Most respondents also said that in hindsight it was worth joining their loyalty card scheme.
The full report and study findings can be obtained by contacting Professor Steve Worthington by email (firstname.lastname@example.org).