Should loyalty programs be included in every volume-based competitive industry?

Second post- decided to try a new format. 

Once again, feel free to comment below and offer your own opinion on what firms would benefit from a loyalty program, or if/how loyalty programs have affected your purchase behavior in the past.

“A 5% increase in consumer loyalty will lead to a 25-80% increase in profit.”- AC310 Lecture @ LSE

Loyalty reward programs have found a way to enter a wide array of retail sectors. From Best Buy’s popular RewardZone program for consumer electronics, to my recently joined Starbucks Rewards card for coffee purchases (a product with a relatively inelastic demand), it would be difficult to find an industry sector that hasn’t employed one of these programs, or difficult to find a reason NOT to employ one.

Best Buy RewardZone

A loyalty program seems like a pretty simple concept, right? At its core, the program is designed to slightly reduce one’s profit margin in exchange for higher sales volume from repeat customers. A traditional program works like this: let’s say for every dollar you spend at a retail chain, you’ll be rewarded with a point, and once you receive 100 points, we’ll reward you with a $5 gift card. Not only are you more inclined to purchase at my store, but when you do receive your reward, you can only redeem it on things that are available at my store (gift card =/= cash).To add a little more frosting to the cake, most reductions in profit margin (referring to the actual “rewards,” and conveniently neglecting the other costs like advertising and maintenance costs for the program itself), only occur after the increase in sales has already occurred; you can’t get your free smoothie at Freshens until after you’ve already purchased 10 other ones. Even if you have a current customer locked in to your brand, the loyalty  program also has the additional benefit of increasing the frequency at which that locked customer will buy your products. You’re also provided with an extensive amount of data regarding an individual’s spending habits; you usually would only have end-result inventory counts and sales numbers to tell you how well your product mix is doing, but with a rewards-card you can monitor a purchase-trend on an individualized level, which could be invaluable data for getting that competitive edge.

Some reasons why this works

1.      Humans are creatures of habit: We all have our frequently visited stores. Once you visit initially, you’re very likely to return…especially with an incentive (unless your experience was unsatisfactory)

2.       Humans are goal-driven: A loyalty program effectively sets a benchmark for purchase quantity. You can’t get rewards until you purchase THIS much...and just in case you’re wondering how long it’ll take, we included the number of points you currently have on your receipt, online, or the amount of stamps on your card.

3.      Customer Incentive: If I had a choice between purchasing my TV at Wal-mart, or earning points and redeem a few gift cards at Best Buy…I’d probably choose the latter.

4.      Increased barriers to entry/higher switching costs: “I could start buying coffee from Dunkin, but I already have this reward card with Starbucks, and it already has points on it, and I if I buy my coffee from Dunkin from now on, then I just wasted my time setting up that account.
Program Suggestion- Scale the quality of your rewards with the overall quantity purchased by the consumer. E.g: provide better rewards to the guy who has purchased 1000 cups of coffee than the guy who has only purchased 10. Effectively transform the purchasing pattern into a time investment…it’s the same reason why you don’t see too many people switch Massively Multiplayer Online Role-Playing Games (MMORPGs) when they already have a level-85 Holy Paladin in World of Warcraft.

 Well level 85...I've officially sealed my addiction

Big players that could benefit from a reward/loyalty program

1.      McDonald’s Restaurants (or any fast-food): Yes, they already have a massive market share…and as mentioned in the film Super-Size Me, they already have a high frequency of repeat customers, but why hasn’t the big McD’s employed its own rewards scheme yet? It could give them a significant edge in the fast food industry over competitors like Burger King, Wendy’s, etc. By employing a reward scheme, you’re inserting a favorable wedge into the consumer’s decision process.
I recently frequented McD’s just because they were offering commemorative Coke glasses with every meal purchase (and I happened to need a new set of glasses for my abroad dorm), and apparently I wasn’t the only one at LSE who did the same. If a program like that could work in the limited-term, why not use a long-term loyalty program?

Until then, this is the guide for fast-food decisions

2.      iTunes Music Store:  The success of this store is already riding the coattails of the mp3 player revolution (Discuss: Is iTunes success directly dependent on the success of the iPod?), but couldn’t Apple receive an even bigger edge over physical-format CDs and other digital media distribution if it rewarded its consumers for staying loyal and frequently purchasing?

3.      Wal-Mart

4.      ETHICALLY QUESTIONABLE- Alcohol, Tobacco, Pornography: As suggested by my OEM team at Babson regarding the operations of ABInBev, in such a consumer-loyalty, high volume, inelastic-product demand (most of these things are addictive, right?) with low product differentiation (you’ll need more than two hands to count the number of existing light beers)…why not solidify customer loyalty with incentives for buying YOUR product over the competitors

Where I see the future of loyalty programs

1.      Single-platform, consolidated loyalty cards/applications-                                                                                    
So, what does that mean? Rather than having 20 different cards for 20 different reward schemes, you reduce the space required in your wallet to a single card…or better yet, remove the card and have it all done through  inputting a receipt-code into a smartphone application.  Rather than having to develop its own program from scratch, complete with producing its own membership cards, a firm can just support an existing program , using a different firm’s card. It would be like saying: “You can now earn rewards for Best Buy, Starbucks, McDonald’s, and Wal-Mart individually, and it will all be done through your Starbucks Rewards Card.” Similar to the way retail outlets are licensed for credit-card usage, a firm can choose to license itself with a particular reward program/card.

2.      Badge/Achievement System-

A company already has access to your individualized spending data through the use of these reward programs, why not offer additional recognition for certain benchmarks, or possibly even use this recognition to promote change in purchase habit?

      The primary pioneers of the “Badge/Achievement” movement are Foursquare, a smartphone application that gives you recognition via clever badge titles for checking in to certain places, and Xbox Live, an online gaming service that provides gamers with achievements (visible on their user profiles) for achieving certain tasks within a video game (Throw for 400 yards in Madden 12, Beat “X” shooter on “Makes you want to cry” difficulty in under “Y” hours).  I have friends who go out of their way to use Foursquare just to see what badge they’ll earn, and as an avid gamer, I have gone out of my way to accomplish or strive to accomplish certain achievements in a video game.

XBL Acheivements

Why not apply this system to something as simple as consumer spending? Using Starbucks as  a primary example of a globalized mega-firm, the achievements could range from global purchase recognition (“Purchased from a Starbucks in 5different countries”) to variety recognition (“Purchased 25 unique product, syrup, milk combinations”) and even promote consistent purchases ( “Purchased 5 Orange Mocha Frappuccinos”). 

Zoolander & Friends: 80% of the way towards earning a badge