Why loyalty card schemes work,
and why companies run them
Card schemes are the umbilical cord that nourishes a loyal consumer base and thereby gives birth to greater profitability. However, not all loyalty schemes are created equal, and whether or not they drive revenue growth comes down to their implementation, their design, and how well they integrate with an overall sales model.
First of all, it is pertinent to ask: why would a company want to target customers that already shop with them rather than those who do not? The answer is simple. It is seven times cheaper to keep existing customers than to acquire new ones.
Nevertheless, it is not enough to simply implement a loyalty scheme and to expect it to drive revenue growth. Recently, coffee companies such as Costa and Starbucks have moved from issuing coffee stamp cards (made out of cardboard) to signing customers up for loyalty cards and key tags. This has enabled them to make use of data previously unavailable to them, thereby increasing profits without downscaling on loyalty.
For instance, on the coffee stamp card scheme at Cafè Nero, customers can buy nine coffees and get their tenth coffee free. This scheme does not differentiate between whether a customer buys the cheapest or most expensive coffee, and it offers them a potential return of £2.05 on an expenditure of £18.45. By contrast, the new Costa loyalty scheme converts pennies to points more precisely, meaning that customers have to spend around £76 to save £1.95. This is an example of a skilfully-targeted loyalty scheme.
In terms of the consumer psychology, Sarah Robinson argues in her book, Fierce Loyalty, that what fosters loyalty is not precisely what customers save, but how they feel about the brand. She therefore claims that making a loyalty scheme personal and formal is enough to make an impression.So while the stamp loyalty schemes are more beneficial to customers in terms of value, a card loyalty scheme is preferred because it is both formal and personal. It gives customers the sense that they are treated differently.
Businesses that emphasise loyalty card services have better market capitalisation than companies who do not. This reflects a perception that such companies have better long-term value. However, a loyalty programme on its own does not equal profits. The criteria for profitability are more complex than what appeals psychologically to the consumer.
As technology has developed, card loyalty schemes have become a rich source of consumer data. The strategic benefit of finding out what consumers are buying is undeniable. This is what separates Starbucks' loyalty programme from that of Café Nero: Starbucks' loyalty scheme is strongly differentiated and manages to seamlessly integrate the retail experience with mobile technology.
Amazon, meanwhile, manages to use its loyalty scheme - Amazon Prime - to remove the niggle inherent in online shopping: shipping costs. Membership of Prime allows customers free two-day shipping, and because of this Prime members spend up to four times more than ordinary Amazon customers.Tesco and Sainsbury's, on the face of it, have similar loyalty card schemes. However, Sainsbury's has the edge over Tesco in terms of sales growth for the past four years now. This is because, whereas the Tesco Club Card is a simple scheme limited to Tesco stores, the Nectar card is much broader, can be used at different retailers, and allows Sainsbury's to capture data from external retailers - thereby generating consumer patterns and tapping into Big Data.