Retail loyalty card programs

From some time ago, Kevin Drum reports:

I really loathe retail loyalty card programs. 

These programs serve two functions.  First, they are a form of price discrimination.  Buyers who are willing to collect and show the cards pay lower prices while the "I can’t be bothered with this ****" types pay higher prices. 

Second, retail loyalty cards enforce partial collusion ex post in an oligopolistic setting.  In other words, cards and frequent flyer programs "lock in" buyers to their favored firms.  Once that lock-in is accomplished, all firms have weaker incentives to cut price to lure away buyers from their favorites.  (The smarty-pants point is to note that firms have to give buyers a better deal upfront in anticipation of this lock-in but still if the company moves first with a non-negotiable offer it still can come out ahead and raise the P/MC ratio.)

The first function is usually welfare-improving, the second function usually is not.  Overall you personally benefit from loyalty card programs if you don’t mind holding the cards (you have a thick wallet) and you have a strongly favorite company/product anyway.  In the latter case you are likely locked in anyway, so the strengthening of the lock-in effect doesn’t so much restrict your freedom.  This is tricky of course because you might miss out on preemptive price cuts from your favorite firm to keep you, since maybe they don’t otherwise know how much you love their stuff.  Still, I will stick with this mechanism as a plausible guess of the net effect.

You suffer from loyalty card programs if…you hate them.  Not only do the programs and the smiling clerks bug you but you are the kind of person who ends up paying more.  Which means you hate the programs even more.  Which means…

But wait: the equilibrium seems to converge and so Kevin Drum’s anger at retail loyalty card programs remains, in reality, quite low. 

Comments

I definitely hate them. And when I get to the register to find that the sticker price is not the price, I feel borderline defrauded. When a Publix was readily available to me, I would go reasonably out of my way to shop there because they didn't use the cards.

The third function of course is that they ease collection of information about your purchases. Annoying, but not too onerous until you start considering ways this info could be funneled to the government.

I would think "good" price discrimination would be better correlated to the amount of resources the customer has rather than their tolerance level for playing card games. It sort of is, I have the resources not to worry about the cards at all but the most frequented stores, but a price discrimination system that makes certain customers not want to shop at your store at all seems not so good, unless you think those customers are particularly bothersome, like shoplifters or civil libertarians.

The one area where these programs make a huge difference in consumption patterns is in business travel. I know that I stay at a certain hotel chain that I may not have stayed at otherwise becuase they give me free nights (personally), and since my job is paying, I'm not really price sensitive. That's clearly non-optimal from a societal point of view.

Rory,
The Feta cheese story is extremely interesting. Any pointers where I can find out a bit more about it?

The equivalent of the Feta cheese story was around 40-odd years ago among British supermarket managements. The importance of some low turnover items for attracting trade was noted without card data.

Me, I don't like loyalty cards much; but I have one for my local supermarket because it does not change my shopping choices but does result in marginally lower prices. I.e.,it marginally improves my welfare. Some other peole seem to like them, no-one is obliged to take them, so aggregate welfare is probably improved by them.

I have a collection of the cards from having travelled throughout the country. I have never used by real name or Address. The hygiene of the data generated from the cards has to be lousy. Also, most stores have a customer non-compliant card at each register that they will use when you tell them that either you get the lower price or you walk out the door.

I do most of my shopping at Schnucks (since it's two blocks from my house). They have a gas station nearby, and their loyalty program is that when I spend some amount of money on groceries, then I get a few cents off a gallon or something like that. The problem is that I don't have a car, and I can only use the discount to buy gas. Even that would be fine, except they bug me about it every time I go shopping.

The Wall Street journal did a study on grocery stores that use "preferred cards." People who used them actually spent more than those who shopped in non-card stores for the same items. The sales items look cheap but everything else is more expensive in the card stores. Stores should be required to compete on price. Wal-Mart forever!!

I ignore frequent flier programs unless I am taking the flight anyway. If I worked at a company (and they were paying), I would, of course, ALWAYS use the airline linked to my personal FF miles.

I get cash back on both of my credit cards, so I do not care which I use.

Supermarkets are the most interesting. They will give a card to anyone, for free, so why not take it. If you dislike carrying the card, just give them your ph#.

Interestingly, I heard that one market (Safeway? Sainburys?) accumulated terabytes of loyalty data but couldn't figure out how to turn it into revenue. They tossed it and ended their loyalty card program.

...connectedness/rfid/crowd data could remove this. once we can get data out of supermarkets (which they wouldn't give, but would be easy enough to get in a crowd-source way once we get the tech) about what they're charging for what, you could link your phone to tell you where the cheapest place to buy your shopping list would be, incorporating loyalty cards or not...

eh, nevermind...my brain's going to explode with all the possibilities. too much for a comment, but tech+data kicks ass.

How bothersome is it to sign up for a supermarket loyalty program? They'll do it for you instantly upon your first checkout; you often get a keychain fob instead of a full sized card; anytime you forget it you can just use your phone # (or a fake one you first provided); you can even use you iPhone or like device instead if it can capture the barcode image. It's hard to imagine the implementation of any sort of coupon program (mail, email, handout, etc.) that is less onerous than that.

How much lock-in do these programs really create? In practical usage, I'm guessing most customers use them simply for the immediate price discounts, and not for the various "rewards" or "points" they accumulate. So any vendor who offers any kind of similar program is competing on the same level. Nowadays, if you insist on going to a small shop that doesn't have such a program, you're definitely paying higher prices anyway.

We now have retailing giants competing heavily against one another driving the prices to the floor. All you have to do is swipe a fob at checkout. This feels a lot better for the customer than the old days when people would drive around to multiple locations to get a good selection and price (the market, the bakery, the butcher).

Tyler,

I had not read elsewhere about price discrimination function of these cards, but it makes a lot of sense. I always get new insights like that from this blog.

Supermarkets have demonstrated that possession of an identifying number is what's important, not physical possession of the card. So I expect other retailers to soon follow suit, and the thick wallet syndrome to end.

I can't imagine why brand marketers would not purchase retailer's data on customer purchases. Identifying high potential zip codes - or even high potential individuals - through data mining should lead to more efficient direct mail marketing. Also, marketers should want better data on customer behavior, such as what percentage of sales are made to frequent repeat customers, how often do redeemers of direct mail coupons follow up with additional product purchases, etc.

One can envision marketers mining data from different sources to estimate potential effectiveness of advertising dollars, such as whether subscribers of Conde Nast or Outdoors are more likely to be sunscreen purchasers. I think the potential value of retail purchase data is yet to be realized.

Personally I hate the supermarket cards. I especially hate them when I'm traveling and run to a regional supermarket that wants me to get a card in order to shop there once (since the chain doesn't exist where I live, I won't use it often enough to actually carry it).

My solution is simple. If a product I am considering purchasing there has a "card" price that makes it cheaper, I simply don't buy that type of product there, because obviously if I don't use the card I'm paying more than I should. This means that I can walk into a grocery store intending to purchase $100 worth of items, but due to their frequent shopper card discounts being advertised, only actually buy $25 worth.

Obviously this is costing them revenue and volume. For someone like me without a card, they're essentially getting no return at all on holding a lot of inventory that I'll never consider purchasing from them.

Maybe that's made up for by local buyer lock-in, but I suspect since they likely only analyze ongoing data from those who have their card and use it, their results are going to be biased against recognizing that "non-card" average purchase likely went down after they introduced their card program.

Eventually I've just learned to avoid places I think have a card program and instead find the best prices elsewhere.

Someone correct me if I'm wrong, but isn't price discrimination welfare-improving only compared to a monopoly? The competitive equilibrium is equally efficient, and additionally maximizes the consumer surplus. So, the loyalty program might be welfare improving, but is not consumer-surplus-maximizing. And as a consumer, that's all I care about.

And an additional reason to hate the cards, at least in grocery stores: they allow the merchant to gather information on the consumer's habits. And the more they know about me, the more they can figure out what's the maximum price they can charge me.

Note that I always get all the 'membership' benefits but don't carry *any* of the membership cards with me - I like keeping a slim wallet. I don't even have accounts at many of these businesses, mainly the grocery stores. Most of these stores allow you to enter your phone number instead of swiping a card (I just use an old number for one of my friends) and I've found that some of them will even accept *any* number, even if it's not a valid phone number. Others have a membership card behind the counter and will just swipe it for you if you say you forgot your card.

This doesn't go against wanting to understand or otherwise discuss this topic, but I thought it worth noting. I personally think the membership cards are very annoying, if for nothing else because I have to spend extra time parsing all the price signs for products that I want to buy and/or compare. Sometimes the 'discounted' price doesn't include a unit price, which is very annoying and I try to avoid those stores.

But I certainly benefit from the system because I get lower prices than I probably otherwise could due to price discrimination - people who perceive the costs of dealing with memberships pay higher prices, which effectively subsidize the occasional advertised 'bargain' deal to get new customers into the store to become members. Sure, there's a time commitment on my part that offsets this advantage but I'd argue it's very, very low since actual participation in these membership programs is trivial (and doesn't even increase the physical size of your wallet!).

-Thomas F.

Things will be a lot nicer when we have digital wallets:
Here's a start http://www.tuaw.com/2008/05/14/scanning-wallet-cards-into-the-iphone/

But we'll be acquiring many more silly memberships then if it is easier. The practice will probably (yech) become more widespread if it is less pain on the user (in the end creating more annoyance).

A few people have made the point about phone numbers. I will admit to leaching off friends' and family loyalty cards by giving their phone numbers. At Petco, this helped us reach the 10 bag discount threshold for Eukanuba dog food. But at PetsMart, this recently made me uneasy because the dude at the register said he'd be calling me the next night at dinner, to which I had to reply that I didn't swing that way.

I have no idea how the stores get any useful data out of loyalty card programs in and of themselves. I agree that they are mostly a mechanism for price discrimination, but I don't see it as a "discount for members". Instead, I see it as letting non-members and loyalty card haters pay more. About the only place I can see that the stores could get something out of the data is in finding optimal price points by conducting price experiments across brands and club discounts. The soda aisle seems hyperactive with such price experimentation.

Londenio, the Feta story came from Safeway's mid 1990s ABC loyalty programme in the UK operated, I think, in partnership with IBM. It was a pioneer scheme, but was abandoned before Safeway itself was acquired by Morrison's.

Sainsbury's abandoned its scheme in a way, but replaced it with the Nectar Card.

http://snipurl.com/296t8 is a wonderful book describing the success of Tesco's loyalty programme, the Clubcard. It contains an extraordinary story about an early privacy breach, of which you'll find details below.

When Tesco introduced internet grocery shopping, they thoughfully prepopulated the favourites list with whatever items the shopper bought most frequently. A sensible idea, except it overlooked the fact that many couples or families often shared cards or a household account.

A phone call came through early on day one: "Why does my Favourites list contain condoms, when my husband never uses them?" asked a distraught caller.

I suppose the unkind answer would have been "Not with you, love." After a hastily convened conference they called back. "There has been a surprise data glitch causing this quite unfortunate error. Please be assured the item has now been removed from the list."

Phew!

what's with all the scanning cards onto your iphone links. are we being spammed?

THis is a bizarre comment from Costco fan Kevin Drum.

superdestroyer: "I doubt that you could stretch the criminal laws on fraud to customer discount cards."

Well, I guess I shouldn't be surprised at that attitude: if I cannot be caught - or cannot be prosecuted - then the bahavior is not wrong.

You may be correct that lawmakers probably do not bother writing criminal statutes that cover such minor offenses. Still, providing false information to intentionally deceive in order to realize monetary gain - in order to receive the discount - meets the common definition of fraud. One can always rationalize unethical behavior by arguing that large portions of Americans commit such fraud. But the bahavior is still unethical and it is still fraud.

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it is possible in the country

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