We are living the future. Yet, this future is behind what, technologically, should have been already implemented. In this particular case, we are speaking about loyalty cards.
Loyalty Cards are not used to their full potential. Retailers generally do not know how to fully benefit from the loyalty program. The result is inefficiency and under-utilization of the loyalty program. It is time to improve efficiency through profiling customers and targeted promotions. The own payment (credit card) facility would not hurt either.
Technology allows bi-directional (symmetric) control feedback loop between business and cardholders. In reality, there is only en masse approach - the loyalty programs are lacking symmetric information exchange. Instead of (or in addition to) trying to "lure" customers into shop with promotions designed for masses – unique and individual approach should be used for each cardholder. Business should provide personalized customer experience created with the help of profiling on information collected on each cardholder. An additional benefit of profiling is price efficiency for retailers who are partners of the loyalty program.
According to the Wiki definition of Loyalty program - the loyalty card is a mechanism for structured marketing efforts to encourage loyal buying and customer behavior. There are no questions that loyalty program is highly beneficial to businesses. However, to succeed the program must be beneficial also to a customer (cardholder).
Below is a collection of ideas that aim to improve the current state of affairs.
From microeconomics perspective to maximize the profit the loyalty program needs perfect differentiation:
Charge each customer as much as (s)he is willing to pay.
Business should use customer profiling to identify clients’ price elasticity. By using personalized discounts (assuming relatively high RRP) a customer is directed to spend as much as (s)he is willing to pay. In the absence of reliable profiling mechanism (or early stages of training algorithms), price elasticity can be discovered using gamification process similar to “Dutch” auction. The differences here are:
- It is only for one customer;
- Auction should stop unexpectedly to a cardholder (otherwise, (s)he will be waiting till the price drops to ridiculous levels);
- Cardholder should be clearly informed that there could be no further price reduction.
The minimum required condition for the above to work is the loyalty program should be used in industries with frequently returning customers:
Airlines, petrol stations, retail chains.
Without multiple repeated engagements with the same customers - profiling and gamification would not be possible.
Gamification has other positive features. First, it allows keeping cardholder engaged. Repeated deep personalized discounts to cardholders (similar to high winnings in casinos) will provide shopping thrills and as such guarantee enthusiastic customer engagement.
Second, gamification helps obstruct price exploration. From a microeconomic perspective - perfect differentiation gives the highest profit. From a customer perspective - (s)he wants to pay the lowest available price (if one knows how low the business is willing to go). As a result, the customer is interested in price exploration, while business should keep it private to continue price differentiation. Again, gamification and casino style random discounts can help with obstructing price exploration.
Loyalty program on its own is not sufficient to cover cases when a cardholder is shopping somewhere else and not using a loyalty card. To get information about his/her activities one can use the payment (credit) card facility. When companies provide both the loyalty card program and the payment (credit) card facility – a cardholder activity can be seen through the loyalty program, the payment card facility or through both simultaneously.
Transactions with the loyalty card enable collecting granular information about customers’ shopping habits and preferences. When a customer shops at competitors or in other categories, the business payment facility still provides valuable information.
Note: It is paramount to record not only the total sum of a transaction but the entire basket. By offering free additional analytical services, such as automatically computed tax deductions, individual and family accounting, and breaking expenditures into categories – customer will be attracted to such payment facilities and encourage members of his/her family to use them too.
Sydney, July 20, 2015,
Timur Yusupov, PhD