Franchisee Associations

When we think of Gift/Loyalty Cards, we think about Christmas gifts. According to the 2006 Deloitte Touche Report on Gift Cards, Gift Cards the single most popular gift.

But it would be a mistake to focus on the major benefits of a Christmas Gift cards -getting the customer back in the store in January. A franchise system wants a program that will work year around. Harrah's provides an interesting example of what can be done with Gift/Loyalty Card program.

In 2003, Gary Loveman; CEO of Harrah's commented on Total Gold Program, in the Harvard Business Review:

"One tactic the company had already decided to use to enhance customer loyalty was called Total Gold, a player-card program that was modeled after the airline industry's frequent-flier programs. Launched in 1997, Total Gold was designed to provide regular customers with incentives to visit Harrah's properties throughout the country. Customers inserted their Total Gold cards into slot machines and earned credits as they played. They were rewarded with the standard fare that all casinos offer--free hotel rooms, dinners, show tickets, gift certificates. But there were three problems with the program. First, nothing differentiated this program from our competitors' efforts. Our customers simply took their free rooms and dinners and drifted across the street to do their gambling. Second, our customers earned different rewards at different properties; there was no uniformity in the program. Third, and most important, our customers were not given any incentives to consolidate their gaming with Harrah's."

So how do you think Loveman changed Harrah's program? What would you have done? How would have dealt with any one of the three problems?

Dr. Scott Shane, in his book, From Ice Cream to the Internet, describes one of the conflicts between the franchisor and franchisee. “A common way to increase sales is by offering a customer a coupon to generate interest in the system's products. Franchisors, almost always see the provision of coupons as a good idea because it increases sales, and hence, franchisor royalties. However, the use of coupons often increases costs along with sales because the company must provide the additional discounted or free items. The increase in sales and costs that comes from the use of the coupons frequently means that the higher level of sales occurs at a lower profit per unit, leaving the franchisee's profit to suffer. As a result, franchisees frequently oppose the use of coupons to increase sales that the franchisors try to get them to adopt”

It is unsurprising that both the franchisor and franchisee immediately see what is in their short term self-interest. What is that after fifty years of franchising, Dr. Shane's observation still holds true.

Remember the Harrah experiment with data mining and loyalty gift cards. Harrah's Total Gold Card was designed to provide incentives for Harrah's customers to return. It was a bit of bust in terms of providing those incentives. Harrah's re-engineered the program in order to be able to identify the expected long term worth of its customers, using the data that the Total Gold program provided to Harrahs.

But Harrah's was not merely passively collecting data; Loveman describes performing incentive experiments based upon what they thought the data was showing them. Instead of guessing or dictating the customer's preferences, Harrah's spent the time actually learning about its clients preferences and finding new ways to satisfy those preferences.

In the language of bargaining theory, coupons frame the relationship between the franchisor and franchisee as primarily zero sum, distributive, or that of claiming value. That is only part of the franchisor and franchisee relations; the other part can be described as coordinated, integrative, or creating value.

There is another difference between a discount coupon like the one I picked up recently from my local hot-dog street vendor and the Starbucks Gift Card,

provides a nice contract, in more ways than one. The hot dog street vendor is essentially selling me discounted dogs, to be paid in the future. With Starbucks, I am giving them both data and money, money they earn interest on until I either make a purchase or lose the card. We have seen how data is valuable, but let's not forget that that gift cards are a form of cash.

You gotta love Those Loyalty Programs: But Who Reaps the Real Rewards? is an interesting article, from Wharton, University of Pennsylvania.

"According to Wharton marketing professor Stephen J. Hoch , very few retailers have successfully built their own loyalty programs. The hotel and airline industries, he says, are better suited to profit off these programs because airlines and hotels are offering seats and rooms that, in most cases, cost little or nothing to provide -- as opposed to hard inventory. At the same time, there is a big spread between light and heavy users in the travel industry, making the high users easy to identify and worth cultivating .

Grocery stores, for example, do not benefit as much from loyalty programs because there is not that great a spread in the amount of money spent by heavy and light food shoppers. Although grocery chains offer loyalty programs, Hoch says, most competing stores match the discounts. Thus, there is little reason for consumers to be loyal to one store over another. "Many people have two, three, four of those cards in their wallet. Anybody who is smart has one just to get the discount," says Hoch. "

What about using the information from the loyalty card? Here Hoch is also pessimistic,

"As for the notion that retailers can use information gathered from frequent buyer programs to target customers effectively, this may be a myth, according to Hoch. A lot of retailers don't have the ability to "use the information to their advantage. After 15 or 20 years, there are just not many examples of [a retailer] who is doing a great job with its loyalty program." Still, he says, programs persist. "They're not dying out. They're vestigial. They don't really cost that much to do once you have bought the system. And since [retailers] are not spending a lot of time analyzing it ... I think of it as a defensive measure."

He notes there are retailers with strong customer loyalty who do not offer loyalty programs -- for example, Trader Joe's and Starbucks. "You don't see Starbucks giving away the 10th cup of coffee free. A lot of these are just a lame way of giving a heavy user a discount. That's not necessarily bad, because heavy users are more price-sensitive. You want to give them discounts, but the question is, does it create loyalty if everybody is doing the same thing for that heavy user?"

The entire article is well worth reading, along with the other Wharton articles on the topic.

From the DFA, "The judge in the United States District Court for the District of Minnesota granted the franchisees' motion for summary judgment. Effectively this ruling determined that the franchise agreements preclude the PULSE mandate and requires Domino's to provide franchisees with specifications for computer hardware and software so that the franchisees can acquire such computer hardware and software from any source. More particularly, the judge ruled that:

1. Section 8.2 precludes Domino's from mandating PULSE, or any other computer system, for that matter.

2. Section 8.2 requires Domino's to provide franchisees with the specifications for a computer system.

3. Specifications and/or standards are guides to constructing a finished product, and therefore they cannot be a finished product.

4. Section 8.2 requires Domino's to provide franchisees with specifications for computer hardware and software that would render it possible to obtain such items from multiple sources.

Given this ruling it is even more critical that you do not sign the current PULSE License Agreement, since the signing of such an agreement could impact your ability to exercise your rights under the franchise agreement, as clarified by the District Court ruling.

As stated in the past, we are neither pro-PULSE or anti-PULSE, we simply are pleased that the District Court has confirmed our belief that we have the right to acquire computer equipment meeting Domino's reasonable specifications from any source."

The entire ruling can be read here., and the DFA's press release is here.

This is area of commerce is going to be increasingly important. Domino's spent years developing the Pulse system, no doubt in part to track the consumer preference information.

What is emerges from a reading of the Court order that Domino's developed the new computer system without involving the Franchisee Association on how to share the additional revenue or information gathered.

Without such input and collaboration, it is no wonder why the DFA opposed the mandatory use of the Pulse system.

What does this mean for other franchise systems, who seek to share revenue or information by introducing new point of sale systems? Well unfortunately, like all hard won franchisee victories, this ruling would have been different had the franchisor thought to include computers and point of sale systems under items that had to be supplied by the franchisor in the contract. Would you like to bet about what is on the agenda for the next IFA's legal conference?

Let's hope that the DFA and the franchisor can now put behind them this contentious litigaiton and work together on setting joint goals, and devising fair procedures to split the value from obtaining those joint goals fairly. Ironically, there are great gains to be had for both

You are in charge of designing your franchise's new gift card prize - the winner gets a dinner once a week, or can share a dinner with one friend twice a week. The consumer preferences of the winner and friend are known, because of your tremendously sophisticated consumer sampling methods.

The winner is announced, a charming gentleman known only as "Fred". Fred is a sandwich sort of customer - who leans towards the salami submarine (S) type of fare. Our consumer preference database also reveals that Fred also likes ham sandwiches (H), and from time to time is known to indulge by scarfing back a burrito (B). In the language of economists, we say that Fred prefers S to H to B, S>H>B. Armed with this sophisticated notation makes us feel better about the task we are embarking upon - how to mix up H, S, and B to serve to Fred so that over the year Fred obtains maximal satisfaction. (We are told that Fred can be a bit demand, on occasion - so we really want to get it right.)

Since variety is the spice of life, as everyone knows, we need to mix up the delivery of sandwiches to Fred so that he doesn't get bored. We know that he would not be satisfied by a year's supply of S, we could even ask him.

We could ask him, and we would be wrong. Fred, whatever other qualities he might possess, according to the psychologist Daniel Gilbert would get his prediction of his own preferences wrong. Fred like most of us, believing in the spice of life, would not pick a diet which consisted of each week eating a salami submarine. And he would be wrong.

According to Gilbert, "Researchers studied this experience by inviting volunteers to come to the laboratory for a snack once a week for several weeks. They asked some of the volunteers to choose all their snacks in advance, and just as [we asked Fred to do] the choosers usually opted for a healthy dose of variety. Next, the researchers asked a new group of volunteers to come to the lab once a week for several weeks. They fed some of these volunteers their favourite snack every time, an they fed other volunteers their favourite snack on some occasions and their second favourite on others." The first group was more satisfied than the second - variety is not the spice of life.

Over a week, the taste of ones favourite food is no longer subject to habituation - the force that makes the tenth bite of a submarine not as exciting as the first bite. We confuse, says Gilbert, the decision between having ten salami submarines over ten weeks with having the choice between 10 bites of a salami sandwich versus five bites of a salami sandwich interspersed with five bites of a ham sandwich. Fred, for all his sandwich making skills, is no better than you or I avoiding this paradox.

According to Business Edge News, Interactive retail kiosks are pushing the right buttons:

"Facing time-starved consumers and continuing labour shortages, retailers are looking to new technologies to change the way we shop.

Various forms of interactive customer-service kiosks - some of which are being tested in Canada - could soon become the latest tool in a store owner's arsenal.

According to NCR Corp., once known as the National Cash Register Co. and now focused on using innovative technology to solve business problems, kiosks are an easy way for companies to "up-sell" their products - getting consumers to buy more than they would otherwise.

"The kiosks are better than a (sales) person on an up-sale," says Kent Porter, Mississauga-based director of self-service for NCR's retail solutions division in Canada. This type of kiosk, where people themselves punch in what they want to order or what service they want, is in demand."

Facing time-starved consumers and continuing labour shortages, retailers are looking to new technologies to change the way we shop.

Various forms of interactive customer-service kiosks - some of which are being tested in Canada - could soon become the latest tool in a store owner's arsenal.

According to NCR Corp., once known as the National Cash Register Co. and now focused on using innovative technology to solve business problems, kiosks are an easy way for companies to "up-sell" their products - getting consumers to buy more than they would otherwise.

"The kiosks are better than a (sales) person on an up-sale," says Kent Porter, Mississauga-based director of self-service for NCR's retail solutions division in Canada. This type of kiosk, where people themselves punch in what they want to order or what service they want, is in demand.