Who Really Benefits from a Loyalty Program?

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.