"Loyalty Programs", expensive and useless
"— "Brother, says he, 'greetings. Didn't I see you in Southern Missouri last summer selling colored sand at half-a-dollar a teaspoonful to put into lamps to keep the oil from exploding?"
— 'Oil, says I, 'never explodes. It's the gas that forms that explodes."
O.Henry, The Gentle Grafter
Before taking up something, it is worth thinking of the goal to be pursued. If you can’t state your goal clearly and convincingly, then you’re probably up to some nonsense.
To realize your goal is even more important in business.
If you cannot think of a realistic situation where your business will result in a growing profit, it’s a safe bet that you’ve invented a stupid thing.
This elementary rule of thumb, if consistently applied, would have helped businessmen around the globe save trillions of dollars. But… Well, you understand.
Let us apply it tо the topic of our publication, "Loyalty Programs" (LPs hereinafter). All LPs, however decorated, in the end come down to handing out money to your customers. Either through "bonuses", discounts, gifts or other options.
Theoretically, an individual market player’s LP should somehow differentiate him from others and thus lead the buyer to more probably prefer this very seller (other things being equal). How? If they all have the same LPs!
Identical LPs will hardly help to stand out. Unless they are outstandingly absurd.
LPs used on a massive scale inevitably lead to the following:
Loss of LPs" significance to the consumer — as all active shoppers have loyalty cards from all the competitors. The explanation is simple cards are handed out freely: "Have you got our card? Want one?" As a result, everybody has a thick wallet full to bursting of colored plastic.
On a highly competitive market the margin is so much depressed that you are simply unable to grant your shopper any significant discount. Who can be motivated by 1% or 3% discount? Off a ten-dollar purchase or even off a 100-dollar one. Given that your competitors give the same discounts.
Even those discounts, while being negligible for the customer, turn out damn expensive for the seller. The mathematics is very simple: if your net profit is the usual 2 to 4% of your turnover, then scrapping your LP that grants shopper an average 3% discount will double your net profit, to put it crudely (actually your final benefit will be even higher, as we’ll show below), without losing any sales due to Para. 2.
In addition to direct sales profitability losses, you bear the LP processing costs — printing, distributing and accounting of the cards, handling bonus assessment problems, etc. A monkey business designed to cut your profit.
In all LPs mainly beneficiaries are not shoppers but the seller’s personnel who use them to steal hefty amounts of money. By virtue of Para. 3 arithmetic, salesmen/cashiers/shop assistants can earn far more than the company’s shareholders, depending on LP processing technology. These are not one-off cases, as we know perfectly well.
On the contrary, we do not know a single case of an LP used in a company and not accompanied by bold stealing. For an ordinary shopper a 2% bonus or discount off a 15-dollar purchase is peanuts. But imagine how much it makes for a cashier who checks out several hundreds of such customers every day! Especially as compared to his salary.
Don’t hope for your control systems, dear managers: firstly, they are also quite expensive to maintain and, secondly, in a cat-and-mouse game between employees and their managers/shareholders the former stand to win — both due to their sheer numbers and because their financial motivation is many times stronger and they can focus on a single goal.
If you hope for the opposite, we feel sorry for your innocence.
The situation is exactly the same with tax exemptions and State support for business: it is always officials, rather than businesses or investors, who will benefit from them (= steal the money), so a flat tax rate and no State support are the best option.
So here is our Valuable Recommendation to almost every seller (almost; see below to whom it DOES NOT apply): abandon this rubbish and enjoy a growing profit and no monkey work.
Your saved effort should better be directed towards what is really important for your shopper and really increases sales.
P.S. Nevertheless, there exists a very small percentage of cases when a discount-based LP really works. These have the following features combined:
the average purchase value makes the purchase so important for the target audience that it compensates for the inconvenient/remote location;
there are relatively few players in this market segment, so their points of sale are not located round every corner;
the business is marginal enough to afford serious discounts which means substantial savings for your target audience;
the LP is highly selective; the cards are difficult to obtain and prestigious to hold, and moving to a higher LP level requires spending a considerable amount (for TA) while offering substantially higher advantages.
P.P.S. A loyalty program made into a game is quite a specific case. If you do make it work, you could not ask for better. It may include discounts a well but the working essence is the game process.