To most consumers, loyalty programs mean one thing: discounts. But savvy retailers know the personal data the programs provide can be golden. Still, mining that data and producing gains from it is no easy feat.
Cincinnati-based Kroger Co.'s customer loyalty program, which is arguably the best known and most popular such program among the nation's grocery stores, is proof of their potential effectiveness. Roughly half of all U.S. households had a loyalty card from Kroger or a subsidiary brand in 2010. And Kroger credited its loyalty program for much of its growth in fiscal 2011, including a 10.2 percent rise in sales from the prior year.
"Our 'Customer 1st' strategy is delivering value for our customers, who are rewarding Kroger with their loyalty," Chairman and Chief Executive Officer David Dillon said in a March statement. "Customer loyalty, in turn, is driving sales and shareholder returns."
Loyalty programs are more the rule than the exception among supermarkets. As of 2009, about 51 percent of all U.S. supermarkets had loyalty-card programs, according to the Food Marketing Institute. Among chains with at least 50 stores, that figure exceeded 76 percent.
Yet despite how entrenched supermarket loyalty programs are, some marketers are questioning whether they do indeed build customer loyalty. "Loyalty programs are effective at activating only a relatively small percentage of a company's customer base," concluded Washington, D.C.-based consultancy Gallup in a 2011 report based on a survey of 22,905 adults.
Many grocery retailers consider loyalty members "activated" once they join a program and swipe their plastic cards through the retailers' check-out readers. But members are truly active when they are engaged with the retail brand, and that requires continual effort on a supermarket's part.
Differentiate and Conquer
A successful loyalty program includes rewards, recognition and relevance, says Bryan Pearson, CEO of Toronto-based marketing services provider LoyaltyOne and author of the forthcoming book, "The Loyalty Leap: Turning Customer Information into Customer Intimacy."
"A well-structured program does create a means to focus the consumer's attention and reward their shopping behavior," Pearson says. "But what needs to be clearly understood is if you stop at rewarding the behavior, you're missing some of the critical importance of the program."
Using discounts as the primary reward can be a short-term solution, says Chad Barnett, vice president of shopper insights at Cincinnati-based Acosta Marketing Group. For one thing, competitors can easily offer shoppers the same discounts. For another, discounting can lead retailers to lose more margin than necessary. "You don't want to subsidize someone's purchase of something they would have bought otherwise," he warns.
Acosta Marketing Group
What's more, too often customers attracted by discounts are the most price-conscious ones and are therefore the least likely to maintain loyalty to any one retailer. And "too much focus on price-conscious shoppers can alienate those who value variety over price," Barnett notes.
That was one of the reasons Market Street, a 10-store chain owned by Lubbock, Texas-based United Supermarkets, didn't include discounts in its Smart Rewards program, which launched last year.
"Our guests don't need to have the card in order to get our ad or sale prices," says Monica Schierbaum, director of marketing for United Supermarkets. "They simply earn points for their purchase. The Smart Rewards program is an extra way to save, not the only way to save. Our program also allows guests to choose their own rewards. Right now, they can pick fuel discounts or cash discounts." In addition to earning one point for every dollar they spend, members are automatically entered into drawings for prizes each time they use their card.
By differentiating its loyalty program in this way, Market Street has contributed to enrollment and card usage that, Schierbaum says, "are way above projections."
With the "basket-level data" Market Street gleans whenever Smart Rewards members use their cards, the company has a better understanding of purchasing behavior, product affinities and shopping frequencies for different customer segments, Schierbaum adds.
How retailers use this information is what distinguishes a run-of-the-mill loyalty program from a highly effective one. "Supermarkets are primarily using [loyalty data] to give themselves a leg up on operational profitability," says Pearson, but most fall short of creating emotional connections with consumers through highly relevant communications and offers.
Using customer data by tweaking merchandise mix can improve profitability. "In the past we could say the top 20 percent of products provided 80 percent of sales," Barnett says. "Today we see there are products that might not be your top sales drivers but that might attract a certain type of valuable customer who might take her business elsewhere were you to drop them."
For example, if the data indicate a distinct subset of customers has a propensity to buy organic foods, retailers can bolster their merchandise selection. From there it's a matter of sending those organic-loving members emails or other communications informing them of the new organic selection and providing a relevant offer–fairly simple yet effective.
But to create true customer engagement and loyalty, retailers need to shoot for the holy grail of marketing: one-to-one communications. Sobeys, a Stellarton, Nova Scotia-based chain of about 1,300 stores, came close to achieving this. The company analyzed numerous data sets from the information it reaped from its loyalty program members, says Pearson, who with LoyaltyOne worked with the retailer. Sobeys looked at "everything from favorite store to 12 variables of offers, such as discounts versus air flight points," Pearson says. It then sliced and diced the information to build impressively targeted mailings using a mix-and-match variety of variables: Out of 1 million pieces mailed–primarily direct mail, with supporting email communications–987,000 were unique.
The results were equally impressive. Overall Sobeys recorded a double-digit response and a significant lift in customers' recall of the mailings. The emails had a 37 percent unique open rate and a 26 percent click-through rate.
"There's always work in creating your optimization and algorithms, but there's definitely a return on investment," Pearson notes, "and a lift on long-term business as well."
Privacy vs. Personalization
Some retailers may shy away from communications that are too personalized–and personal–for fear of scaring away loyalty program members. The New York Times Magazine in February published an excerpt from Charles Duhigg's book "The Power of Habit" that described, among other things, how retailer Target began sending a particular young customer, whom its data analysis indicated was pregnant, prenatal offers–to the chagrin of the customer's father, who didn't yet know about the pregnancy. The article revived fears among some consumers about the loss of privacy.
But most consumers, Barnett says, recognize the quid pro quo of loyalty program membership, which after all is voluntary: "Yes, they're collecting my data, but there is a benefit I'm receiving in exchange," he says.
In fact, about two-thirds of consumers are disappointed that retailers don't use the customer data they gather to provide more-targeted communications and offers, says Pearson, citing research by Colloquy.
Pleasanton, Calif.-based Safeway is certainly banking on that sentiment with the nationwide rollout of its Just for U program, which digitally delivers highly targeted offers and "personalized prices" to participants' club cards. In its annual investors meeting this year, the company said that it expected Just for U, which it has already tested in several markets, to be the primary driver of its projected 1 percent to 2 percent rise in sales for fiscal 2012.
"Consumers recognize that different customers will get and should get different offers," Pearson says. "Their feeling is, 'If you're going to track the information, you should be using it to try to provide value that is customized for me.'"