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8 Reasons Why Retail Loyalty Programs Do Not Work

Written by TABS Analytics | September, 03 2014

All right I'm guilty of the dramatic, attention-grabbing headline that ignores the nuances of this issue. A more accurate headline would be ""8 Reasons Why Mass Market Loyalty Programs Don't Perform as well as the Programs they replaced." Too wordy and not bold enough.

The evidence is pretty compelling, though, that there are fewer incremental sales and profits being generated due to much broader use of these programs with such retailers as Safeway, CVS, Walgreens and Kroger. On a macro basis we see Publix, with no loyalty program, significantly outperforming such loyalty stalwarts as Kroger, Tesco and Safeway. On a micro basis TABS Group has tracked hundreds of instances where the promotional lifts just die when retailers move to an exclusive loyalty or digital platform.

Note that I only make these conclusions with respect to Food, Drug and Mass Merchant retailers because that is where I have the most exposure to the data. I suspect, however, that the conclusions can be generalized to other retail outlets, because the shortcomings of these programs are also found in the Specialty channels. Here then, are eight reasons why these "loyalty" programs are not working.

1. The offers are confusing - We regularly see ads where it takes several seconds to decipher the actual consumer offer. "Mix & Match," and "Spend $50 and get $10 off these selected items" are just two of dozens of examples where the consumer actually has to stop, decipher and understand the offer. Roll this up to several dozens of these types of offers in a typical 16-page circular and a meaningful number of consumers will just check out and ignore anything that cannot be instantly understood.

2. The offers are deceptive - A significant portion of these offers have qualifiers attached to them such as "With Purchase of 3," "On next Shopping Visit," "When Spending $50 or more," and it goes without saying that these qualifiers are communicated in mouse type vs. headline grabbing callouts. Some may work on the current purchase, but a sizable percentage will translate into an angry customer that feels deceived.

3. The offers are less compelling - While the quantity of promotions may be increasing, we are tracking far fewer instances of deep discounting. After all, there is a clear, documented relationship between lower prices and higher sales. It's called the Law of Demand; maybe you've heard of it.

4. The offers are exclusionary - For most of these "loyalty" retailers, almost all of the offers in their Circular can only be achieved if you have their Rewards card. In addition to a level of coercion many find offensive, it is just plain bad business to hinder marginal customers (not necessarily marginal shoppers) from coming into the store and buying products they may not normally buy or buy them in heavier quantities. Just because a shopper is a light shopper in a given store, does not mean they are light, overall. There is a high percentage of non-card holders that are heavy shoppers, and just bounce from store-to-store shopping for the best deals. This is not a behavior any one or even any ten retailers can break. Our Consumer Value Study shows that over 50% of shoppers say they prefer to shop at outlets that provide the best deals. If retailers want to make it difficult for them to shop in their stores, then these people are more than happy to go to other retailers that want them.

5. The offers are unrealizable - Similar to Points #1 and #2, just think how many times a shopper will get to the register only to find out that a certain deal is not available because they didn't meet the conditions of the Ad. These "Purchase $50 and Get..." offers either exclude the vast majority of shoppers or aggravate and alienate another significant percentage. Our analysis clearly shows that almost none of these unrealizable offers moves the needle on sales.

6. They are not "Loyalty" programs anyway - The TABS Group Consumer Value study shows that that average user of these programs shops in 3.6 outlets for Consumables vs. the average non-user 2.9. What Loyalty? These results are consistent for OTC, and they are consistent with what we found in last year's study. A better description of these programs are "Rewards" programs, and they are just another tactic used in the arsenal of Active Deal Shoppers.

7. They are expensive to execute - The main reason for all the contortionary offers mentioned in Points #1 and #2 and the lamer offers in Point #3 is that these programs are more expensive to execute vs. the typical TPR (Temporary Price Reduction) or Circular. In looking to recoup the heavy investment in their Reward program infrastructure, retailers are much less flexible in their subsidies on these offers. There is more burden on the Manufacturers. Manufacturers, therefore, look to other ways to try to reduce the cost of the event and (futilely) maintain the sales impact. The most direct method in doing this is just by reducing the discount on the product. So we have a situation where companies are spending more to promote in programs that have lower impact than the less expensive programs.

8. They breed a complacency - Too many retailers point to their Rewards program as their number one strategy to increase sales and profit. They delude themselves into thinking that they can "personalize" the offers to shoppers so that they are more "engaged." They can then cull through all of the "big data" generated from these transactions to create "win-win" scenarios with their shoppers. (Programming note: I'm trying to slide just one more industry cliche into this paragraph, but I'm tapped out.) Ask the ex-CEO's of Tesco and Safeway how that has worked out for them. These programs have proven to be fantastically ineffective at defending their business from lower-priced competitors such as Walmart or Aldi.

So in summary, there is not a whole lot going for these programs, yet retailers are insistent on doubling down on their investments in them, and manufacturers are doing nothing to resist them or at least be an agent of change. What changes you ask? These programs can have some value, if retailers employ some simple rules: 1) accept the programs for what they are: another vehicle to deliver deals, 2) provide discounts to all consumers, not just Rewards card shoppers, 3) ensure that discounts stay sharp and compelling to the consumer, 4) eliminate the confusing, deceptive and contortionary offers, and 5) use the rewards offers to layer on additional saving to basic deals.

In other words, make deals compelling and simple for the consumer and they will buy more stuff.