The hidden side of loyalty card programs December 2009 Professor Steve Worthington, Monash University Josh Fear, The Australia Institute Retail Therapy
1 Introduction Jane is 53 years old and lives with her cat in a northern suburb of Melbourne. She works full time on the other side of town, so she prefers to drive rather than catch public transport. On the weekend Jane likes to do some gardening, and she is also fond of red wine. In fact, she drinks so much that it makes financial sense for her to buy her wine by the carton. Jane s daughter lives a few kilometers away and has an 18-month-old girl. Jane likes to buy clothes and toys for her granddaughter, even though she has more than enough already. How do we know all these things? Because some time ago Jane applied for a loyalty card at her local supermarket so that she could earn frequent flyer points every time she goes shopping. She now hands over her card whenever she is at the checkout. Although her identity is kept confidential by the supermarket chain, Jane would probably recognise herself from the profile that it has built from its database. The supermarket knows that she is a pet owner, because she buys cat food. It knows that she drives to work, because she buys fuel at a petrol station owned by the same corporation. From her regular purchases it also knows that she is a gardener and a wine drinker. From her occasional purchases of baby products, it has even deduced that there is a baby in the family, but that it isn t hers. Given her age, it has assumed that Jane is a new grandmother. Jane now receives regular mail from the supermarket chain (and affiliated companies) with advertising and promotions that are specially designed to appeal to her. After doing extensive survey and focus group research with people like Jane, the supermarket chain has developed a sophisticated segmentation that allows it to target different kinds of customers with different messages. Like Jane, many people who hold a loyalty card do not realise just how valuable their personal information can be, even when it is aggregated with that of their fellow customers. This paper explores the hidden side of loyalty cards by comparing the reality of such schemes with public perceptions. It begins by providing some background to loyalty programs in Australia and the possible uses to which loyalty program data can be put. It then describes the results of survey research with a sample of 832 Australians who participate in retail loyalty programs. The paper concludes with some observations about how the environment in which loyalty programs operate can be changed to achieve a better balance between commercial innovation and consumer privacy and autonomy. What is a loyalty program? The basic idea behind a loyalty program is to gain a bigger share of customer spending by rewarding individuals for shopping at a particular store or group of stores. The more money that a customer spends, the greater the rewards. Sometimes rewards come in the form of discounts on products in the store. Other loyalty programs allow members to accumulate rewards points, which they can then redeem for a variety of free goods or services. Members of a loyalty program are usually given a loyalty card perhaps a simple piece of cardboard (for example indicating how many take-away coffees someone has purchased), but more usually a credit card-style plastic card with a magnetic strip or barcode containing a unique member identification number and perhaps the name of the customer. There is usually no payment facility associated with a loyalty card; its sole purpose is to monitor transactions in order to reward customers in proportion to their spending. Whenever a purchase is made, information about the purchase (such as the price, product, place of purchase and date) is recorded alongside the member number. Over time, therefore the information about consumer behaviour gathered through loyalty card data can be substantial. Loyalty cards
2 Increased customer fidelity is just one benefit of setting up a loyalty program; in addition, such programs can generate a wealth of commercially valuable information about purchasing behaviour. In fact, this aspect of a loyalty program can be just as important for a company as any increase in sales due to customers spending to earn reward points. For this reason, loyalty program is something of a misnomer; a better term would be rewards and information exchange program, because that is a more accurate description of the transaction between customer and company. In return for providing information about themselves and their spending patterns, members of a loyalty program receive rewards in proportion to their spending. The company operating the program can then use the information that these programs generate to more accurately target offers to customers, refine their marketing approaches, and potentially to also then sell aggregated information and insights about consumer behaviour to their suppliers. Types of loyalty programs Before continuing, it is worth distinguishing a loyalty card from other card-based schemes that aim to increase customer loyalty. For the purposes of this paper, a loyalty card refers to a personalised card, issued by a retail outlet or group, which has no payment function and which can be used to track customer purchases at the product level. It is the ability to generate data about specific product purchases that makes loyalty programs such a goldmine of commercially valuable information. There are of course a range of similar schemes which aim to encourage loyalty, but these do not generate data at the level of specific products. These include: Credit and charge card reward programs, which are linked to a credit/charge card payment facility. Although such programs reward fidelity to the card issuer, and garner information about the card holder and their spending behaviour, they usually cannot capture information about the types of products purchased only the place and date of purchase. Some credit/charge card reward programs are co-branded with airlines, retailers, petrol companies and other multiple-outlet businesses. Frequent flyer programs, which were the original loyalty programs and are still highly successful in commercial terms. Frequent flyer programs collect information about an airline s highest spending customers, and reward those who fly regularly. Rewards can take the form of free flights or upgrades, but over recent years frequent flyer points have developed into de-facto currencies which can be redeemed for a wide range of products. In some cases and somewhat confusingly - other loyalty programs (including pure loyalty programs and credit/charge card reward programs) can issue frequent flyer points as rewards. This paper considers only those loyalty programs which can track purchases at the product level. In Australia, the most prominent loyalty programs (as defined) are: FlyBuys, which is operated by Loyalty Pacific Pty Ltd. Fly Buys points can be earned at a range of retail outlets many of which are part of the Coles and NAB groups. Fly Buys points are offered by: Best Western, Bi-Lo, Budget car rental, Coles, Curves, Jetset, Kmart, Liquorland, NAB, Source MasterCard, Target, and Travel World. There are an estimated 5.5 million members of the FlyBuys scheme, making it the largest in Australia. Everyday Rewards, which is operated by Woolworths. Points can be earned at Woolworths, Big W, BWS and Dick Smith. This loyalty program was launched in mid 2009, but membership is growing strongly. The Everyday Reward card is believed to have attracted 3.8 million members by September 2009.
3 Myer One, which is operated by Myer. Points can be earned at Myer stores only. There are believed to be 3.1 million members, who between them hold 4.4 million cards. Priceline Club Card, which is operated by the Priceline Health and Beauty Group. Points can be earned at Priceline stores only. There are an estimated 2.7 million members. In addition to these popular national loyalty programs, there are many other programs in Australia of varying sizes and kinds. For example, there are loyalty programs associated with retailers of household goods (e.g. Holy Sheet), outdoor equipment stores (e.g. Snowgum), and hotel groups (e.g. Priority Club). Each program has a different system to earn and redeem points, in line with the kinds of customer behaviour it seeks to promote. How loyalty programs use information Loyalty card programs collect and store different types of data about their card holders. This can include: Information provided by the customer upon applying for the card (e.g. age, gender, address) Information about purchases made using the Loyalty card at the point of sale (e.g. type and location of retail outlet, type of product, price) Information about redemptions made using the rewards that the Loyalty program provides (e.g. type of product redeemed, store at which vouchers are spent) Responses to any surveys or other information-gathering schemes conducted by the Loyalty program. Thus some of the kinds of information that such loyalty programs collect and collate are: Customer demographics e.g. age and gender Location e.g. home address, most visited/highest value store Products purchased by category, brand Frequency of purchase e.g. every week, last six months Transaction value e.g. average basket size, average category purchase Basket analysis which product purchases correlate with other characteristics (such as gender/age/cross-promotions) Customer behaviour response to promotional offers and other marketing. 1 Loyalty program operators must abide by the provisions of the Privacy Act 1988, which set out how personal information can and cannot be used under the law. For example, personal information cannot be given to any third party organisation. Loyalty program providers use personal information about their members in various ways. First and foremost, it is used to keep track of points earned and redemptions made, and then to communicate this to members. 1 This information was derived from a variety of loyalty program providers, both from publicly available information and personal discussions by the authors. Loyalty cards
4 Second, personal information is used to send marketing material to members. These two functions communication and marketing are in practice often carried out simultaneously. Members might receive brochures or flyers about an upcoming sale in the same envelope as their quarterly or yearly statement of points earned. Or, since much of this activity is shifting online, they might be notified of offers in an email that also includes their points balance. Consequently, the act of joining a loyalty program is interpreted as a signal by members to the retailer that they are interested in and willing to receive marketing materials. Having received such consent from loyalty program members, retailers need to decide which marketing materials to send to whom. A very simple promotion might apply to all members for example, a 10 per cent discount during a certain period. More complex promotions are targeted, with different materials sent to different members. For example, since women are thought to be more likely than men to respond to an offer on cosmetics, such an offer might be sent to female members but not males. A more sophisticated approach would be to use the repository of personal information to predict which kinds of members are more likely to respond to which promotions. The database might show that certain individuals spend more on a particular class of product or at a particular store; these people would then receive an offer or deal that corresponds to those habits. Or the database might show that women between 35 and 54 are more likely than others to use a discount voucher, so members that meet this criteria would be sent vouchers rather than some other kind of promotion. Given the wealth of information available to retailers through a loyalty scheme, the extent to which promotions can be tailored is limited only by the imagination and budget of marketers. A third way that loyalty program operators can use the personal information supplied by their members is to convert it into commercially valuable insights to generate additional revenue. In a hypothetical scenario, a supplier of hair products could ask a loyalty program operator to ascertain what types of customers typically buy its brand of hair shampoo. Armed with this knowledge, the supplier could devise a promotional campaign giving buyers of its shampoo a half-price offer on its conditioner. This offer would then be sent by the loyalty program operator to members with the right characteristics. The personal details of members are not passed onto the supplier (because the loyalty card operator disseminates the offer), so privacy laws are not breached. The operator is compensated by the supplier generating income from the loyalty card scheme while the supplier benefits from being able to target potential customers with more precision than they would be able to achieve through other kinds of marketing. A fourth way that loyalty card operators can use member information is to sell it in de-identified form i.e. after removing any markers, such as name and address, which could reveal the identity of individual members. This is already being done in some overseas markets (see the example below). Anecdotal evidence suggests that this practice does occur in Australia to some degree, and it is likely to increase as databases mature and marketers realise the commercial value of that information. The Tesco example 2 UK retailer, Tesco, provides a telling example of how loyalty programs can make use of customer data. Launched in 1995, the Tesco Clubcard is said to be the world s most successful retail loyalty scheme. It has a participation rate of over 80 per cent and has been extended to Tesco s operations in Ireland, Poland and Korea. Every quarter Tesco mails out 13.5 million pieces of Clubcard promotions to British households, with 7.5 million variations in the coupons, deals, discounts and other deals sent to customers. The response rate is very high, 20 per cent 2 Information on the Tesco Clubcard loyalty program is from Humby C., Hunt T. and Phillips T. 2004. Scoring Points: How Tesco is winning customer loyalty, Kogan Page, London.
5 of customers make use of coupons sent to them, compared to an industry average of 0.5 per cent. The high participation rate is due to fact that coupon offers are targeted to each customer based on previous purchase patterns. For example, Tesco can use its customer data to promote products that are likely to appeal to parents of students leaving home for university for the first time such as bedding, towels or cooking equipment at the start of the academic year. It can then use the data gleaned through this process to provide offers on products that are likely to appeal to these same parents as their offspring return home in the lead-up to Christmas products such as computer software, DVDs or alcohol. The Clubcard scheme costs Tesco an estimated 0.8 per cent of the value of its sales, but it recovers these costs by generating additional revenue through partnerships with suppliers. Tesco offers its suppliers access to aggregated (i.e. de-identified) data relating to customer behaviour. Having access to information about the shopping habits of 13 million households in the UK, Tesco s data is valuable for suppliers, who can use it to better understand the purchasing decisions of potential customers. By working with their suppliers and sharing information in this way, Tesco claims that it is creating a more collaborative partnership by placing the customer at the centre of the decision-making process. 3 Tesco organises its suppliers around certain category captains, who are responsible for ensuring that the correct products are developed, stocked and merchandised for each category of product. The information derived from the Clubcard scheme enables Tesco to increase sales in other ways, such as through in-store advertising, differential pricing and better merchandising. Its massive database of customer habits also helps to identify opportunities for Tesco to increase its share of customer spending outside its stores. For example, Tesco has now become a provider or financial services, offering insurance policies, credit cards and other loans to consumers. 4 In Australia, some retailers are also moving into financial services. David Jones has recently launched a credit card through American Express, while the Woolworths Everyday Money credit card is operated in partnership with HSBC. 5 Loyalty card survey In order to better understand how loyalty programs are perceived in Australia, The Australia Institute, in collaboration with the Department of Marketing at Monash University, commissioned an online survey of 1,000 people in July 2009. The survey sample was representative of the adult Australian population by age, gender and state/territory, and respondents were sourced from an independent online panel provider. 6. The survey questionnaire is reproduced at Appendix A, and additional tables of survey results are available at Appendix B. Four in five survey respondents (83 per cent) reported having at least one loyalty card; this figure is probably higher than for the population as a whole because of the nature of the survey sample. 7 The most common card was Fly Buys, held by a majority of those surveyed (59 per 3 4 5 6 7 Dunnhumby 2009. Case studies Tesco. http://www.dunnhumby.com/uk/our-clients-case-studies accessed 26 November 2009. See www.tescofinance.com/personal/finance/home.jsp See http://www.everydaymoneycard.com.au/numbers/ and davidjones.americanexpress.com/dsmlive/dsm/int/au/en/davidjones/davidjonescard/davidjonesamexcard.do? vgnextoid=0fca417db755a110vgnvcm200000cff4ad94rcrd and Further details about the survey methodology are available at Appendix A. Respondents were sourced from an online panel of people who had agreed in advance to answer surveys. The high proportion of respondents with one or more loyalty cards is likely to be due to an overrepresentation of loyalty card holders among the online panel community (because there is an intuitive similarity between Loyalty cards
6 cent). Around half (48 per cent) said they had a Woolworths Everyday Rewards card, while about a quarter said they had a Myer One card or a Priceline Clubcard (25 per cent and 23 per cent). A few respondents (11 per cent) said they had another type of loyalty card; 8 these included cards issued by Franklins, Dymocks, various pharmacy chains, local coffee shops and the Qantas and Virgin Blue frequently flyer programs. When looking at the average number of loyalty cards held by respondents of different kinds (up to a maximum of five in this survey), it is possible to see distinct differences between men and women and between people of various ages. Women held an average of 2.02 loyalty cards, while for men this was only 1.29. Average numbers of loyalty cards increase more or less consistently with increases in age. Whereas 18-24 year olds had only 1.55 cards, those over 60 reported having 1.76 cards. Figure 1: Average number of loyalty cards 1.0 1.2 1.4 1.6 1.8 2.0 2.2 Male 1.29 Female 2.02 18-24 years 1.55 25-34 years 1.60 35-44 years 1.72 45-54 years 1.61 55-64 years 1.70 65 years or older 1.76 All 1.66 Base = 1,000. Question: Do you have any of the following loyalty cards? (maximum of 5, including other ). Includes those who said they had no loyalty cards. The frequency with which loyalty cards are used depends on which type of card it is that is, how often people are shopping at a particular store. Cards associated with supermarkets are used very often, 67 per cent of respondents with a Fly Buys card, and 73 per cent of those with a Woolworths Everyday Rewards card, reported using it at least once a week. By contrast, only 6 per cent of Myer One card holders and 7 per cent of those with a Priceline Club card used it at joining a loyalty card scheme and joining an online survey panel). Although this makes it difficult to draw conclusions about the incidence of card ownership across the population, other survey results (which focus almost exclusively on people who have loyalty cards) remain statistically reliable. 8 This proportion would in all likelihood have been higher if additional cards had been presented in the survey.
7 least once a week. Nevertheless, very few of those with a loyalty card said they never used it less than 5 per cent in all cases. The great majority of loyalty card holders said they still carry their cards with them. Indeed, 93 per cent of those with a Fly Buys or Woolworths Everyday Rewards card said they always or usually carried their card with them. Most respondents also said that in hindsight it was worth joining their loyalty card scheme. Around two in three loyalty card holders surveyed (70 per cent) said they had redeemed awards or points from a loyalty card scheme. 9 By far the most common type of redemption was for vouchers to spend at a particular store or group of stores; 76 per cent of respondents who had redeemed points had received this kind of reward. Around 14 per cent had redeemed points for electronic goods, while 12 per cent had made redemptions for airline flights or holidays. One in four (24 per cent) said they had made another kind of redemption, most commonly discounts on fuel. Other kinds of redemptions included movie tickets, restaurant meals and even cash. Respondents were asked to estimate the dollar value of any redemptions made through their loyalty card schemes in the previous 12 months. The mean value of redemptions was $113. 10 Three in four of those who had made a redemption (73 per cent) estimated its value at $100 or less, while just under half (46 per cent) made redemptions worth $50 or less. A minority of survey respondents said they had opted out of receiving marketing materials from their loyalty card schemes between 15 and 20 per cent for each card type. Those who had opted out almost invariably did this when they were joining the scheme, by ticking a box on the application form; there were very few who had made a request by phone or in writing after they had joined. The survey asked which aspect of a loyalty card scheme was most important to respondents keeping their personal information confidential or getting more rewards. Around half of respondents (49 per cent) said privacy was more important, while 45 per cent preferred getting more rewards (with another 7 per cent not sure about this question). Women were slightly more concerned about privacy compared to men. However, there were major differences in attitudes to privacy across the age spectrum. People aged between 18 and 24 years were much more likely to regard rewards (63 per cent) as more important than privacy (28 per cent). Respondents aged between 35 and 44 years were divided roughly evenly between preferring privacy (50 per cent) and preferring rewards (48 per cent). Among the oldest age group (65 years and over) there was an overwhelming preference for privacy (58 per cent) over rewards (35 per cent). In other words, concerns about privacy are associated with increasing age, and to a smaller extent with women. This finding is notable, given than women and older people tend to have more loyalty cards on average than men and younger people. 9 10 This figure applies to any redemptions made from the loyalty card schemes referred to in the survey. In order to account for the value of points accrued but not redeemed in the last 12 months, all respondents with a loyalty card have been included in calculating an average redemption amount. Respondents who said they had not made a redemption in the last 12 months were assigned a value of $0. If high-value redemptions (greater than $1,000) are excluded from analysis, the average redemption amount was $79. Loyalty cards
8 Figure 2: Privacy vs rewards by gender and age 0% 20% 40% 60% 80% Male Female 18-24 years 25-34 years 35-44 years 45-54 years 55-64 years 65 years or older Privacy is more important Rewards are more important All Base = 832. Question: In your view, which of these aspects of a loyalty card scheme is most important? Respondents were asked whether they were aware that their personal information could be used in various ways when they originally signed up for a loyalty card. A majority said that they were aware that their information could be used to track what products they buy (56 per cent), to track where they buy products (61 per cent), and to contact them with offers and promotions based on their purchasing behaviour (69 per cent). Less than half said that they were aware that personal information could be used to compare their purchasing behaviour with others (44 per cent) and to profile them as a particular type of customer (46%). Only a quarter (28 per cent) reported being aware that their information could be combined with data on other people and sold to third parties in de-identified form. As well as measuring awareness, the survey also tested levels of concern about the various ways that loyalty card schemes can use personal information. Roughly one-third of respondents (between 30 and 41 per cent) said they would be concerned if their personal information was used in these kinds of ways. The exception was if their de-identified information was combined with others and sold on; a large majority (71 per cent) expressed concern about such a situation.
9 Figure 3: Awareness of and concern about use of personal information 0% 20% 40% 60% 80% To track what products you buy To track where you buy products To contact you with offers and promotions based on your purchasing behaviour To compare your purchasing behaviour with others Aware Concerned To 'profile' you as a particular type of customer To be combined with data on other people and sold to third parties in de-identified form Base = 832. Questions: When you originally signed up for a loyalty card, were you aware that your personal information could be used in the following ways? Would it worry you if your loyalty card scheme was using your personal information in the following ways? Concern about how data is used was stronger among respondents who indicated that keeping their personal information confidential was more important than getting more rewards. Four in five of these respondents (79 per cent) said that they would be concerned if their information was sold to third parties in de-identified form, compared with 63 per cent of those who said that rewards were more important than privacy. Around half of respondents who said privacy was a priority (48 per cent) also expressed concern about their information being used to profile them. Loyalty cards
10 Figure 4: Concern about use of personal information 0% 20% 40% 60% 80% To track what products you buy Privacy is more important Rewards are more important To track where you buy products To contact you with offers and promotions based on your purchasing behaviour To compare your purchasing behaviour with others To 'profile' you as a particular type of customer To be combined with data on other people and sold to third parties in de-identified form Base = 832. Questions: In your view, which of these aspects of a loyalty card scheme is most important? Would it worry you if your loyalty card scheme was using your personal information in the following ways? The minority of respondents who said they did not have any loyalty cards (17 per cent of the survey sample) were asked why this was so. Although many (38 per cent) said there was no particular reason or that they just weren t interested, a sizeable proportion (30 per cent) said that they wouldn t get enough in return for using loyalty cards. Fourteen per cent said they had never got around to joining a loyalty card scheme, while 13 per cent said that they had had loyalty cards in the past but got rid of them. Only a small proportion (2 per cent) cited privacy concerns as the reason for not having any loyalty cards. Conclusions Loyalty cards are already a widespread feature of the retail environment in Australia, with the most popular loyalty programs now having millions of members. The largest program, FlyBuys, has more than 5 million members, and membership of the Woolworths Everyday Rewards scheme, which was launched relatively recently, is growing very quickly. According to our survey, women are much more likely to have a loyalty card than men, and membership of loyalty programs is more common among older rather than younger people. The majority of survey respondents with a loyalty card reported using them regularly and carrying them around. Around two in three people surveyed said that in hindsight it was worthwhile joining the loyalty card program, while around twenty per cent said it was not worthwhile.
11 Despite such indications of general satisfaction with the big loyalty programs in Australia, it is likely that these schemes have a large number of lapsed members that is, people who applied for a card and perhaps used it for a time but no longer do so. There is no publicly available information from loyalty program operators on the proportion of members which are active or lapsed. However, our survey results show that the most common reason for not joining loyalty schemes is not getting enough in return; only a small proportion of people cite privacy reasons. Survey findings suggest that most members of loyalty programs are aware that their information can be used to track what products they buy, to track where they shop, and to contact them with offers and promotions. There is relatively little concern about loyalty program operators using information in these ways. Fewer people are aware that their personal information can be used to compare their purchasing decisions with others and to profile them, and around one in three respondents said they would be concerned if this occurred. Very few people were aware that their information could be combined with data on other people and sold to third parties in deidentified form, but a large majority (71 per cent) said they would be concerned if this took place. Concerns about privacy are strongest amongst women and among older people, the very demographic groups that are most likely to be members of loyalty programs. Seventy per cent of loyalty card holders said they had redeemed awards or points from a loyalty card scheme. By far the most common type of redemption was for vouchers to spend at a particular store or group of stores; three in four respondents who had redeemed points had received this kind of reward. Other kinds of redemptions included electronic goods, airline flights or holidays, and discounts on fuel. The financial value of redemptions allows us to put a dollar value on the benefit to a typical loyalty program member for actively participating in a loyalty program (by regularly presenting their card at the point of sale). At a normal level of retail spending, someone can expect to receive around $113 worth of rewards points per year. Economic implications The costs of running a loyalty scheme can be substantial when spread across millions of members. For instance, it has been estimated that the cost to Woolworths of purchasing Qantas frequent flyer points accrued through its Everyday Rewards scheme will be between $60 and $80 million per year and lift the cost of customer loyalty by 0.4c to 3c for every dollar spent by customers. 11 There are a number of ways that retailers can recoup these costs. The first and most obvious is to raise prices. If a retailer with a loyalty program did this, it would mean that members of the loyalty program, who receive benefits in the form of reward points, are being cross-subsidisied by customers who are not members, and therefore do not receive any rewards. In such a case, it would cost someone who is not a member of a loyalty program $123 per year in forgone benefits to shop at a retail outlet that offers a loyalty program. Another way to recover the costs of running a loyalty program is to generate more revenue by increasing sales volumes. This is the ostensible purpose of a loyalty scheme to encourage people to spend their money at one store rather than another so as to earn reward points. But an even more effective way to increase sales is to turn the purchasing data from a loyalty program into commercially valuable information. Such information might be used to refine the range of products sold to match customer habits, or to develop offers or deals targeted at particular types of shoppers. For example, it has been reported that Woolworths uses postcode 11 Mitchell, S. 2009. Woolies out to woo unfaithful shoppers, Australian Financial Review, 26 April. Loyalty cards