I carry a tiny wallet. It can hold only my driver’s license, MetroCard, three credit cards, and about $100 in cash. My friends wonder how I get by with so little carrying capacity. Answer: I don’t participate in customer loyalty programs. No cards that earn me coupons from drug stores, no key fobs for discounts on groceries, not even a little piece of paper with stamps that entitle me to a free sandwich. Loyalty cards are usually a bad business strategy. They’re either a creepy way to monitor and exploit your habits or a desperate gambit by weak retailers to distract you from their own shortcomings. Most companies use loyalty programs as a crutch when they’re out of ideas, and, therefore, these schemes are ultimately bad for customers as well. If a cashier tries to shove a loyalty card into your hand, it’s a good indicator that you should be taking your business elsewhere.
A brief history of the customer loyalty program shows why. In 1981, American Airlines CEO Robert Crandall made three observations about his industry. First, a tiny proportion of customers were responsible for a huge percentage of revenue. At the time, more than half of American Airlines’ customers took just one flight per year, whereas the top 5 percent flew 20 or more times. Second, business travelers, who made up the bulk of that top 5 percent, cared very little about the price of any individual ticket. Finally, airlines are all basically the same.
As much as people tout the quality of a few airlines, Crandall’s assumption that his competitors offered the same levels of service, safety, and timeliness is beyond serious dispute. A 2010 study showed that a mere 5.5 percentage points separated America’s most on-time airline (Southwest) from its 10th best (JetBlue). Flight safety experts insist there is no way to statistically separate the safety records of major airlines, because accidents are so rare. As for service, I don’t need to hear curated house music while I put my bag in the overhead bin, nor do I fully appreciate the value of a warm towel.
Since Crandall couldn’t compete on quality and his biggest customers didn’t care about price, he made a novel offer: Choose American Airlines over our identical competitors, and we’ll toss in a free flight every now and then or bump you up to first class. It was called AAdvantage, and most management experts agree it is the father of the modern customer loyalty program.
Here’s the takeaway: Loyalty programs only make sense in industries in which a company can do nothing to differentiate itself from its competitors, and customers lack either the motivation or the price sensitivity to shop around. Those descriptors apply to very few businesses. In addition to airlines, the programs probably make sense for car rental companies, newsstands, and possibly a few others. In most industries, though, companies that think they can’t compete on service or quality are not trying hard enough.
Take a look at grocery stores. A few chains, including Whole Foods and Trader Joe’s, attract customers through superior quality or unique products. It’s no coincidence that these stores don’t have loyalty programs. They don’t need them, because they’ve given you a compelling reason to shop with them. Grocery outlets with harsh lighting, cheap flooring, and signs handwritten in marker—you know the ones I mean—almost always have some kind of club program, because they can’t think of any other reason for you to walk through their noisy, unresponsive sliding doors. (Wegmans is alone among premium-quality grocery chains in having a loyalty program, but it dates back to 1990, before the chain surged past its humdrum upstate New York competitors.)
Business management scholars have written piles of studies on customer loyalty programs, and virtually all of them reach the same conclusion: In most industries, they’re hopelessly mismanaged. It’s not that the programs don’t work; it’s that they work too well. Customers become so well trained to follow loyalty discounts that they won’t buy without them. According to a 2002 article in the Harvard Business Review, many retailers now offer such extensive rewards for loyalty that they’re no longer making money on their top customers—the very people the programs are supposed to entice. In addition, most customers engage in what researchers call “polygamous loyalty,” which is a creative way of saying disloyalty. The overwhelming majority of fliers, for example, belong to multiple rewards programs. It’s a race to the bottom, as companies are so afraid of losing customers to their competitors that they destroy their own profitability and forsake strategies to attract customers in novel ways.
Those rare loyalty programs that management researchers favor lock customers into uncomfortably personal relationships with a grocer, airline, or clothing store. Take, for example, the widely celebrated program launched by the British grocery chain Tesco. The more often a customer shopped at Tesco, and the more high-profit-margin products he purchased, the more coupons he received in the mail for more high-margin products. In other words, Tesco trained its customers to buy pasta with a larger markup, like dogs that salivated at the sound of a bell. In addition, Tesco monitored its customers’ buying habits closely. When a loyal shopper who visited the store weekly suddenly missed a couple of weeks, the chain feared that one of its sheep was straying from the herd and dispatched some coupons to shepherd him back. Maybe you’re comfortable with that relationship, but I don’t want a large grocery chain tracking my weekly movements, and I’m willing to forgo 40 cents off of Greek yogurt to avoid it.
From a business perspective, it’s not entirely clear how valuable these data collection tactics really are. Earlier this year, the company that owns Albertson’s grocery stores and a string of other major supermarkets announced it was eliminating its loyalty programs. A spokesman for the company said that tracking customer habits wasn’t as useful a strategy as they originally thought, and “Getting to know our customers in neighborhoods, learning each store like it’s our only store, and offering best-in-class customer service” would make a better strategy.
I realize that sounds like baloney from a corporate spokesperson, but it should strike a chord. Would you prefer to shop at a store that increases profits by figuring out what you already do, then tricking you into doing it a little more often? Or a store that thinks creatively, brings you new products, and showcases its wares in a novel way?
I invite you to join me in a vacation from customer loyalty. For six months, stow your plastic cards, your key fobs, and your punch cards in a drawer. Even if you buy from a retailer with loyalty cards, don’t flash your membership to the cashier. At first, you’ll probably receive a flurry of coupons trying to bring you back. Resist. Once you get through it, see how your buying habits change. Are you buying your sandwiches, groceries, and shampoo from the same stores? If so, go back to the loyalty program. I’m not irrational: If you can buy the same stuff for less money, you might as well do it. But try to identify bad relationships and get out of them. Walk into a store because you choose to, not because of habit. It’s time for customers to start training stores, not the other way around.
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