Loyalty Programs| Good or Bad?

Loyalty Programs have been around for a while and have caused a large debate on if they are ethical or not. There are many pros and cons to both the consumer and the retailer with the programs, so are they ethical? And trust me, it won’t come down to a black and white answer.

So first questions- where do you stand?

Do you think they are ethical? Or do you believe they breach consumer’s privacy rights? Do you think that the retailer opts in for the program maliciously? Or do they create a program while thinking of the customer first?

Basic Background Information:

Consumer Pros

                Get items at discounted prices, coupons, better targeted marketing, purchase history

Consumer Cons

                Junk mail, spending more money, not being considered a “better” customer, privacy issues

Retailer Pros

                Better marketing strategy, better sales campaigns, maintain customers

Retailer Cons

                Rewarding those who don’t purchase, costly, competition, no incentives

               

But the Holy Grail of this issue stems from the idea of Data Mining. Data Mining is “the practice of examining large databases in order to generate new information.” It seems reasonable: you had over your purchase behaviors and they generate new information for you. But when does it become unethical?  

So what is the answer?

As I said earlier, it is not black and white. The only way to discuss the matter is by looking at both groups and both sides of the topic.

Consumer Pros:

At nearly every store you visit they will ask if you already have a membership card, or if you would like to obtain one, from Fred Myers, TJ Maxx, Starbucks and even Yogurt Extreme. Loyalty programs can be simple or complex, simple as in Yogurt Extreme’s cases that for every 10 purchases you get one free. A very simple, yet effective incentive for a consumer to keep on going to that particular store. At Fred Meyer’s you can obtain a rewards card, for every 100 points earned you get 10 cents off of your gas purchase. The upside for this for consumers is the lower gas price (additionally you receive three cents off when you visit there normally), and more targeted coupons and email marketing ads. To the consumer, loyalty programs seem great, you are able to save money and feel special since they have coupons you will actually use!
Ethical

     

Consumer Cons:

As I said earlier with ‘Consumer Pros’ the coupons you receive are more targeted to what you are purchasing, there can be some very strong pitfalls to that. For example, Target is able to send you expectant mother coupons before you are able to tell your friends and family that you are indeed pregnant. For this teen and her father, the customer loyalty program was a definite con.

-         Both Ethical and Unethical
        Ethical since they were producing coupons for the correct buyer needs
       Unethical since they should probably know her age and respect that the news was still private

Once again Target has me questioning theirs and other’s loyalty program, especially during the busy holiday shopping season.

 “as many as 70 million Target customers might have had personal information stolen in a massive data breach.” 

Putting your information out there to be then stolen is something that might cause consumers to rethink their decision to open yet another loyalty program even if it does save them 15% off their first purchase. This security breach caused havoc on Target and their Marketing department to reassure their customers that this is a onetime problem and that their information is safely stored.
Unethical- Personal information was leaked due to a security Breach!

This next topic comes with both pros and cons- having multiple levels. With Starbucks, when you join their rewards program there are multiple stages, Welcome, Green Level and Gold Card. But if you don’t continue to purchase using your Gold Card you’re demoted! Many customers have been offended that they have been demoted, causing them to stop the loyalty program that does frequently offer out free drinks.
Ethical and Unethical

                Rewarding those who do purchase, but it discriminates against others making it unethical

Consumers spend more money when they are a part of a loyalty program. From the Forbes article The Lowdown On Customer Loyalty Programs, states that

“members of programs spend more–but it is unknown whether the program drives spending or whether big spenders are just more prone to join programs and get rewards for their spending”

Even though they are unsure of why there is an increase in spending, customers chose loyalty programs to save money, not to spend more.
Neither, just how the world works for now.

Though the loyalty programs are out there to help you save money by offering discounts and coupons, if you are an infrequent shopper or the retailer is not very good at understanding your purchasing behavior their efforts can turn into junk mail. Unwanted coupons, disregarded emails, and poor understanding of your needs make loyalty programs unwanted and unnecessary. The more burdened the consumer feels the less they will purchase leaving them to receive even more unwanted offers. If the consumers don’t feel like the loyalty program doesn’t reward them they will be less likely to continue to shop at the retailer.

Neither, we have always been getting junk mail, now we just have the loyalty programs to blame instead of the company.

Retailer Pros

Besides the fact that consumers spend more money while having a loyalty program, there are other pros for business to improve or start a loyalty program.  With an increase in customer information, you can improve your marketing strategy, better your campaigns and maintain your customers.

A simple, buy 10 get one free is a strategy that works with small businesses encouraging repeat purchases. But for bigger retailers you must tailor your coupons and rewards to things that individuals will want and use. Ethical, loyalty program’s reward those who are loyal

A major benefit of loyalty programs is that you are able to improve your marketing strategy. Peter Clark, the author of The Wise Marketer & The Loyalty Guide offers out three rules with successful businesses and loyalty programs  

Acquire customers that are likely to repurchase - even though this may be at the expense of initial raw response;
Recognize which customers are unlikely to repurchase and limit your marketing spend for this segment accordingly;
Focus the marketing budget on those who exhibit the same profile as existing repurchasers but have yet to buy a second time.

By gathering as much information though loyalty programs you will better your marketing efforts, save money by being smarter and your customers will be much happier

With loyalty programs, if the data collected is used correctly by the marketing team, and rewards are given out correctly customers will continue to purchase from you. Since nearly 80% of your future profits will come from 20% of your existing customers, it is best to focus on those who have been buying and will continue to buy from you. By creating a loyalty program that offers the best incentives, perfectly executed and exceeds your competitors your customer retention should outweighs your customer acquisition.

Ethical, you are keeping the customer in mind so they are rewarded

Retailer Cons

The pros that come from loyalty make it hard to have a con list, but don’t worry I found a few to discuss. Since 80% of your sales come from a mere 20%, what about the other 80% of customers who probably have loyalty cards. You still have to market to them, giving them incentives to come into the store and purchase which can be costly. Why spend money on people who probably won’t buy? Because if you want the 20% who do purchase from you to continue to, you have to reward the spenders and the non-spenders.
Ethical as long as there is not price discrimination

Another con is if your competitor decides to up their loyalty program, offering maybe 15 cents off of gas, or buy 5 get one free, or overall being better at distinguishing your purchasing behavior.
Ethical to up your competitor with better rewards

So with the pros and cons listed out, does it seem ethical?

When consumer privacy is breached is when the customer loyalty programs become customer nightmare programs. When just tracking the spending habits of the consumers and rewarding their behavior is completely ethical, and highly looked upon.

One ethical issue with loyalty programs is with coupons- customer pro I thought? Well the issue is with price discrimination, which is

“When stores offer coupons through the mail directly to nearby residents or inside newspapers, those who use the coupons get better prices than those who don’t.” 

One reason that price discrimination has become an unethical issue is because of the increase in data being collected from customers when they shop. If they are being rewarded for shopping resulting in a lower price, those who don’t shop as often are disgruntled that they now have to pay more-even if they are a part of the loyalty program.

But loyalty programs become unethical when privacy issues are breached such as the Target example, if information is being collected and then sold, or information is exploited to discriminate against a certain group.  If a company can create a system that is ethical, and both proactive for the consumers and the brand then they have succeeded in creating the best loyalty program they can offer.