"Discounting as a reward is eventually a zero-sum game because you have to always discount to keep your members in the program. The retail price becomes meaningless."
--Mitch Krayton, business development director, 1st Kiosk
Most of us can remember our first encounter with a supermarket self-checkout lane. Once we overcame the initial doubts that such a system could possibly work ("How does it know what I've put in the bag? What if it overcharges me? Where do I put the 40-pound bag of dog food?"), many of us became enamored of the time that could be saved if every trip to the grocery was concluded with one of these devices.
But when it comes to those who are a tougher sell – the old-fashioned consumer who wants face-to-face communication with the checkout person – retailers continue to struggle with education, with explaining how the new technology benefits everyone involved.
As with so many things, part of the answer lies in how changes are communicated to the customer. Several years ago, a national big-box grocery chain decided that it was going to cut costs by having customers bag their own groceries. This was a radical idea at the time, and the challenge became how to tell the customers that they were now expected to bag their items without making it sound like a negative.
The answer? Signs were placed near the checkout lanes that read, "You're about to bag some serious savings!"
Today, the answer involves a loyalty program—some sort of automated offering that keeps them coming back.
"Users always ask, ‘What's in it for me?'" said Mitch Krayton, business development director for Valencia, Calif.-based 1st Kiosk.
"Users always want a benefit to change their behavior. People do want convenience but they also want courtesy, respect and recognition. Machines don't exhibit these human traits without a carefully planned loyalty program. To do that requires great UI design, professionally developed content and a lot of real user testing. This is rarely in the budget."
As a result, he said, focus turns to the things that are easily measured and put in place. It is far easier to simply slash prices than it is to study and understand your clientele, so many retailers go that route.
According to a recent study by Forrester Research, that is exactly the problem with most loyalty programs: By focusing too heavily on price and discounting, they drive consumers to pay attention to all the wrong things, and often drive them right into the waiting arms of the competition.
"Consumers – even supposedly loyal ones – demonstrate that they're easily enticed elsewhere," writes Carrie Johnson, author of the report. Statistics show that few customers are "loyal" in the truest sense of the word: Very few individuals shop exclusively at one store, opting instead for whichever retailer has the best price on a given day.
De-emphasizing price
This discussion of price-cutting versus value building is certainly not new. Businesses that emphasize quality of brand or service bemoan the arrival of a "bottom-feeding" price-cutter in their neighborhood. The same conversation is taking place behind the idea of a loyalty program, and according to Johnson, building such a program primarily around price will backfire.
"The programs clearly aren't working," she writes. "Today's loyalty programs do the opposite of their intended value … This is especially true when competitors offer virtually indistinguishable programs as in the grocery or office supply industries."
While using such programs to creatively trim prices might boost sales, it can have a long-term negative effect on branding. Customers caught in such a "lowest price wins" game quickly learn to ignore other positive aspects of what they are buying.
"Most loyalty programs do not venture beyond price discounts to reward more intangible aspects of loyalty that drive increased wallet share as well as overall spend, such as brand identification and connection … programs do not garner any emotional connection between consumers and retailers," she writes.
"Discounting as a reward is eventually a zero-sum game because you have to always discount to keep your members in the program," said Krayton. "The retail price is meaningless. Car dealers have not been able to sell volume without discounts for years because they have trained their customer to wait for the discounts. Most loyalty programs are doing the same thing for retail sales."
Alternatives that work
So if price should not be the emphasis, what should take its place?
"The hidden strength of a loyalty solution lies in linking a consumer's first visit to the next, essentially creating a reward for returning, and an emotional bias against competitors," said Mike Finley, vice president of global product marketing for Radiant Systems, Inc. "The trick, however, is to avoid spending the profit of one visit on the rewards for the next one – the operation will break even at best and consumers will react negatively when the rewards are removed."
Apparently, part of the answer goes back to that old-fashioned desire to deal with a person – one thing a machine cannot do is get to know a regular shopper, ask him how his wife and kids are, or how little Timmy's recital went. This is where loyalty programs stand to succeed, by taking the data they are collecting and using it to make the customer feel special.
"Good retailers are moving from just collecting the data to using data to enhance the shopping experience," said Doug Peter, chief executive officer of software and service provider St. Clair Interactive. "Mass customization is gradually being implemented. The terabytes of data are now being sorted to give the customer a perception that the retailer knows her or him."
According to Johnson, retailers need to be aggressive with customer surveys, exit interviews, and other research tools like secret shoppers. There are many problems that a loyalty program will never solve – poor inventory management, for instance, or bad customer service.
"The point of a loyalty system is that the customer can have a unique relationship with the store and the relationship gives the customer status and privileges that non-members don't get," Krayton added. "It is how American Express got us to pay for a credit card that others gave away."
