Current Trends in Loyalty Programs

Data
mining is the computational process of discovering patterns and knowledge from
large amounts of data. The purpose is to extract previously unknown information
and transform it into a structured format, so it can be of meaningful use.
Although there are multiple types of loyalty programs in the industry, they all
follow the same fundamental process.

### **Data Mining Process**

In order to establish purchasing patterns of customers, retailers first need to develop the customer’s profile and encourage customers to sign up for an account at the cash register. The shopper applies for the loyalty program through an application in which the personal data such as their home address, marital status, number in the household, interests as well as financial information, may be requested. The purpose is to link this profile to current and future purchases. Customers are provided with a scannable unique ID that takes the form of a credit card sized plastic card or a barcode/QR code on a smartphone app. The data is then stored in a Loyalty Card Database (see figure 2). This data could be forwarded to a third-party “Demographic Data Append Vendor,” an “Ad Agency,” or a “Product Supplier” for further processing or storage in their databases. The retailer could also perform data mining on the data and provide statistics to retailer’s Marketing department for analysis.

Figure 2: Data Mining Process Source: [27]
Data mining is the analytical step of the “Knowledge Discovery in Databases” process or KDD [3]. Data procured from a variety of sources is put into a single data store called “target data.” This data is from there pre-processed and made into a standardized format. Data mining algorithms take and interpret data and turn it into patters or rules. Those patterns and/or rules from there interpreted become knowledge or information that can be used to target customers.

Figure 3: Data Mining as Part of Knowledge Discovery in Databases Process Source: [28]

### **Economics of Loyalty Programs**

As mentioned earlier, companies have the incentive to collect as much data about their customers as they possibly can. In order to collect this vast volume of data, the data not only needs to be stored, but requires processing as well. To the company’s benefit, both the technology and the economics behind this technology is on their side. Moore’s Law states that the power of microprocessors double every 18 months, and according to The Law of Mass Digital Storage, the amount of digital information is roughly doubling every year [20]. In summary, the downward trend of the cost of increased processing power and digital storage is helping loyalty program providers improve their bottom line.

### **Types of Programs**

Loyalty programs attempt to change a customer’s behavior from making an unplanned spontaneous decision on a purchase to a planned, multi-period contractual relationship. These programs provide a delayed reward that directly supports the product’s value proposition or provide some other indirect type of reward at a later date. Therefore, all programs provide a delayed gratification, but the reward structure can be somewhat flexible.

Market research has indicated that reward programs are divided into 2 groups: fee based programs and free programs [21]. Both types of programs are built on tiers because within a reward program, not all customers must be treated the same. In some instances, it can be beneficial to offer increased credits toward a goal as a customer spends more money. This provides both an incentive to spend more and provides greater satisfaction for those who actually spend more. The Alternative Response Function (B) in the figure below illustrates the differences in the reward tiers.

Figure 3A: Loyalty Program Reward Schedule Source: [21]
### **Major Players**

The following section briefly describe some of the providers of each type of loyalty program.

#### **Fee based Membership Programs**

Amazon’s and Costco’s loyalty programs are administered on a fee based membership business model.

#### **Amazon Prime**

Amazon Prime is the customer loyalty program of one of the internet’s largest retailers. It is a $99/year single tiered program offering free two-day shipping on millions of items, unlimited, ad-free access to over a million songs, instant streaming of thousands of movies and TV shows with Prime Instant Video, free unlimited photo storage in Amazon Cloud Drive, and borrowing of free books each month through Kindle First and the Kindle Owners' Lending Library [23].

Prime has been a wildly successful marketing vehicle that attracts new customers, increases sales, and serves the needs of high volume customers. New members increase their purchases by an estimated 150% after joining [22]. Amazon claims it has at least 20 million Prime members, having signed up 1 million new subscribers. According to Consumer Research Intelligence Partners, the average Prime customer spends $1,340 annually, compared to $529 for regular customers. Given these figures, Prime members account for roughly 36% of Amazon’s $74 billion in annual revenues.

#### **Costco Wholesale**

Unlike Amazon Prime, Costco Wholesale Club offers a multi-tiered membership program. The $110 Executive membership offers a 2% rebate on most purchases followed by a $55 Gold Star basic membership [24]. Costco has 44.6 million members with the business model of a bare-bones, cement-floor retailing space where shoppers pay a membership fee to choose from a limited number of products in large quantities at deep discounts.

Costco uses the data collected on its customers for more than just targeted marketing. Since it is an exclusive membership only retailer, it is able to collect, and hence, mine data on all the purchases its customers make. The data mining came in handy in the case of the tainted stone fruit. After a California fruit packing company announced a possible Listeria contamination in stone fruits sold at several major grocery chains, Costco took just one day to use the data it collects on its members to create a list of all the customers who could have purchased the potentially dangerous fruit [25].

Any time one of Costco's approximately 70 million members buys something, the company logs the item number of the product they purchased, explained Craig Wilson, vice president of quality assurance and food safety at Costco. "We know every item that everybody purchases every day," Wilson told The Huffington Post. "If there's an issue with an item -- be it ground beef, peaches, socks or tires -- we can contact the members that purchased the item, because we have a record of that purchase." Costco mailed "hundreds of thousands" of letters to follow up on the phone calls, said Wilson. The retailer has been using shopper data in similar situations "for a really long time," he said. Costco shopper data helped the Centers for Disease Control and Prevention identify salami that sickened people during a salmonella outbreak in 2010, according to a report from The Denver Post.

#### **Programs based on Free Membership**

Some of the most popular loyalty programs are based on free membership i.e. enrollment into the program is not exclusive but is completely free.

#### **Target Corporation**

Target Corporation, a major retailer in United States, provides a “Guest ID” to track its customers. It starts with name, address and the credit card or debit card they use and expands from there to a history of their store purchases, online purchases, mobile phone ID, and actions taken in response to Target emails, and Internet browsing activity if one clicks on a link in one of those emails. Location data is interesting to the company; if a customer lives right near a competitor, Target will try to steer toward shopping at Target.com.

#### **Starbucks**

The ability to collect customer data is a core benefit of any loyalty program. Typical data could include what the customer purchased, as well as the location and frequency of purchase. A quarter of all transactions at Starbucks are made with loyalty cards [2]. There are a total of 6 million registered loyalty program members and Starbucks has profiled half of them thus far. Starbucks segments its customers with data, then sets up rules based on their purchasing behavior. Then, the customers get offers on their smartphones.

#### **Airline Industry**

    Frequent flier reward programs have been in use in the airline industry for the last three decades. Through these programs, airlines are able to mine and compile every customer’s profile including their seat preferences and meal selections. Some carriers, including American, British Airways, United Continental Holdings Inc., and JetBlue Airways Corp., are now pouring data into unified digital warehouses and stitching together customers' information using unique identifiers, including frequent-flier numbers, email addresses and phone numbers [26]. The resulting customer profiles can be accessed by cabin crews on their tablet computers or smartphones, which show seat maps with details on most fliers. With information at their fingertips, flight attendants can know that a flier in a particular seat is a vegetarian and the couple behind him are on their honeymoon.

United Airlines is working on connecting its 3.5 petabytes of data, while rebuilding its website, kiosks, and mobile app to better use this data [26]. This has resulted in a surge of sales of United's economy-plus seats since it started using data to target fliers who are more likely to buy them.

The goal of all loyalty programs is to reward past purchases in return of increased customer spending. However, customers are wary of abuse and misuse of data collected and many see this as invasion of privacy.