Loyalty, Privacy and Economics

In the light of the emptiness of the claims to the technologies’ novelty, their actual re-configuration of twentieth century tools for the control of consumption, it is useful to assess exactly how effective they are - do companies get a return on the significant investment involved and what do customers get out of it?

Perhaps the most evolved and extensive use of ‘one to one’, CRM or relationship marketing has been in the use of store loyalty cards in the grocery and fast moving consumer goods (FMCG) businesses. For this reason, the business of loyalty repays closer study. A Guardian article recently listed the numbers of active store loyalty cards in the UK: Nectar having 11 million, Tesco 10 million and Boots Advantage 15 million.37 Accurate data on whether the schemes benefit companies is hard to come by. However, bearing in mind that Safeways cancelled their scheme in 2000, saving around 60 million in operational costs, Tesco in the UK claims: ‘Most retailers who have launched a loyalty scheme experience a 1-4% sales uplift’.38 A loyalty marketing manager for Supervalu, 11th largest food retailer in the US and the country’s largest food distributor, claimed in an interview, that their Preferred Perks card scheme effected 5.5% growth in sales with a 40% growth in profit for their retailers. However, they had no hard data on the effect of such a scheme on frequency, i.e. loyalty.39

What is in this for the customer? What accounts for the high levels of participation in store loyalty card schemes? Research indicates overwhelmingly that participation in these schemes is motivated by cost savings. The remuneration model varies for each card, but in effect, gives the customer a modest discount for every pound or dollar spent. The Guardian quotes an Asda study (a supermarket that does not have a card scheme) that appears to show 96% of shoppers would prefer lower prices, to a card scheme.40 A survey carried out in 2000 on CRM systems generally by the Chartered Institute of Marketing (C.I.M.), showed that of just over 1000 adults surveyed, 50% would be motivated by cost savings to enter the relationship. Only 8% believed that regular contact with a company benefits the customer, while 50% thought that such ongoing relationships benefited company. Finally only 5% of the study would be interested in hearing about new products and services and 4% encouraged to participate by the fact that the company could get to know them better. The most telling statistics concern what should constitute the relationship - very small numbers expected or wanted direct mail. Aside from the actual act of purchase, the only significant numbers that agreed with a relationship was when it was after-sales care or a complaints handling service.41 Earlier studies on personalised marketing schemes appear also to show a correlation between financial incentive and participation. Zuboff and Maxim quote a study that found 81% of participants of these ‘relationships’ were motivated by cost savings, rather more than those motivated by either personalisation or convenience.42

This focus on prices by the customer is echoed in an article on SearchCRM, a CRM industry site, by Micheal Lowenstein, a consultant in the CRM industry. Lowenstein makes the point that the effectiveness of the schemes in ensuring loyalty is levelling off, or diminishing, due to adoption across the industry. He refers to a study undertaken in the UK during 2000 that showed around 40% of shoppers had more than one loyalty card.43 Lowenstein advises a better use of existing data to optimise the cost of running the schemes and to maximise the spend of the top shoppers: ‘(The) bottom tiers of customers should receive less, or no, investment [by the supermarket]. Some might even have to be discarded if the company is to concentrate its resources on retaining profitable customers.’ It is a widely reported statistic that around 80% of a retailer’s profits comes from 20% of customers. The attraction of attracting and retaining these customers is obvious; the inverse is discouraging shoppers from whom a company does not make significant profit, or who simply cost too much to service. The ‘ investment’ Lowenstein refers to is that of the costs of servicing the relationship - emails, brochure mail outs, discount vouchers - however, when one considers that in order to receive favourable prices, a customer must participate in the relationship, denial of access to this relationship effectively means being ostracised to a punitive pricing environment. A recent study by Consumers Against Supermarket Privacy Invasion and Numbering (Capsian) in the USA, indicates that by comparing a number of supermarkets in one geographic area, some with card schemes, some without, that the discounted prices offered to card holders in card scheme stores were very similar to standard prices in non card stores. Non card users in card scheme stores paid considerably more for an average basket44.

We can sense here the complexity of loyalty schemes and the challenge faced by companies in getting them to pay. In effect they are paying for access to information on the customer and using this to launch new products, optimise price (i.e. find out how much the customer is prepared to pay) and to cross sell. For instance, Tesco’s swift and successful launch of its range of financial products in the U.K. is widely attributed to the effective use of the accurate and detailed data gathered by the company’s Clubcard scheme. However, as Lowenstein observes, it is a precarious balance, ensuring customers do not simply mine the loss leaders and the cheap deals and not increase their basket size.

Grocery retail is fiercely competitive, particularly in the UK and much of the take up of the technology has been the result of competitive pressure; if the other retailers have a scheme, so must you. However, the fact that customers are, in the main, only motivated by cost savings, and that not all retailers adopt relationship based marketing schemes, would suggest that the original principles behind relationship marketing (convenience, loyalty, customisation) barely inform the deployment of loyalty cards and remain unproven. Nonetheless these ideas, ideals even, of intimate relationships between producers and consumers still form the basis of visions of the retail future. This is a challenging future, for grocery retailers in particular. The Store Of The Future quotes an IGD research study which predicts that, by 2010, the share of the European grocery market held by the top 10 Food retailers will be 60.5%. With fewer new territories to enter and fewer weaker competitors to incorporate or take customers from, the big retailers will have to start competing for each other’s customers, or make more money out of the ones they already have.45

Digital technologies are often seen as significant drivers of this competitive future, as well as a way of mitigating its effects (one is reminded the homeostasis of Berringer). For instance, the ease with which customers can browse for and select the cheapest price for a given product has clearly led to lower margins and changes to retail geography.46 The Store Of The Future acknowledges this paradoxical challenge of digital technology to business, in two visions of the future relationship between customer and retailer. In, what they term, the ‘Consumer Control Relationship’, the customer runs the relationship, deploying a range of futuristic technologies (intelligent software agents, online tendering and so forth) to source and obtain the best deal for the products they require. In this the opportunities for the retailer to maximise margin is limited, reduced, as they are, to passively publishing price lists. Alongside this scenario, the report posits another, the ‘Retailer Driven Relationship’:

‘Luis is busy finalising a financial analysis for a client, when he remembers that it is his turn to organise the food shopping. He and his wife Petra usually take turns to organise the food shopping, but she is away on business in Munich. Because Luis works from home, he decides he could do with a break, so he drives over to CasaQuinn. But first he consults his PDA and finds that CasaQuinn had already sent him a reminder that the refrigerator was running low on various essentials. He also finds that Petra had requested some recipe details for their dinner party at the weekend and CasaQuinn had already sent an order confirmation.
Luis picks out some e-coupons sent by CasaQuinn and sets off for the store. As he enters, his PDA tells him that many of his regular purchases, plus the special dinner party items, have already been collated and can be ready for him to collect at the Drive-Thru by the car park exit. He chooses to accept most of the suggested products along with a double loyalty points offer on various items shown on his PDA.’47

Whether customers would accept this level of intrusion into their personal lives must be open to question, however, the ability of technology and technology vendors to deliver it must also be in doubt. In 2001, one survey of 226 CRM system users reported that 25% saw no significant improvement in company operations, while half experienced only minor improvement. 48 These systems have been and remain extremely expensive, with the software costing in 2000 around $3 million and up for a large company, (and involving considerable configuration and implementation costs). Prices and projects sizes have dropped in the last 3 years, perhaps reflecting the scepticism that now pertains, as well as the economic down turn, with average CRM deals at 1.4m and 1.7m euros ($1.37m and $1.66m), still significant investments. 49

The data suggests that unequivocal CRM successes are rare. The Boston Consulting Group (BCG) estimates that 67% of companies that have completed enterprise Customer Relationship Management (CRM) or Enterprise Resource Planning (ERP) initiatives have seen neutral or negative results. Of projects that finish on-time and within-budget, a mere 33% saw positive financial impact.50 Meta Group, an information technology analyst, estimates that a full 75% of CRM initiatives fail to meet their objectives.51

The problems with CRM systems, however, go beyond implementation. In a thought provoking paper Privacy, Economics, and Price Discrimination on the Internet52 Andrew Odlyzko makes a convincing case that the real reason for the erosion of privacy implicit in CRM systems is not to ensure loyalty or to programme frequency, but to employ discriminatory pricing. That is, charging customers what they are prepared to pay, rather than what the market determines. Key to this are two things: intimate knowledge of the customer in order to assess what they are prepared to pay, and the prevention of arbitrage, that is those customers who are unable to secure low prices buying off customers who are.

Whilst this paper is not concerned with the specifics of price discrimination, it is useful to note that Odlyzko makes a convincing case for price discrimination as it is: 1. economically efficient, tending as it does to generate low average prices; 2. socially progressive, in that it charges customers what they can afford. However, as Odlyzko makes clear, despite these low prices and socially progressive effects, overt price discrimination is very unpopular with the public. In fact, such dissatisfaction with railroad pricing, led to the first serious regulation of private business in the United States, with the Interstate Commerce Act of 1887

For retailers of today, the implementation of overt discriminatory pricing would continue to be very controversial. Odlyzko makes the point that price levels are less important than how they are set, as seemingly random pricing structures appear to undermine the moral legitimacy of capitalism. However, the attractions to price in such a way are very strong, particularly in highly competitive markets, or with products with low marginal cost. Clearly, relationship marketing and loyalty schemes provide rich information on individual customers’ willingness to pay, and there are ways to hide discrimination. Strategies such as bundling,53 or avoiding quoting costs in cash (loyalty points are an excellent alternative), allows companies to create dynamic pricing.

If technology brings about the fiercely competitive markets that can deliver the low prices customers seem to want, companies will be impelled to find ways to defend themselves against the commoditisation of all that transacts between producer and consumer. As we have seen, relationship marketing strategies and CRM systems are ways to maintain loyalty and inhibit open markets, but it is worth pointing out that other, more conventional marketing strategies can be seen as increasing margin by allowing dynamic pricing. Brand difference, for instance, allows companies to charge more for products that may appear different but are virtually the same; or the ‘value added’ service outlined in visions such as the ‘Retailer Driven Relationship’ of The Store Of The Future, but based upon traditional notions of ‘service’, where the added value justifies price increases that are more than the increased cost of servicing the relationship.

Finally, it is clear that the commercial and economic context of the deployment of modern digital marketing technologies is complex and paradoxical. Behind the marketing rhetoric of the technology vendors, the reality is one of companies using the technologies to mitigate the lower prices being created, in part, by the transparency and speed of other digital network technologies. Their customers enjoy the lower prices, but are not prepared to endorse the erosion of privacy and the arbitrary pricing strategies these competitive markets generate. As a consequence, the technology of marketing is being deployed within an increasingly hostile relationship between producer and consumer. More importantly, the potential for restrictive and anti-competitive behaviour risks dampening innovation and the radically new formations of capital, labour and technologies that some believe are essential for continuing prosperity, growth and social justice.