May 23, 2015

Economics Of Retail Loyalty Programs

 I'm a great fan of Carrefour Loyalty programs scheme here in UAE. I think Indian retailers ought to learn a thing or two from the way they have designed it, purely from a perspective of maximizing long term profit .. I haven't seen anything close-by to the way this operates - may be its there in the developed markets of West.

Carrefour operates this loyalty points scheme - for every purchase, you accumulate varying number of points depending on the items that you buy. Once you reach 500 points, you get a 50 AED voucher.  There are two kinds of underlying point boosting schemes -  on certain days there are things like extra points / double points thats available to anyone who buys certain products  . These are presumably linked to Inventory clearing items.  So, sometimes, you get extra points for buying washing liquid , sometimes for biscuits etc.  Why I feel this is linked to inventory clearing  -  These items are usually set at the start of the week and often run out by the end of the week ( i.e, thursday ).

 The second set of 'loyalty boosters' is what it makes somewhat unique.. Based on your purchasing pattern, you get a set of coupons - like if you spend 50 dhm for meat / fish, you get 75 points etc ( within so and so date )  .  What Carrefour is doing here is to 'upsell' you or introduce you to new categories, which you usually don't spend. So, I've never bought beef from there. But I regularly get these coupons linked to those.  And these would be typically high-margin stuff for them. One of the mistakes that businesses do in designing this step is that they mix the inventory-clearing objective & upselling objective. This is a mistake that usually erodes their margins.

There is a flaw in their algorithm / logic here though. If I buy baby diapers & baby food together in a single purchase, I'm quite less likely to get a coupon which is going to incentivize me for buying either of these .On the other hand, if I buy only baby diaper in a purchase, I'm much more likely to get a coupon incentivizing me to buy baby food. Because the system apparently thinks that it is a related category - so let me prompt this customer to buy from that.  Similarly, if you buy fruits only in a single purchase, you are quite likely to get a coupon incentivizing your purchase either in vegetables / breakfast items / dairy products . I'd like to know if this hypothesis holds well in other carrefour-type loyalty schemes

So if you live near a Carrefour supermarket, I think staggering your purchase by categorizing your purchase items into largely non-overlapping categories can benefit you ( the consumer ) most

Economically, this is something that I'd call as a second-generation loyalty program. Plain loyalty programs like 'earn & burn' schemes still dominate the retail landscape in this part of the world ( Shukran points is the best example ) .  Those lack an ability to 'upsell'  / bring customer into higher margin products.  Carrefour does that nicely. This is important in retail business as unlike in services industries ( airline / hotel / dining ) etc, the marginal cost of goods is still high. So, you need to find ways to move beyond an 'earn & burn' reward scheme by catching in the customer & leveraging their spending power to the maximum.

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