How will the loyalty card evolve now?

Loyalty schemes could be a giant evolutionary step forward for marketing, altering pricing strategies, allowing new opportunities for data generating, and changing the present model of branding from being production driven to consumer driven.

Jaws. It’s difficult to imagine life without them. How dull those fearsome beasts depicted in BBC nature programmes would seem.

Yet aeons ago, when the first fish began to swim the seas, they didn’t have jaws. Jaws hadn’t been invented. They emerged unexpectedly from something utterly different – the need for a complex bone structure supporting the gill arch just behind the mouth.

What started for one purpose – helping the fish to breathe – ended up facilitating something completely different: helping it to eat.

Could loyalty schemes be the business world’s equivalent of gill bones? OK, the concept of loyalty is surrounded by intellectual fog and too many marketers invest far too much time and effort on loyalty schemes to the neglect of brands themselves. Nevertheless, visionary marketers could use them to plot a new evolutionary trajectory for their businesses.

We’ve already started exploring the first pathways. The key characteristic of sophisticated schemes is their data generating capability. For many companies, this represents their first opportunity to find out who their customers are and what they buy. The marketing payoffs in terms of segmentation, targeting and relationship building are enormous. But there are many other possibilities of such schemes.

One is a rethink of pricing strategies. Until now, the price weapon has been aggressive, used to poach customers from rivals. And it has left marketers teetering endlessly on the edge of mutually destructive price wars. But by allowing marketers to channel discounts to existing customers, loyalty schemes reverse that dynamic. Price can be used non-aggressively, while making it doubly expensive for competitors to use it as a poaching weapon. Loyalty scheme lingo may be “reward” and “discount” but its true import may be the way it allows competitors to subtly cooperate in making price rises stick.

Another possibility is a recasting of brand and business models. Say you what you like, but the standard model of branding is still production driven. Its rhetoric may be “find out what consumers want and then meet it” but at root it’s all about keeping factories (or stores, or banks) busy. The core is still “what can I make and how can I sell it”.

However, the loyalty scheme’s customer identification and relationship building may allow some firms to migrate to a different model of business – and branding – where the core question is “who are my customers and what can I sell them?”

Loyalty schemes may also change the way marketers see their business. Until now, their view has been uni-dimensional. Buyers exchange goods and services for money. Now, a second layer has been added. Each transaction is also an exchange of information with a value in its own right.

The question is are you in the business of selling widgets, or exploiting and trading information? If the latter, what does this do for large swathes of the market research industry?

Second question: if what loyalty schemes do is offer customers extra benefits in exchange for information about themselves, what happens when they realise that they are not only buyers of goods but also sellers of information?

It’s inevitable. The most savvy and sought-after consumers will start using this as a bargaining chip. One means of doing so could be a new type of business and brand – a buying club which assembles consumers with a specific interest, say in golf or gardening, and offers firms access to the database in exchange for hefty discounts. We’ve had organised labour. The loyalty scheme may be a midwife of the organised consumer.

There are plenty more potential evolutionary trajectories. Take distribution. Who says schemes are paid for by improved customer retention? Swissair, a member of the Qualiflyer frequent flyer scheme – which embraces a number of airlines, hotels groups, car hire firms, banks, and telecoms operators – has discovered that 30 per cent of miles redeemed come from customers who have never set foot on a Swissair plane before. They’ve been offered as loyalty rewards by Qualiflyer partners and bought from Swissair, often at close to full price.

For Swissair, Qualiflyer has become a new distribution channel, generating margins six times fatter than traditional sales routes. It is a channel with negligible distribution and advertising costs and can save the travel agent’s 30 per cent commission.

Qualiflyer is emerging as a brand in its own right. So may others. Smart, the Shell scheme, was deliberately named and designed to allow it to play down the link with Shell and encompass many partners.

Loyalty schemes are becoming the gravitational field which attracts and keeps alliances of diverse businesses together. When loyalty points become cross-accepted within such consortia they are, what David Birch of Hyperion argues, “the natural migration to private currency” which traps business within its borders just as state currencies did.

“Which brand would you rather be?” he asks. “A brand of baked beans, the supermarket brand that sells them, or the brand of money that buys them?” The big issue then becomes which brands would you trust with your money? Will all the brands maintain their profile?

Or will some – perhaps the scheme brand name itself – begin to take precedence, as Birch suggests? The loyalty scheme may have started out as a means of boosting individual brands’ loyalty, but it may end up having the opposite effect.

One further thought. Loyalty schemes could become a regulatory hot potato. What does the Bank of England think of loyalty points as private currency? And the Inland Revenue about points as incentives; the Accounting Standards Board about scheme databases as assets; and the Data Protection Registrar about predators who identify targets because their scheme data is complementary?

New brand and business models, new distribution and pricing strategies – even new headaches for regulators. Loyalty as a concept may be overblown. But the humble loyalty scheme, like those gill bones, may open up competitive possibilities that none of us has conceived of yet.

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