By John Elliott, Principal Consultant Consult Hyperion I’ve just been offered the ability to ‘turn shopping into something special’ by the latest retail loyalty scheme to arrive on my doormat.
Shopping’s always been a special kind of experience for me. Traipsing round a shopping mall with what seems like half of humanity holds a special place in my heart. The new scheme is called Nectar has ‘four big names, thousands of rewards, one new card’. The one new card is plastic, embossed with a number and has a magnetic stripe on the back. No sign of a chip on it anywhere.
Unsurprising really. At a recent retail conference in London the leading UK grocer stated in no uncertain terms that there is no business case for smart cards in their loyalty programme, one of the most successful in the country. Collaborative evidence suggests that this goes industry wide. A petroleum retailer has recently changed its scheme from a smart card to a magnetic stripe. Why are there so few smart card based loyalty schemes and is the situation likely to change in the near future?
Of course, a loyalty scheme is a marketing initiative; it’s not technology driven. The scheme should start with a defined objective, maybe to increase turnover or reduce churn. Without an objective, it would be difficult to test and choose between various initiatives, such as going smart. When American Express launched the Blue credit card they wanted something that would encourage sign-up. In a competitive market, much of the success of this card has been attributed to the cash back loyalty scheme (of course the card looks cool too). It was the right incentive for the objective.
OK, if the business case for smart loyalty is weak it must be because of the cost of the card. So, let’s cut the cost. Why not use paper instead of plastic? Philips and ASK are two manufacturers that have done just this, with the introduction of the contactless paper smart cards. The cost of these cards in volume is expected to be similar to plastic magnetic stripe cards. Durability will be as good, as the card is permanently in a wallet, and reliability will be better, as the interface has no mechanical action. Where’s the catch? Unfortunately, the card is only one aspect of the infrastructure that needs to be deployed. Contactless readers would be a significant change to the point of sale (POS), even with hybrid magnetic stripe adaptors. Conversely, the ability to read magnetic stripe loyalty cards is often a small incremental cost to existing terminal real estate.
A 1% of turnover loyalty programme may mean our leading grocer above gives away as much as $200m per year. While the costs of creating the scheme may be high (the card is one component) they are not as significant as this incentive. However, there is little reason to spend an extra few million dollars on smart technologies if there is no business benefit. The benefit comes in two principal areas: customer authentication and value management.
Currently, the smart card is the most appropriate technology to act as a customer authentication device in a multi-channel world, across POS, portable POS, kiosk, PDA, mobile and interactive digital TV. Self-service retailing is particularly suited to these networked environments and a smart enabled segment of customers may quickly become the most profitable.
Value management is about risk management. If redemption in a loyalty scheme turns points into vouchers that can then be widely spent, careful consideration needs to be given to the risk of fraud. As the mobile operators know to their cost, paper vouchers are difficult to control. Electronic vouchers on smart cards are an effective alternative.
As we’ve discussed, the business case for a smart card based loyalty scheme is often weak. Maximising an existing or necessary infrastructure for additional use, such as re-using the POS for loyalty as well as payment, may deliver cost savings that will mean a smart card is affordable and the other benefits offered by the technology can be realised. Increasingly self-serviced, portable and multi-channel environments may also alter the retailer’s business case for its own smart loyalty scheme. As smart card readers become built into POS terminals with the rollout of EMV, it may start to make sense for the retailer to issue their own smart cards with unique functionality.
