Rethinking The Push to Sign Customers Up for Your Loyalty Program

Source: www.technologyinsights.com

Black Friday is almost upon us.  As consumers shop at many retailers, many people will be asked if they are members of the company's loyalty program.  If not, associates will ask customers if they would like to join.  Do loyalty programs add value?  Clearly, most retailers seem to think so.  Yet, I'm always intrigued by the retailers that don't have loyalty programs.  Consider Trader Joe's, one of the most successful grocery retailers in the world.  They have developed a cult-like following without offering customers a rewards program of any kind.  

Recent research suggests that companies might want to rethink the standard approach to loyalty programs.  Scholars Wayne Taylor and Brett Hollenbeck conducted a fascinating study of a major home improvement retailer's loyalty program. Thye examined transaction data for more than 10,000 customers at five store locations over two years.  15% of these customers were members of the retailer's loyalty program, which only offered customers rewards for purchases in a particular product category.  The scholars found that customers do spend more when they join the program, but the cause-effect relationship is unclear.  Did customers spend more because they became members, or did they become members in advance of making some planned major purchases?  Overall, the scholars don't see a substantial positive impact on profits from signing new people up for the program.

Interestingly, however, the scholars do find that a certain subset of customers do deliver additional profits when they become new members of the retailer's loyalty program.  The customers that reside a considerable distance from the retailer's store locations, but in close proximity to a rival's store locations, tend to be quite valuable as new members of the loyalty program.  In other words, loyalty programs work best when they induce customers to switch.   Otherwise, the rewards simply eat into your margins on purchases that would otherwise occur at your stores anyway.  For marketers, the results imply that one could and should focus direct marketing efforts on specific customers in particular locations when trying to increase membership in a loyalty program. 

REI Shuts Stores on Black Friday! What Are They Doing?!

REI made a rather stunning announcement today.  The firm will be closing all of its stores on Black Friday, the biggest shopping day of the year.  Instead, it will pay its employees to explore and enjoy the outdoors on that day, and it will encourage its customers to do the same.  The company has launched a social media campaign in conjunction with their unique Black Friday strategy.  They have adopted the hashtag "OptOutside" and encouraged people to share their ideas and experiences for enjoying the outdoors on Black Friday.   Jerry Stritzke, president and CEO of REI, explained the company's reasoning: “Black Friday is the perfect time to remind ourselves of the essential truth that life is richer, more connected and complete when you choose to spend it outside. We’re closing our doors, paying our employees to get out there, and inviting America to OptOutside with us because we love great gear, but we are even more passionate about the experiences it unlocks.”  

I love the idea!  I've always felt that the Black Friday phenomenon had become a sort of Prisoner's Dilemma for firms.   Each company opened earlier to keep up with or one up the competition.  Some firms even began opening on Thanksgiving itself.  Promotions became even crazier with each passing year.  Yet, such moves often only shifted sales from other days.  They did not add to total holiday spending necessarily.  Thus, firms incurred more costs without actually improving revenues overall.  No firm wanted to opt out of this arms race though, for fear of the damage they would suffer if they didn't keep up with the competition.  Now, we have seen one firm choose to opt out of the arms race.  Great firms zig whenever everyone else zags.  They find a way to differentiate.  For REI, the move fits beautifully with their brand image and their values.  It reinforces all that we believe about REI's brand, culture, and beliefs.  It helps them stand out from the competition.   The key question: Will other firms follow?  I doubt it that many will follow.  Actually, simply copying REI's strategy does not make much sense anyway.   Being different is the key to building a great strategy.   Other firms may want to adapt their Black Friday strategy to avoid the arms race that I describe above, but they will have to find their own unique way of doing so.  

Target Pep Talk!

Now this guy is one heck of an engaged employee!  Check out his pep talk at the Westminster, Maryland Target store as he prepares his team for the onslaught of Black Friday shoppers.

SNL Black Friday Skit

Retailers, Black Friday, & A Prisoner's Dilemma

We've certainly heard a great deal over the past few days about the controversy surrounding the decision by many retailers to open on Thanksgiving evening.   Regardless of where you stand on that issue, you should ask yourself:  Are these retailers actually generating incremental sales and profits by opening at 8pm on Thanksgiving or at midnight, as opposed to early on the morning of Black Friday?   Perhaps they are, but I suspect that they are simply shifting sales which otherwise would have occurred on Black Friday or thereafter.   People aren't buying more items overall this Christmas; they are simply buying them a bit sooner as a result of the Thanksgiving day openings. 

Why are firms pursuing these policies if they are unlikely to drive incremental sales and profit?  I think it's because the retailers are caught in a prisoner's dilemma.  If they all chose to wait and open on Black Friday at 6:00am, they would be better off as a whole.  However, each retailer is worried that it will lose out if it remains closed while rivals open on Thanksgiving night.  Therefore, each retailer opens up earlier and earlier, for fear of ceding sales to rivals. 

How can firms extricate themselves from this losing proposition?  Well, the retailers cannot legally collude to shift openings back to Black Friday morning.  However, they can try to achieve some form of tacit collusion, or they can try to influence and signal to one another in a way that leads to cooperative behavior for the greater good.  Typically, such cooperation emerges if you have a strong market leader who can influence the behavior of smaller rivals.  Could Wal-Mart serve that function?   It seems unlikely, because even though they are enormous, rivals would probably jump at the opportunity to steal sales from them.  That's why we probably will see this trend of early openings continue, though it may not be enlarging retailer profits by much at all. 

Retailers, Thanksgiving, and Black Friday

Many retailers have decided to open at midnight this year on Thanksgiving, rather than waiting for the early morning hours of Black Friday.   Some controversy has erupted over this decision.  News reports indicate that Anthony Hardwick, a part-time Target employee in Omaha, became very upset when he learned that some employees would have to come to work at 11pm on Thanksgiving night to prepare for a midnight opening.  He launched an online petition, gathering over 37,000 signatures in protest of the midnight opening. Here in Massachusetts, firms have had to delay their opening to 1am or later because of the "blue laws" prohibiting certain businesses from requiring employees to work on the Thanksgiving holiday. 

For me, the controversy around whether employees should work on the holiday obscures a more strategic issue facing these firms.  The critical question is:  Will opening at midnight actually enhance revenue and profitability?  Retailers may find that the earlier opening simply shifts sales from other points in time on the holiday weekend, rather than adding true incremental revenue.   Moreover, even if the firms experience incremental sales, they may find that the additional expenses associated with opening at midnight overwhelm the additional revenue.   To be successful, these firms must do more than cope with the public relations backlash that they are experiencing.  They must generate true incremental revenue, and those sales increases must be sufficient to offset the additional costs that they will incur.