Would you want a free membership card?

Last weekend I was at Cafe Coffee Day on MG Road, waiting to meet a prospective client, when one of the store staff walked up to me with a card. “This is a free loyalty card, Sir”, he said, going on to tell me that if I were to buy three coffees using the card I would stand to get a free additional coffee. Considering that Cafe Coffee Day is my favourite meeting room, I thought it might make sense to use the card.

You might have noticed this in supermarkets, too. Invariably you get asked if you want a free membership card. In case you tell them that you had taken a card but are not carrying it, they offer to find your card number for you based on your phone number. Given that it probably costs the store to issue these cards (cost of cards, maintenance, staff time, cost of rewards), there must be a good reason that they are so eager to give it to you for free.

What separates traditional retail from modern is that in the latter, there are way too many customers who visit a store, and way too many store staff who attend to them. Consequently, it is hard for store staff to know who is a regular, and what the regular customers want. You might go up to your regular “single store” bar, and the barman might start mixing your favourite drink as soon as he sees you pop in. In a chain such as Cafe Coffee Day, however, such information is not forthcoming.

What loyalty cards enable stores to do is to track repeat purchases. You might be buying a kilo of rice every week at the neighbourhood supermarket, but in most cases there is no way for the supermarket to know it is you who bought the rice each time. Once you have a card and your sales are logged to that each week, the store knows how often you visit and what kind of items you are likely to buy together. Loyalty cards allow the store to “profile” you and thus hope to serve you better. The cost of the card is small compared to the value of the information the store gets about you.

A new trend in loyalty cards is “third party cards” that work across stores. These cards are issued by independent third party vendors and multiple stores subscribe to them. The advantage with these cards is that the third party has information about the customer across retailers. So for example, it makes it possible for the vendor to know the brand of formal shirts that people who buy Levi’s Jeans buy.

While this is a dream from an analyst’s viewpoint, the uptake of such cards so far has been low. I know of at least one company in this area that folded up and another that is not doing too well. Hopefully this trend will reverse soon and we will find one player who manages to scale up and issue cards at lots of retailers.