Consumer Life – Customer Loyalty Cards: A real deal?

Chances are, if you open your purse or wallet right now, you’ll find at least one or two of those shiny plastic cards, the kind that let you collect points every time you buy coffee or airline tickets or dog food.

And depending on which customer loyalty programs you use, the rewards sound fabulous. With every swipe of the plastic, you can ?show yourself some love,? ?start enjoying the savings,? or even ?imagine the possibilities.?

It all sounds thrillingly close to nirvana (or maybe just loads of free stuff, which for some shoppers is one and the same).

But what about that old adage, there’s no such thing as a free lunch?

Are the corporate decision makers really sitting around trying to figure out ways to give you, the loyal customer, free vacations, gas, and other goodies as a way to say ?Gee, thanks,? for spending your cash on a particular store or brand?

Not really, because like many a deal, the devil is in the details, and odds are that You’re giving away a whole lot more than You’re getting.

The first thing to remember is that stores and services are in business for one reason only: to make a profit. From employee benefit plans to the price of electricity, the cost of running that business is built into the price you pay at the checkout?and that includes the cost of the hardware, software, and administrative expenses of operating a loyalty program.

So as exciting as it may be to chock up enough points to redeem on 20 dollars worth of merchandise, don’t think you haven’t already paid for it.

In fact, loyalty programs may end up costing you more. As a 2005 Consumer Affairs article reports, ?stores that use loyalty card programs actually increase the regular prices of items for non-club members, making purchases more expensive for all buyers and reducing the margin of card members? saving to almost nothing.?

A CBC Marketplace investigation turned up similar results. On a single day, they bought the same 10 items at four different stores, using a customer rewards card at one of them. The result was that, in spite of the perception of savings attached to these cards, the total bill using the rewards card was higher than the other three; in one case, by just over 42 per cent.

For the stores, however, running a loyalty program has a valuable payoff: information. And not just a little bit of information; heaps of it, terabytes of ?dynamic, detailed data.?

That data isn’t hard to come by, either. Although application forms differ, consumers are happy to hand over their names, addresses, phone numbers, birthdates, employers, kids? birthdates, bank account numbers, and more. So what do the stores do with it? Make more money by targeting customers with special offers and, in some cases, selling the data to marketing partners.

Which leads to the issue of privacy.

Even if You’re one of those people who don’t really care how much private info You’re handing over to a corporate database (?I don’t have anything to hide,? you shrug), you may want to think again: the medicine, alcohol, or plane tickets you buy could one day be used to build a case against you, or even affect your chances of winning a lawsuit against someone else.

An LA Times article reported on the case of plaintiff Robert Rivera. In 1996, the Los Angeles man slipped on some spilled yogurt in a Vons grocery store, falling and shattering his kneecap. He sued the store for negligence, and the case would have faded into legal obscurity except for an interesting claim Rivera made: during the pre-trial phase, he said the store had used his club discount card to look up his past spending habits and threatened to use his history of alcohol purchases against him in court.

The store denied it, but even if they didn’t resort to such a tactic in this case, the possibility raises some disturbing questions. With all that data at their fingertips, what’s to stop a corporation from using it against a customer to defend against a lawsuit?

After all, the company owns the information It’s collected about you. And the information was handed over willingly, every time you swiped that card at the checkout. Even if You’re confident that the companies behind your loyalty cards would never use that data against you, they may not have a choice: government agencies could demand it.

In the US, that scenario has already happened. As the Marketplace report noted, a grocery store in Arizona ?turned over records of some of its shoppers purchasing plastic sandwich bags.?

Apparently, the US Drug Enforcement Agency (DEA) was trying to use customer loyalty records to find people who were buying lots of sandwich bags?the logic being, of course, that the bags weren’t being used for a community bake sale. In the face of a subpoena, the store had no choice but to hand over the customer data it had been collecting.

Besides the hidden costs, some customer reward programs are also adding insult to injury: US Airways has recently added an ?Award Processing Fee? to its program. Now, when program members redeem their Dividend Miles, the value of those miles is eroded by between $25 (continental US/Alaska/Canada) and $50 dollars (Hawaii or international flights).

Even if you don’t get charged a redemption fee, you might be surprised at exactly what the stores think your loyalty is worth. For one major Canadian grocery brand, it isn’t much. If you use your no-fee bank card to buy their products, you’ll earn five points for every dollar spent. Sounds good, but to get one dollar in stuff you need 1,000 points?a reward of just half a cent on your dollar.

Still, most customer loyalty programs aim to create a sense of fun, and lots of customers are happy to play along in exchange for the exhilarating moment when they’ve finally been loyal enough to earn their ?free? prize at the checkout. But the final word is neatly summed up in Marketplace?s interview with Katherine Albrecht, at the time a Harvard University student completing her doctoral thesis on loyalty cards. In all of her research, she had ?been unable to find a single consumer benefit from using these cards.?