On Loyalty Cards

October 10th, 2013

This post is not going to be particularly kind to loyalty cards. Let’s start off with the first problem: we’ve got the name wrong.

Are we really creating “Loyalty”?

They aren’t really loyalty cards, they’re more accurately described as discount cards. They are a fancy and convoluted form of coupons. Great coffee shops tend not to think of themselves as the sort of places that offer discount coupons but that is what loyalty cards are.

Let’s not fool ourselves: no one is loyal because of the card. No one is going to avoid other coffee shops simply because of the fact they carry a single loyalty card in their wallet for their favourite cafe. Chances are they have several, and are just slowly working the system to earn the free drinks.

What upsets me more is the idea that a discount on coffee is the best way to create loyalty. Loyalty programs came from companies with a commoditised product who were looking for a competitive edge. The whole point of speciality coffee is to make the point that we have a differentiated product, rather than a commoditised one. If we’re earning loyalty on price, then we’re likely to lose it on price too. If we earned that loyalty through quality and through experience then it will be so much harder for a competitor to win that customer away from us.

The discounts

Coffee is sold, in most of the world, on pretty tight margins. The only way to generate considerable return is to increase your scale as typical coffee business will achieve 8-12% of their net sales as pre-tax profit. The discounts we offer on our core products through loyalty cards are pretty astonishing.

Let’s compare:

Number of drinks to fill card Discount
5 16.7%
6 14.2%
7 12.5%
8 11.1%
9 10%

Those are pretty staggering discounts on a product that doesn’t have huge margins to begin with. If you have a buy 7 and get your 8th free and a well intentioned barista throws an extra stamp on there the average discount for every drink bought using the card becomes 25%!

Now a ten percent discount only translates to a 3.8% increase in cost of goods (as a percentage of the drink), but an already squeezed business just has its life made much harder. For staff who want to be paid more, there is simply less money in the pot.

If you want to get into the detail you should probably cost out the cost of the cards, the ink and the time taken to do it (all of which do add up over a year).

Big Data

This isn’t to say that there are no redeeming features in loyalty programs, but I don’t think many independent businesses are entirely comfortable with some of the opportunities. For many larger companies a loyalty program gives access to data about the user that can be exploited for increased profitability.

The Harris and Hoole iOS app is an interesting inbetweener in all of this, and I think is worth paying attention to. I should state now that I know next to nothing about future plans for the app, or about what data is being collected and analysed. This is speculation mixed with experience.

When you download the app you’re informed you get a free coffee (essentially the digital loyalty card has already been filled once for you). The app asks you what your favourite coffee is. I picked a small, black filter coffee.

When you arrive at, or near, a location you check in and can send your order to the till – you don’t have to be inside, just close. By the time I got to the ordering point the barista asked if I was James. She then asked if I wanted to use my free drink, which I did. She then told me it was already being made and I could collect it from the second of their two coffee stations. Impressive.

Interestingly they brew a specific coffee for black filter coffee drinker – I didn’t realise this until I asked someone afterwards, but the fact they gave me a naturally processed coffee was interesting. Knowing I wasn’t going to add milk allowed them to showcase a more interesting and risky coffee than they otherwise might have. The experience was fluid, and once they add payment then they’ve removed a great deal of hassle from the entire experience. For locations with time constrained people (i.e. the financial district), I could see this making a lot of sense.

As I said, I don’t know what data they’re collecting. Simply putting a digital, location aware loyalty card in your customer’s pockets yields interesting opportunities. As Harris and Hoole are connected to Tesco I hope they’re doing more with the data. I certainly would want to!

I’d want to look for trends in customer behaviour and ordering patterns. Do they visit the same store every time? Do they always order the same thing? Do more customers order black coffee drinks on Mondays, allowing me to drop my milk order a little bit – or be prepared if people tend to drink larger beverages midweek? If I alert a customer to a newly opened store when they walk past it, coupled with a reminder that they’ve nearly hit their free drink, can I capture a sale that might have been lost to a competitor?

I’m sure there are huge limitations on what we can currently do with data, and how accurate we can be, but there is no doubt that the collection of information about us and our habits is hugely important for many businesses. Whether we approve or knowingly consent to this data collection is a large, but separate topic.

Get rid of loyalty cards?

I want to make this clear: I am not criticising people who have those programs in place. If I had opened a cafe in the last 5 years I would undoubtedly have thought long and hard about doing one. Opening a business is terrifying and it is natural to look for every opportunity for success.

Nor am I saying that people should get rid of them. Taking something away is incredibly difficult to do, because it is hard to reward a customer for a behaviour and then tell them you think this behaviour is bad. This makes people confused and angry. We don’t want that.

I would urge people to consider them carefully, if only from a fiscal perspective, and be fully prepared for their impact on margins and opportunities for lost revenue. I don’t want us to think about price and discounts driving loyalty, because it takes away focus from what we should be good at.

I expect lots of people won’t like this post. Lots of people will accuse me of criticising their business, which I’m not, or tell me that their program is very successful (which, on the condition that they’re ok with the discount, I hope it is).

I wanted to write this because Simon from Electric Coffee wrote to me about them, and got my brain thinking (thank you) and I thought I’d share those thoughts here.

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