Credit cards have been a staple for retail rewards programs for decades (you know, like that Visa card they try to make you sign up for every time you go to Gap). They’ve been an effective way to reward customers, and for retailers to get additional funding.
But a new report by analysts Michael Exstein, Chrisopher Su and Trey Schorgi at Credit Suisse says that it’s time for retailers to abandon the credit card. Why are credit-based rewards programs not the right way to go anymore?
1. The cost of rewards programs keeps rising for banks. As rewards competition ramps up, issuer margins are pressured.
2. As the programs get more expensive, banks will offset costs in other areas. This will result in either less beneficial terms for retailers, or higher fees for consumers. Retailers may have to increase their own rewards programs to remain competitive
3. Retailers’ relationships with their customers could be hurt, because banks (who are now in control of many retailers’ credit businesses) could squeeze consumers. Since the programs are branded for retailers, not the banks, consumers would deem them responsible.
Credit Suisse instead suggests that the answer to these woes is simple. Switch over to programs based around membership fees or other upfront investments. “Going forward, we think the emerging trend will be the need for consumers to “invest” in loyalty programs, thereby creating a “vested interest,” says the report.
So what brands are doing it right so far?
Amazon — The Amazon Prime membership program has been vastly successful. Consumers pay an annual membership fee of $79, and get shipping benefits, free use of Amazon Instant Video and perks for their Kindle.
Costco — The largest membership warehouse club in the world has three levels of membership. There’s a $55 annual fee for businesses, a $55 ‘Gold’ card for individuals and a $55 executive member upgrade, which gives folks a 2% discount on most purchases.
Sam’s Club — Walmart’s warehouse subsidiary has a similar system, with a $40 per year Advantage card for individuals ($100 for Advantage Plus which offers extra savings) and a $35 per year Business membership ($100 for Business Plus).
Macy’s — “Thanks for Sharing” is a program that’s working for Macy’s to generate loyalty. It requires a $25 upfront investment (which is actually a donation to charity), in exchange for rewards.
Target — The REDcard is a ‘hybrid’ method which has been working well since the retailer started it up in 2010. It offers 5% savings on everything and includes shipping benefits.
These programs all capitalize on the concept of creating that “vested interest.” Customers, having already paid a set of promised benefits, will be more likely to keep spending to use those benefits that they’ve already paid for. They’ll keep coming back.
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It sounds a lot like Amazon Prime, Amazon’s $79-per-year service that offers fast shipping and other benefits.
The Wall Street Journal first reported the service, and confirmed that Macy’s had been approached by Google to participate.
The next-day shipping will apparently be combined with Google Product Search, which today lets users find products and compare them across different e-commerce sites to get the lowest price. When people buy a product from one of the sites after finding it on Google Product Search, they’ll get an offer for one day shipping for a low fee, the Journal says.
Google won’t be running an e-commerce site or stocking products in warehouses like Amazon does, but will instead create a system that figures out which retail partner’s stores are nearest to a customer and have the product in stock. Then it would team up with UPS and local couriers for delivery.
Still, e-commerce fulfillment is a pretty big step removed from Google’s core mission of organizing the world’s information. Lack of focus has been a problem for the company, and CEO Larry Page has killed a lot of non-core products this year
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“Although Abercrombie fans agree this Skyler cami is cute, a few refuse to pay $88 for it.”
That’s the kind of insight Brean Murray’s Eric Beder drew from comments on the Facebook pages of retail brands. Here are some more:
A&F fans also love the new warm and comfy sweats.
AE fans love the spread in People magazine and they’re digging the “Friends & Family Additional 30% Off” deal, but they’re bad about web tech problems.
Aeropostale “are going crazy” over the 40% off for “Friends & Family” and they’re also excited about the fee $25 gift card after they spend $100.
Hollister fans are buying the new sweaters, though a few object to the prices. The Huntington Beach cardigan is a “must have.”
Urban Outfitters is pissing off its target consumers with the latest fashion line. And everyone thinks those platform heels are “hideous and unoriginal.”
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Dr. Augustine Fou is Digital Consigliere to marketing executives, advising them on digital strategy and Unified Marketing(tm). Dr Fou has over 17 years of in-the-trenches, hands-on experience, which enables him to provide objective, in-depth assessments of their current marketing programs and recommendations for improving business impact and ROI using digital insights.
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