Consumers Think They Are Smart by Being Loyal — But There Are Some Tricks

Image Credit: Ion Chiosea/123rf

Oh the coveted Starbucks’ Gold Card: as much a status symbol as an indication of the copious amounts of money that you’ve spent on beverages. There are few excitements that equal the thrill you feel when you open the envelope containing your shiny new Gold Card. But is that Gold Card all it’s cracked up to be? Just how great are the benefits? And are you really saving the amount of money you believe you are saving? Below we’ll discuss the value of Starbucks’ and Dunkin’ Donuts’ and some other popular retailers’ reward programs. And a word of caution: you might not be getting as great a deal as you think.

In the retailing business, marketing analytics experts often use an analytical technique named the RFM model — Recency, Frequency and Monetary Value. The three metrics are used to develop customer response models, predict customer loyalty, and calculate customer lifetime value. Rewards programs build on these three golden numbers to encourage repeat purchases.

Beverage

In the beverage retailer department, we review Starbucks and Dunkin’ Donuts.

Starbucks renovated its rewards program early in the year of 2016. The new rewards program is based on how much you spend (Monetary Value), not how often you make purchases (Frequency). You need to spend about $63 to earn a free drink or food item from Starbucks, conditional on you being a Gold member. To upgrade from a Green to Gold membership, you must spend $150 in a 12-month period. This means that the Gold membership isn’t for everyone. If you’re the kind of person who visits Starbucks every day for a morning latte, then this loyalty program is for you! However, if you only buy Starbucks for the occasional Peppermint Mocha, earning your Gold Level status might take you years, and who has time for that?

Dunkin’ Donuts’ rewards program is quite simple — only one level. You receive a free drink on enrollment (no purchase needed), your birthday, and every $40 of spending. In a nutshell, there isn’t any entry barrier to join Dunkin’ Donuts’ program, and it is easier ($40 vs. $63 and every member vs. Gold member) to earn a reward there than at Starbucks. However, can we equate a free item from Dunkin’ Donuts with that from Starbucks? Well, customers have the answer. Nevertheless, certainly both companies rely on the Monetary Value metric to encourage repeat purchases.

Retailing

Let’s consider the loyalty programs of some other popular retailers. We choose Target and Kroger.

With the Target REDcard, the cardholders receive a 5% discount, free online order shipping, and more time for returns on most of their Target purchases. However, the downside to the REDcard is that it can only be used at Target, and it comes with a rather high APR.

Target’s RedPerks program also has only one membership level. Members receive a free item (up to $20) after 5,000 points earned or a 5% off coupon. Members found that the RedPerks program was difficult to use because it required so many apps, so Target unveiled the Cartwheel app back in September 2016 for trial in select states. If successful, the Cartwheel program is intended to replace the RedPerks program. Members can use the Cartwheel app to keep track of their Cartwheel Perks. Similar to the RedPerks program, after 5,000 points earned members receive a free product.

Grocery retailer Kroger’s rewards program, the Plus Card, also has free membership. Rather than earning a free item after 5,000 points earned, members receive discounts on certain products and fuel points at participating gas stations. To reap the rewards of the loyalty program, members only have to scan their barcode or enter in their phone number at check out. This seems a lot simpler than opening the Cartwheel phone app, scanning the barcode, and registering points. In addition to its simplicity, Kroger’s loyalty program gives members discounts immediately.

While Target and Kroger reward customers based on how much they spend, the actual savings are quite different. Target customers save by getting a free product ($10 — $20 value), and Kroger customers get discounts on every day purchases and free gas. However, Kroger customers should know that the fuel points earned will expire at the end of the next month, and there is a limit on how much they can redeem each time. The limit at participating Shell gas stations is 10 cents off per gallon while that at Kroger Fuel Centers is 1 dollar off per gallon. The limit per fill-up is 35 gallons.

In a nutshell, if you spend $500 a month on groceries, shopping at Target could give you a gift product valued at $10 to $20, while shopping at Kroger could award you with gas savings at the maximum level of $17.50 if the fuel tank size of your vehicle is 35 gallons (not likely, unless you’re filling up your boat).

Clothing

Next question, what are you really saving when you join the rewards programs at your favorite clothing retailer? Let’s take a look at Gap and Nordstrom.

The Gap requires its loyalty program members to purchase a store or Visa credit card before they’re able to start accruing points. The five points for every $1 spent on the card sounds good until you realize you only receive 5%, or $5 in rewards, on every $100 spent. And while the Gap Visa Card can be used at other stores, the reward is only good for Gap stores (equivalent to 1% cash back). Unless you purchase hundreds of dollars’ worth of clothes every year, for a credit card with an APR of 24.99%, the deal isn’t that great.

Nordstrom shoppers have the option to use Nordstrom Rewards or purchase a credit or debit card for double the rewards. After earning 2,000 points, Nordstrom reward users are given a gift card of $20. This is only a 1% reward for $2,000 spent! While becoming a cardholder does double your point earning abilities, this means that for every $2,000 spent, you earn a generous reward of… 2%. In addition, the 4 level status structure only adds more complication to the Nordstrom cardholder benefits. Who can remember the distinctions between all 4 levels of benefits?

In summary, if you have $500 to spend, you could receive the following rewards:

Starbucks: approximately 8 cups of free drink (assuming you are already a Gold member),

Dunkin’ Donuts: 12.5 cups of free drink,

Target: a free product (i.e., sunglasses or detergent),

Kroger: $10 saving when you fill up a car of 20 gal fuel tank capacity,

Gap: $25 to spend at Gap or other family brands,

Nordstrom: $10 to spend at Nordstrom.

Notes from the authors: firms rely on the fact that their customers won’t calculate their actual savings when they join a loyalty program. Customers choose loyalty programs not because of the savings, but for the sense of accomplishment when the customers’ points accumulate to a reward.