Big Y is charging shoppers an annual fee to join one of its loyalty programs. What if retailers force customers to pay for the privilege of being frequent shoppers?
By Len Lewis
At its core, loyalty marketing is about bribing consumers with discounts or rewards for shopping your store. But what if customers paid retailers for the privilege of being frequent shoppers?
Sounds a little like protection money for the mob, does it not? But the essence of loyalty marketing is being challenged by Springfield, Mass.-based Big Y Supermarkets, which recently launched its Silver Savings Club, a pay-to-play program that charges a $20 annual fee. This is a bold move and could either be a game changer or a disaster.
I’ve been fascinated by loyalty marketing ever since my mom filled two books of S&H Green Stamps to get a new shopping cart. I was convinced stores offering stamps charged more for groceries. However, it didn’t matter because—eventually—we got a present for being good little shoppers.
However, will customers be willing to pay cash up front for something they consider an entitlement program and can it co-exist with the chain’s free Express Savings Club.
Frankly it is way too early in the cycle to say anything definitive. But officials claim that it is based on the Costco model. That makes sense since you are forced to pay a membership fee in advance.
The similarity ends there, since Big Y is not going to deny you entrance to the store without a card. Costco works because its entire model is based on membership—a totally different customer relationship. In the case of Big Y, you’re just not going to get as good a deal as someone else who pays for the privilege.
Therein lies the real issue for supermarkets. You risk alienating shoppers who refuse to buy into the program and are forced to pony up the higher price. This is really kicking the hornet’s nest, since it can severely impact a chain’s price perception among those who don’t sign up. Those who do join will expect a lot in return and will be your harshest critics. Woe to the retailer who doesn’t deliver.
I asked Keith Colbourn, leader of the global loyalty practice at dunnhumbyUSA, what he thinks, since his company’s work with Tesco, Kroger and others is almost legendary in the world of loyalty marketing.
“It’s an interesting approach and changes the dynamic from a reward-based program—a ‘thank you’ for customers—to prepaying for a discount. It’s a different mentality. It’ll be interesting to see how customers respond.”
Colbourn applauds Big Y for making a pioneering move, but notes that the risks are as high as the rewards. Additionally, he notes that launching a fee-based rewards program is a lot easier than sustaining it, which is why the first few months will be critical.
For one thing, a typical retail staff is not comfortable selling a fee card. However, if they don’t push it at the outset the program may be doomed.
The challenge for Big Y’s hybrid approach is reconciling free and fee in the minds of consumers.
While many other retailers have tried fee-based programs, customers have generally respond negatively, according to Colbourn. “Their attitude is that they shouldn’t have to pay a fee when they already spend so much.” Even though discounts in the fee program are deeper, food price inflation or offering discounts on the wrong items will send the program into a tailspin.
Fee-based programs work when they are attached to a superior level of potential rewards, according to Jim Sullivan, a partner in Colloquy, a research and consulting firm specializing in loyalty marketing. Barnes & Noble, which may have other problems, has been very successful in this area. “It’s allowed them to focus on the cream of the crop—the frequent reader—and eliminate the acquisition costs of those who only come in once in a while,” he says.
On another level, there is the American Express Black Card, which has only been issued to about 1,500 people. “It creates the perception of elite status,” he says. “This can be valuable in the context of what this retailer is try to do in creating a new tier.”
In other words, Big Y may be getting rid of the cherry pickers to get to more profitable shoppers.
Actually, I’m thinking of trying it myself. Len’s Club has a nice ring, doesn’t it? Then again, I’m reminded of what Groucho Marx once said: “I wouldn’t belong to any club that would have me as a member.”
Len Lewis, a regular Grocery Headquarters columnist, is a veteran industry journalist, commentator and editorial director of Lewis Communications, Inc. He is the author of The Trader Joe’s Adventure—Turning a Unique Approach to Business into a Retail and Cultural Phenomenon. He can be reached at firstname.lastname@example.org or at www.lenlewiscommunications.com.