I literally don’t understand how it’s profitable to spend points ie free money ??
Edit : I’m partially talking about spending points earned
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A loyalty program encourages shoppers to visit a store more often. Those repeat visits earn the store more money than they give away in the form of discounts and rewards.
>I literally don’t understand how it’s profitable to spend points ie free money ??
It’s a *loyalty* card. You can only use it **with that particular company**. In order to use it you will have to provide them with additional profit in the future.
You are a business. You could sell your 10$ product at a 3$ margin or you could sell your product at a 2$ margin and ensure your costumers will be unlikely to ever shop with a competitor again. If option Two yields you more profits, you’re going to choose option Two.
The idea is that in order to earn points, you have to spend money with the company. It encourages me to do all of my spending with **one** store rather than spread it out over multiple stores.
So, for example, lets say that there are two stores in my town that sell the same goods at the same profit margin (20%). Normally, I’d split my purchases across the two, but store 1 offers me a loyalty program of 3% for every dollar I spend.
Without the program, store 1 makes $50 in revenue and $10 in profit (because I split my purchases evenly).
With the program, store 1 makes $100 in revenue and $20 in profit, from which they give me $3 back – still netting $17 in profit when its over.
$17 > $10, so the loyalty program benefits them.
Loyalty points are exactly what their name is: Points for your loyalty to that company. The only way to get them is to continuously go to that company, often ignoring other companies that you don’t have a loyalty card for.
This means that you are more likely to visit that company more often, and therefore spend more overall than you otherwise would, even with spending those points to get discounts or even get free stuff. It just doesn’t feel like it because your brain tells you, “Hey, you’re getting a free thing!”, when you had to already spend $10 to get that $3 product for free.
As well, most products are sold at an incredibly high markup in most cases. So, companies can give you a discount or give you something for free and still make a profit because just selling two or three more of that product will make up for it. And they can easily sell those two or three because they have more people trying to get those same points, so they spend more, creating an endless cycle.
Some companies even give incentives to spend more and get those points by saying that if you spend a certain amount a month, you get an even better bonus (Which often hardly adds up). If you were already spending that much, then this is just a bonus, but most people weren’t going to and now will just so they can get those extra points, thus bringing in more money.
The points themselves aren’t profitable, but their impact on customers is.
The “free money” they’re providing you via the card costs them very little compared to the money they make from you when you decide to keep going there (to get stamps on your loyalty card) vs going somewhere else.
Lets say it costs a restaurant 10 cents to make a coffee, and they charge you $1. They have a loyalty card where after 10 coffees you get a free one.
So every time you buy a coffee from them, they profit $0.90 (because the coffee costs them 10 cents and you pay $1). After you’ve bought 10 coffees, they have made $9.00 profit from you, and giving you your free coffee with the loyalty card costs them only 10 cents!
Put another way: **Every 10 times when you get a free coffee, it costs them 10 cents. But every single time you buy your coffee elsewhere it costs them 90 cents (in lost profit they would have made)!**
And maybe on some of those 10 times you go there for coffee you buy something else like a muffin or a sandwich, making them even more profit from you. But even if you make no other purchases, they still make more profit from having the loyalty card and having to give you a free coffee every once in a while vs you going somewhere else.
loyalty programs exist to promote repeat customers. its a psychological trick to get people to progress toward something(and our issues at leaving stuff like this unifinhsed if there is value ot be had).
w/e money you are losing in the prize you are giving away is more than made up by the fact you got that customer to walk in x number of times.
Because ooo aaaa I really want Wendy’s today but I have sooooo many McDonald’s points to use and while I’m there maybe I should get a large fries. And obviously they have already raised menu prices to accommodate a budget for this. It’s all factored in.
No one has mentioned the massive amounts of data they can then collect on you and sell. For example, let’s say you buy Lucky Charms every week. Without a card you’re just an anonymous shopper and their count of Lucky Charms sales goes up by one each week. But when you scan your card, now your weekly purchase is tied to you and also everything else you bought. That’s valuable to General Mills because they not only know your shopping habits but they can start targeting you with ads since you also buy off brand Cheerios every week and GM would love to convert you. Every scan at the register is a data point and that translates directly to $!
Loyalty cards lower the margin but increase volume. They are a “nudge” that can lead shoppers to choose their loyalty program over a competitor more often. They are especially common in high margin industries where there is still a profit even with deep discounts, e.g. airlines
The points you are awarded are literally pennies on the dollar. The value of the DATA the company acquires with respect to your purchase history and trends MORE than outweighs any “free stuff” you may get as a result of freely providing them that information.
You are basically providing them with incredibly targeted data on individual consumer habits. Multiply that by hundreds, if not thousands of people doing the same, both in your community and across the country, and consumers are providing these corporations with a (virtually) free source of highly profitable research which they in turn sell on.
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