Tuesday 26 October 2010

3 reasons why 3x Tesco Clubcard Deals will work


Just over a year ago I wrote about how Tesco had introduced double points to the hugely popular Clubcard scheme, making it far more rewarding and really capturing peoples attention at a time when they were increasingly evaluating their retail choices.

Those in the industry questioned how long they could continue to offer double points given the cost of it and so thought it a short term promotional campaign rather than a longer term programme change. Now, 12 months later, we have the answer - it was both.

From the 6th December the Clubcard scheme is changing again, however it's not double points which are going, it's the 4x Clubcard Deals. Tescos state:-

We've decided to keep double points going, because it has been so popular and has made a real difference to how much value we've given to customers. So, your shopping will earn you twice as many points (especially useful when you do your Christmas shopping!) which means twice as much value back in your next statement.

It would be easy to be cynical about this and suggest that as they give with one hand they take with another. However while the scheme value will drop from the current high that the double points promotion brings, this is not a scheme devaluation. By keeping double points going and at the same time dropping the Clubcard Deals from 4x to 3x value, the scheme is still more rewarding than it was 12 months ago - but only just.

The table below shows example spend levels for a customer who earns points across a number of different areas. Assuming they also use their Tesco Credit Card to buy their Tesco shopping and Fuel, they are still 15% better off under the new rules than before double points were introduced.

CategoryMonthly SpendOriginal SchemeDbl Pnts Promo3x Deals
Car Insurance£25£1.00£1.00£0.75
Credit Card£1,000£10.00£10.00£7.50
Total Reward

Of course, the current double points promotion has significantly increased the reward value for customers so there will inevitably be a big drop for many. If you look at this as just a promotion however, the Clubcard scheme still appears to be more rewarding.

So what is going on. Why have Tescos complicated things by essentially devaluing rewards and increasing earning simply for the scheme value to stand still?

My guess is this has been done for 3 reasons.

1. Rewards too good to be true - Customers don't trust promotions that give too much value. When testing points rewards, you typically get no additional lift moving from double to triple points and increasingly, as you lift the points value, you decrease participation. This is basically because customers begin to see the offer as being too good to be true and feel there is some other objective at play and so shy away. Ironically, in order to increase the take-up of Deals, Tesco may have had to reduce the offer to make it appear less appealing.

2. Partner Participation - The Clubcard Deals are fantastic value, but it is rumored that partners have to fund 50% of the value. With some partners like Legoland seeing an increasing number of customers using Deals vouchers to gain entry, I suspect it is becoming harder for Tesco to keep these partners engaged and to keep the offers open and free from restrictions. There is probably a gain in this programme change for partners as well, lowering their participation costs.

3. Two points is better than one - Customers don't "do the math" when looking at loyalty schemes, they simply compare one scheme to another based on the earning rate. If they get 2 points per £1 on Clubcard and only 1 point elsewhere it immediately feels more rewarding, regardless of the ultimate exchange rate. Tesco had previously tested giving 2% rather than 1% when first launching Clubcard and had seen no uplift in spend with the higher return. However, in a competitive market, this increased earn rate is probably doing a better job of attracting and retaining customers, even if it doesn't actually result in any more uplift. This was evidenced by Tesco managing to hold and slightly increase it's market share in a tough economic climate and taking share from ASDA who was fighting on everyday low prices and had previously shown signs of growth at the expense of Tesco.

It takes a lot to communicate changes like this to customers and causes potential confusion and re-evaluation. You can bet Tesco wouldn't be doing this if it wasn't going to result in a return.

What I think is great is that Tesco is not content to sit back and just go through the motions. They really want to sweat their loyalty scheme to get the most from it, even if this means making bold changes to keep it on track.

Loyalty is far from a commodity for Tesco - it still has the power to change the playing field.