Retail Strategy Secret #6: Loyalty Pricing

golden-handcuffs

Welcome to the sixth post in our series of “Retail Strategy Secrets”!  Here you will learn the angles, approaches, and tactics retailers are using every day to try and separate you from your hard-earned cash.  Understanding these unlocks the door to spotting great deals, and you never want to pass up a Dealicacy…

Loyalty Pricing

This pricing technique involves a retailer offering different prices to different customers for the same product (or products).

Wait a second, retailers do this?  Isn’t that price discrimination?  Yes, they do.  And depending on how it’s implemented, price differentiation (not discrimination) is perfectly legal – even encouraged.

A very prominent example came to light in the suburbs of Minneapolis, Minnesota about two years back.  A retailer headquartered in Minneapolis that you have likely heard of (Target) was accused of price discrimination.  Diapers and other health and living products were being watched closely by a couple of consumers (Dealicacy kind of people!), and a big “aha” came to light. For nearly every product they were looking at, prices were 25 cents to a couple dollars MORE in one location than the other…

Just imagine the media frenzy that followed.  The Star Tribune reported on it, the local news channels sent in their investigative reporters, etc.  But there was no wrong here – no one demographic was being unfairly targeted. The prices applied evenly to every shopper at each location. Capitalism was being put into good practice (determination of “what the market will bear”), right down to pricing being slightly higher in prime real estate locations to support the cost of leasing the building.

Within two weeks, everything was quiet again.  No court cases, no lawsuits, no more editorials.

As you can see, the line separating the good from bad is drawn based on how price differentiation is put into practice.  If things are based on race, religion, etc. the business is likely to (very quickly) get shut down / run out of town by angry mobs.  However, if price levels are based on rules and business strategy that is applied consistently and fairly, and is done in an open, transparent way, everything is good.

If a retailer can successfully employ price differentiation, it can mean sustained business and better long-term profitability.  So now, back to Loyalty Pricing.  Since we now know some of the background behind price differentiation, it is easier to see that Loyalty pricing (at a basic level) is simply “what works” in a successful price differentiation system.

Throughout a store featuring loyalty pricing, key items are priced at two levels.  The standard price, and a very much lower or unadvertised price (or perk) that’s available only to the loyalty program member.  To activate the perk, the customer typically exchanges some form of loyalty points, which are built up as a reward for past purchases or behaviors the retail chooses to encourage. Examples can be found at many grocery store chains, drugstores like Walgreens and CVS, and even department stores (like Kohl’s where their credit card doubles as their loyalty card).

Pretty straight-forward.

At a deeper level, however, the retailer is not simply requiring purchases in exchange for points. The shopper is also giving the retailer access to a treasure trove of information about them and their purchasing habits.  All the information captured from the time you sign up and extending to every purchase you make is being collected for analysis.  The results? Everything from simply noting brand preference and how frequently you purchase necessity items, all the way up to noticing that married females aged 25-30 are much more likely to buy name-brand cosmetics when a coupon for milk is available.

In short, the loyalty program can be seen as allowing the retailer to tie a virtual noose around your financial neck (although they prefer to refer to this practice as “golden handcuffs”).  And, unfortunately, there is no silver bullet to getting the best of any given loyalty program.

Why?  They are everywhere, stretch far past traditional retailers, and are as varied as snowflakes in their approach to separating you from your hard-earned cash.  I’m certain you have already realized this just by reading the article – further examples of Loyalty Pricing extend to frequent flier miles, cash back rewards on your Visa or MasterCard, and even the stamp-cards for your local fast food restaurant!

Here’s where Dealicacy comes through for you – this is our bread and butter.  We can’t devote all the time in this article to detailing specific loyalty programs, but we can (and do) go MUCH further in the Dealicacy newsletter.  Hint: click on one of the graphics to your right to sign up for free.

We just sent a number of exclusive articles to our subscribers detailing how to approach (and get the best of) loyalty programs found at stores you likely pass by every day.  Have you heard of Walgreens and CVS?  Stories about walking out with FREE cases of Pepsi / Coke always make good conversation at parties. 🙂

Ok, enough for today – we must move on!  Next up, Price Skimming!

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