Do Loyalty Card Programs Really Generate Loyalty?

Open your wallet. Take a look at your key chain. Chances are, the first is stuffed, and the second festooned, with tiny pieces of plastic -- loyalty cards -- that various companies have gotten you to sign up for in exchange for various benefits they offer. The question is: Why?

But it's a bigger question for the companies that hand out these cards than it is for the customers who accept them.

I Made a Deal With the Devil...

From a consumer's perspective, there's very little downside to signing up for a company's loyalty program. Sure, you can say that you don't want to give away your personal, private information, and make it easy for companies to "data-mine" you. But the truth is, privacy in the 21st century ... is pretty much a 20th-century concept anyway.

Between our constant Facebook and Twitter posting, corporations and organizations using our Social Security numbers as generic IDs, the NSA listening in on our phone calls, and hackers breaching databases right and left, there's precious little privacy out there in the world. (And no one seems to care.) Truth be told, there's little chance you can keep hold of your "privacy" anymore, even if you avoid loyalty programs entirely.

On the other hand, if you don't take advantage of loyalty programs when they're offered, you're certain to miss out on a host of "rewards" that companies offer their customers. These could include lower prices at the grocery store, preferred seating on airlines, cash back from credit cards,and on and on.

... and the Devil Lost

These are all things you already know. Now here's something you probably don't: You know all these rewards that companies have been handing out in exchange for loyalty? Turns out, they're not generating very much loyalty.

At least, not according to Gallup.

Gallup research reveals that across the U.S., companies spend some $2 billion on loyalty programs annually, hoping to "activate" their customers to spend more. Gallup defines an "activated" customer as one who, having signed up for a loyalty program, proceeds to do what the company wants him or her to do: Namely, to be "much more likely" to shop at the company whose loyalty card he or she holds -- or at least be "a little less likely" to patronize other companies.

But after conducting an analysis of the effectiveness of these programs, Gallup has concluded that "loyalty programs are effective at activating only a relatively small percentage of a company's customer base."

Shoppers Wanted in Aisle 10

Take grocery store shoppers, for example. Fifty-seven percent of shoppers surveyed by Gallup participate in at least one grocery store loyalty program, such as Kroger's (KR) Shoppers Plus card. According to Gallup, that's the highest participation rate of any industry in America. Higher than for credit cards' rewards programs (47 percent), airlines with their frequent flier miles (33 percent), or department stores (27 percent), with the ubiquitous Kohl's (KSS) card being a prime example.

But while Gallup data confirm that nearly nine out of 10 shoppers have a favorite grocery store, only about half participate in their favorite store's loyalty program (making it hard to "activate" them with benefits showered upon cardholders). What's more, even among grocery loyalty card holders, only about 28 percent are "activated" -- shopping more at their primary store than elsewhere with the specific intention of maximizing their loyalty card benefits.

Result: Your average grocery card loyalty program, costing millions of dollars a year, is encouraging increased shopping among only 14 percent of its customers.

Money for Nothing?

Now, 14 percent is certainly better than nothing. But even so, Gallup managing consultant Jordan Katz characterizes the results thusly: "A company may pay millions of dollars to try to lure customers into such programs, but that investment doesn't change the behaviors of a large percentage of them. It offers no perceivable impact above that of a regular customer."

And Gallup found similar results in other industries -- some slightly better, some much worse:

• Airlines: 17 percent of fliers, preferring one airline over others, are "activated."

• Credit cards: 28 percent of shoppers with a favored card use their rewards program actively.

• Department stores: The worst result of all -- a mere 7 percent of the customer base is activated.

What It Means to You

If you work in the upper echelons of a retail business, pay close attention. Gallup closes out its report with a few words of advice to management on how to get more bang for their loyalty program bucks. Gallup says companies should offer greater discounts to loyalty card members, offer richer rewards and allow customers to earn them more quickly and redeem them more easily.

These, it seems, are the real perks that turn a loyalty card holder into an active and engaged loyalty card user.

Until these companies figure out the winning combination, though, it's likely we as customers will continue doing what we are doing already: Collecting the little pieces of corporate plastic whenever they're offered -- but then shopping wherever the heck we want to, "loyalty" be darned.

As the year winds down, Motley Fool contributor Rich Smith is conducting his annual ritual: rifling through a stack of accumulated rewards cards, deciding which are worth keeping -- and which are duds. He shows neither loyalty -- nor mercy -- and owns no stocks mentioned above. The Motley Fool doesn't own any of these stocks, either.