The article below discusses pricing issues
associated with cards.
Supermarket Cards: An Overview of the Pricing Issues
John Vanderlippe, CASPIAN
It's about more than just higher prices. Brace yourself for "customer-specific pricing."
For many consumers, the pricing issues surrounding supermarket "loyalty" card programs can be summed up in one simple concept: those without a card pay more at the register. The stores portray it the same way, but call it "rewarding loyal customers" with lower prices. Though this sounds simple, few things in life are as simple as they seem and supermarket cards are no different.
Pricing issues with card schemes actually fall into two categories: savings and segmentation. While the savings issue has the greatest impact on consumers today, it is segmentation that will have implications for years to come.
The recent proliferation of card programs throughout the country makes it clear that participating stores think they are a wonderful marketing tool. But when consumers take off the rose-colored glasses that the supermarket hands out along with their cards, they find that the programs do little good for anyone but the stores themselves.
The first time I was confronted with the choice between using a card or paying higher prices, my initial response was, "How do they pay for all this?" Indeed, these programs are expensive, reported as being "as high as 30 million dollars" to start, with subsequent annual expenses running from "$5 to $10 million."  When Safeway in the United Kingdom ended their program they acknowledged that they had been spending $70 million (U.S. dollars) in annual operating costs.  Such large amounts of money have to come from somewhere, and that somewhere is the customers themselves.
The first impact on consumers is that retailers raise prices throughout the store when a new program is implemented. This allows stores to show "'savings" that look far deeper than they really are and forces those who refuse to participate in the programs to bear the brunt of their cost. An industry executive admitted this in a Smart Money Magazine article in the summer of 2001.
"The whole point is to give the best shoppers something special, and you have to pay for that out of something," says David Diamond, President of Emerging Business for Catalina Marketing, the St. Petersburg, Fla., company that handles many supermarket card programs. "It used to be that everybody got Rice Krispies for, say, 79 cents. Now they're available to anyone for 89 cents, but the best shoppers get them for 49 cents." 
While Mr. Diamond contends the price increases are nominal and the discount substantial, the empirical evidence paints a sharply different picture. One of the best examples of this was in a pricing study conducted by the Waco Tribune earlier this year.  Within that study one of the products cited was Velveeta cheese; clearly marked with a manufacturers suggested retail price of $3.99. Two stores without cards had priced the cheese "within a few cents" of the MSRP.
However, Albertsons and Brookshires, the two stores with card programs, had priced the cheese at $5.99 and $5.59 respectively. Yup, you guessed it, the card price was $3.99.
Other recent examples include strawberries raised to $9.99 with a "special card price" of $3.99  and a six-pack of 20 oz. Pepsi that soared to a ridiculous $7 after the card program started, with the card price falling to $2.49. 
The stores try to capitalize on this, in some cases requiring cashiers to circle the "amount saved" on a shopper's receipt and then verbally stating the amount to re-enforce how "great" their program is. But is matching the MSRP really an example of "savings"? Consumers also need to consider that every non-sale item they buy also carries an inflated price, resulting in a considerably higher grocery bill overall.
Is the Velveeta case an isolated incident? Don't card programs save the customer money over the long run? Not more than before the program started, and the prices may quite possibly be worse. In a Pacific Business News article one marketing executive explained the situation, saying:
"The prices with your card are what used to be the ad prices. The customer is still paying the same price that they paid before the card on sale items." 
This was confirmed in CASPIAN's 2000 study on Kroger in Indiana, where the majority of prices, 56 percent, remained unchanged after the card program was introduced.  Our study went on to show that of the remaining prices, those that increased in price outnumbered those that were lowered - by a significant margin. The total grocery bill for a purchase of each item compared in the study increased 1.5% - a seemingly odd way for a store to "reward loyalty."
If the prices are raised throughout the store, and sale prices are no better than they were before, is that what makes the card programs profitable? Yes and no. The stores can break even, or perhaps gain a small profit in this manner, but the bulk of increased revenue goes back into the costs of running the programs.
So where is the payoff for the stores? The answer to this question is only beginning to come into play, and for most people, it isn't good news.
Segmentation of Consumers
Some suspect that stores intend to use card information for direct marketing purposes, but in reality this is not the long term concern. Most stores have privacy policies that prohibit them from selling the information (at least for now), and there is a large segment of the population that obtains cards by using a fake identity, making the data worthless for direct marketing purposes. Not only does the "fake name" phenomenon not upset the stores, but in June 2002 Kroger's QFC division in the Pacific Northwest actually sent out letters to shoppers suggesting that they use a fake name on the card application if they opposed the new card program. 
So what is the real purpose? Card programs allow stores to identify who their "best" customers are and then cater the store to meet their needs. A study conducted in the late 90's showed that 75% of a supermarkets profit came from just 30% of their customers. When store spokespeople say they exist simply to "Reward the best shoppers. We will target them in the future. They will get the benefits", as QFC recently stated in Seattle, it certainly sounds like they are referring to everyone that participates, but the real goal is to identify and reward that elite 30% . For store executives, "loyal" is synonymous with "high profit" and if you don't meet that criterion, don't expect your current shopping experience to remain the same for much longer.
One of the first ways this strategy is being implemented is in product selection. If a store's high profit customers rarely buy an item, no matter how well it sells to everyone else, it may be dropped to accommodate those items higher on the profitable customers' wish list. The following example shows how this was done in one store:
"One retailer had a 40 foot aisle devoted to candy. Candy was profitable, but was that the best use of his space? Looking at his customer database, he found that his top customers (top 30% who provide 75% of the sales) did not buy much candy. What did they buy? Baby products! So he cut his candy counter to 20 feet, and added twenty feet to baby products. The reasoning? "We are concentrating on our top customers not our top merchandise. It is more profitable that way." 
If you are among the masses of "less profitable" customers, (and bear in mind, that is more than 2/3 of us), product selection at card stores will diminish. This strategy has the obvious potential to adversely affect poor and minority populations, making fewer of the foods they purchase available to them.
Stores can also use information collected from the card to offer high-profit customers incentives that are withheld from the general population. The same article cited above contained the following:
"As computer power is further enhanced, total customer profitability can make it possible to provide even better treatment for large annual purchase customers than that extended to regular cardholders"
It has also been suggested that stores should "withdraw low margin offers to unprofitable customers and offer the best customers aggressive pricing and special benefits" and that "some [customers] might even have to be discarded if the company is to concentrate its resources on retaining profitable customers." 
In both of the above examples it doesn't matter if a card was obtained using a "fake" identity, the only way a customer will continue to receive decent prices will be if the card profile matches that of a high spender. Once this is understood it becomes clear why many stores are unconcerned about customers who use this approach in an attempt to "beat the system".
The "two tier" pricing that we now see in stores (card price, non card price), will soon develop into a three-tiered system. Stores are being advised to "make one offer to a frequent, high spending customer, a completely different offer to a low spending customer, and yet a third offer to a new customer with moderate spending habits." 
In a paper aptly titled "It's really about economics, not loyalty," the differential pricing issue is explained to grocers as follows:
"Do you pay everyone the same wages? The inescapable conclusion is that charging the same price to each customer is as illogical as paying everyone, from chairman to carhop, the same hourly wage! Our salary policies are based upon the concept that our wage and benefits package should vary in proportion to each employees economic contribution to the firm. The same logic should also apply to our customer price and benefits package."  (Emphasis added.)
The banking industry has already begun applying these principles, raising similar concerns about affordability and access that could soon result from "loyalty" cards. Software has been developed that allows banks to analyze the profitability of each customer. A recent article on the subject explained that:
"Consumer advocates say the technology - used by such banks as Bank of America, RBC Centura Banks, and Central Carolina Bank - could lead to discrimination and invasions of privacy. The banks say it's no different from airline frequent flier miles or supermarket loyalty cards." 
Airline tickets are optional purchases for most people and there is no penalty for failing to belong to their frequent flyer club. On the other hand banks are difficult to avoid, supermarkets are a necessity, and in both of these situations customers may be penalized for being "less profitable".
In the banking industry, one segment of the population is already paying higher rates as a result of customer specific analysis. In 1998, Wells Fargo Bank discovered that it was losing a lot of money on older customers who were on Social Security, and accordingly raised checking and overdraft fees for all Social Security recipients across the board. 
Though consumer segmentation does not specifically target people by wealth or class, the net result will be the same. Much as the elderly were targeted by Wells Fargo for banking price increases, the people that can least afford increased costs will be hit the hardest. The segment of society that has relied on supermarket sales for survival has no choice but to be a low profit customer. These are the very people likely to lack access to reliable transportation and have very limited grocery shopping options.
As a single male, I can't meet the stores' profitability targets either. Though I was completely "loyal" to one store and purchased virtually all my groceries there, I could never spend anywhere near enough to obtain any of the "free" offerings that higher spenders received. So-called "free" giveaways are just one step in the implementation of a customer segmentation program, as explained by Gary Hawkins, a store owner and marketing consultant who has signed on such big name companies as Kroger and Ahold to fine tune their card programs:
"During his travels, Hawkins sees retailers typically implementing customer loyalty programs in stages. The first stage is two-tiered pricing. In the second stage, retailers begin to skew some of their rewards to their higher-spending customers (free turkey programs, etc.). In the third stage, retailers begin to experiment with customer category management, breaking customer groups up based on the amount they spend each week. The fourth stage is true customer-specific retailing, providing each individual customer with their own mix of products, services and privileges. 'In a sense, their own weekly ad,' Hawkins says." 
The practice of "customer specific marketing" or "customer specific pricing" is slowly being implemented around the nation. While most consumers are unaware of the practice, they are less than appreciative when it is discovered. A few years back Amazon.com was caught in what they referred to as a "test" where they offered individual consumers different prices on the same merchandise. They were only caught when consumers on the retailers' web forums started discussing prices, and subsequently raised a furor. 
One final aspect of the cards involves couponing. Stores claim that cards allow them to provide shoppers with only those "coupons they are in need of, for products they regularly purchase." But it is far more likely that the opposite will occur. Regular purchasers of a given product who buy it each week regardless of price will be unlikely to receive a coupon from the store, since no incentive is needed to get them to purchase. There may be an occasional minor discount to retain a shoppers' interest, but the real coupon deals will go to infrequent purchasers or those who buy a competitor's product, in an attempt to get them to switch brands.
Though it is clear that card programs are good for the stores that use them, the implications for consumers are not as good. The elite few will see little difference but the majority of consumers will be met with higher prices and less selection.
The solution? Consumers must take their business to stores that respect ALL customers and appreciate their business, and avoid those who only reward the most profitable.
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Zelda Gordon of No-Cards Shoppers has also written an excellent article exploring the themes outlined above.