BrainTrust Query: Cash Back Popularity on the Rise, But Is There a Better Way?
By Bill Hanifin, Managing Director, Hanifin
Loyalty LLC
Cash is king. During the past two years,
this age old encouragement from our fathers has been driven home with punctuation.
In the loyalty and rewards game, cash is king in a different way. Ask a
focus group to rank their preferred reward options and cash rises to the
top. Surveys often produce the same result.
But look into the transactional detail of
a loyalty program sponsor and you’ll find that cash is not always the top
choice among rewards. Over the past decade, experiential rewards and air
travel have stayed at the top of the list. There seems to be a disconnect
between what consumers say they want and what their behavior proves they
want.
Why then is there a resurgence in cash back
rewards programs in the market today?
Since Discover Card launched in the mid 80’s,
cash back on cards has been a staple of the product offering. The fuel
card business is now laden with cash back offers as well, which
sometimes translate to “cents off the gallon” at the pump.
This week, JP Morgan Chase announced that
holders of its Freedom card can earn five percent back on spending in the
dining, drug store, and grocery categories, while continuing to earn one
percent cash back on every other purchase. The announcement is interesting
especially as there are no spending tiers to be achieved to trigger the
higher earning rates and no caps on the amount that can be earned.
Holders of the True Earnings Card from American
Express and Costco can earn one percent on all Costco purchases and up
to three percent back on other purchases, including travel, dining out,
and gasoline purchased at the Costco store. Business cardholders enjoy
a similar offer, topping out at four percent for gas purchases. Accumulated
earnings are distributed each February and the certificates expire in six
months.
While Costco follows a traditional model,
Target and Tesco are offering a glimpse into the future of cash back.
Tesco’s Clubcard offers cash rewards, but
turns a dollar (Pound Sterling) into two as it offers Clubcard holders
double the value of their vouchers when spent in-stores and increases the
value up to four times through partner rewards, including restaurants and
entertainment venues.
Target is testing promotions with their private
label and co-branded credit cards. Instead of the usual “10 percent off
today’s purchase” incentive to take a store charge card, Target is testing
everyday rebates between three to five percent on all store purchases made
with the card. This signifies a shift from traditional acquisition strategy
to incentives designed to drive repeat purchase and customer retention.
Focus group members may have spoken that
“cash back is king” for years, but a closer look suggests that the original
model may not breed stickiness to the brand and leaves financial leverage
on the table for program sponsors.
Discussion Questions:
Will cash back rewards continue to become more and more popular with
consumers, or is it just a temporary reaction to this recession? How
do you think cash back rewards programs should be best optimized to
encourage loyalty or repeat purchase? What do you think of the different
cash back incentives from Costco, Tesco, Target and others?
- Chase Freedom Empowers
Customers to Earn More Cash Back, Save More by Avoiding Interest on Everyday
Purchases – Comcast.net Finance - It’s Reward Time at
Costco – Are You Motivated? – Hanifin Loyalty - Tesco Puts £120 Million
Back In Customers’ Pockets – Tesco - Target Tests Aim To
Measure Effect Of Various Rewards – Payment Source
Tesco’s system is brilliant in that it turns “cash back” into “cash back…in our stores.” In other words, they get all the credit from the customer for the clean simplicity of a cash-back rewards program, yet they recapture a high percentage of this no-stings-attached rewards money in spending at their own stores.
In the U.S., CVS’s ExtraCare program’s ExtraBucks system is another great model. Although it doesn’t have the simplicity of Tesco’s approach (I have yet to find a single CVS customer who can explain how or why CVS decides to give them ExtraBucks), it certainly has the power to bring shoppers back into the store. The high dollar values, coupled with very short fuses (sometimes only a week or two), mean that customers are highly motivated to shop again soon. This increase in shopping frequency has helped CVS carve out a strong competitive position against rival drugstores (such as Walgreens) and rival channels (such as grocery, club, and convenience).
It’s no secret that the use of credit cards has become a symbol of excess and stupidity during this recession. There has been a decline in the use of credit cards by not only those whose credit spigot has been turned off, but even the financially stable have pulled back considerably.
What are the credit card companies to do? Offering cash back for spending gives some people the green light to use their cards again for everyday purchases as sort of a back handed way to save. The more you spend the more you save? And, as far as the cash back rewards from CVS, it irritates me when I get to the store the day after my cash back coupon expires. Hello Walgreens!
I estimate that last year, between three of the credit cards I use for business and personal use, I averaged 2.7% in cash rebates. I take advantage of all the 5% rebate rewards. It amounts to a few thousand dollars a year which is a nice bonus. Knowing who is giving you an extra 5% off is just smart business.
These cash rebate cards have been around for a long time. You really can’t score big using one card but rather using at least three cards to battle for your business. As long there is strong demand, especially among high volume users, I would expect to see cards getting more creative. I used Discover only on 5% rebates promotions. American Express only on their 5% promotions, and Visa for 5% on gas, groceries, drugstores, 2% on travel and dining, and 1% on everything else. Never use a card isn’t paying at least 1% on first dollar purchases.
Those airline mile cards are mostly a waste since we can now fly just about anywhere for $200. I only use an airline miles card when they give you a free ticket after making your first $1 purchase and then I cut it up.
The real key to any loyalty program is simplicity for the reward holder. The airlines have struggled because of blackout dates and expirations on miles. They made it very tough for a frequent flyer to earn free flights. Hence, loyalty was not that high.
I find Marriott, Costco and Staples to be three of the best loyalty programs in the market today. Why? They’re easy to understand and more importantly, to use. Costco and Staples are both cash-back rewards. The one difference is Staples uses cash back for future Staples purchasers while Costco will give you cash when you redeem your loyalty check. Marriott points are easy to earn and even easier to use. Loyalty is high for those two reasons.
Yes, the recession has certainly helped consumers focus more on cash for loyalty, but I also believe that consumers like cash rewards because it is the easiest to understand. Imagine if American Airlines offered cash back, no expiration checks that could be used for any American airline product including airline tickets, in flight movies and food. Would this drive loyalty more than saving 30,000 miles for one round trip with limited seats and blackout dates? Only a market test can tell us the answer to this question and I hope they or another airline does.
This is a great question Bill and indicative of a conundrum that many brands face when developing reward-oriented loyalty programs.
Cash back is a great concept for certain categories like credit cards, as it was really cemented with Discover Card. Yet as Bill illustrates, cash alone doesn’t drive additional transactions and likewise doesn’t necessarily provide any leverage to the program sponsor. Leverage is a fundamental driver of loyalty profit for rewards programs as it is essentially what extends the difference between incremental sales and the associated cost of those sales.
If you view loyalty as a brand-oriented behavior encompassing an emotional element, then a straight and (largely) one-dimensional value proposition like cash back is not going to win for most businesses. It’s very easily replicated and while transparent, it’s also limited in its value. Most importantly, cash is generic and brand-neutral at best, unless an approach like Tesco’s is used.
Finally, most any single-dimension rewards structure is limiting and underscores the importance of other loyalty elements such as soft benefits, data-driven/relevant communications and a brand-focused strategy. Ideally, a brand’s loyalty strategy and its program (assuming there is a programmatic component) should be as unique to that business as the brand itself. Cash doesn’t support that.
Cash back is more immediately energizing than off-in-the future plane ticket, or an over-crowded cruise and other like rewards. Cash is recognizable without the commercial, promotional pillow talk. It should continue to ascend in popularity with consumers.
Costco’s program is neat and clean. At the end of your year you get a certificate to use in store. No muss, no fuss. And it comes as a big surprise because you are not being constantly reminded of what your balance is. I believe consumers are looking for the simplest way to accumulated rewards. Give me a percentage back of what I spend at a certain point in the future. Those programs that allow you to spend your rewards at another store may have a good subscription base but ultimately as a retailer, you want to keep that money in-house.
Cash is king due to cards reducing the value of points. Airline miles are worth little when compared to a Jet Blue ticket. Difficultly in redeeming points has consumers saying just give me the cash. Fuel Perks are easy to redeem and are viewed as cash. American Express prints a beautiful catalog, but when reviewing the points required, unless someone has tons of points, it is not a good value.
Thanks to all the respondents for great comments on the question of cash back.
I see a few big points rising to the top:
1. The discount airlines have made it tough to get excited about waiting to accumulate 30,000 miles for a free round trip, especially when redemption is not always easy.
2. Consumers want rewards programs that are simple and easy to understand. The more we ask people to read the fine print, the more skeptical they become (and the higher probability of disengagement).
3. We’re all mostly frustrated with the credit card companies. Bank of America’s decision to stop OD fees on debit cards, announced today, is a step in the right direction.
3. Cash back is preferred by most of our contributors.
I still wonder if some improvements can be made in the way of adding partner funding as mentioned or by structuring the coupons to drive a bounce back (one or more) visit.
Thanks to all for the comments.
It is all about being easy to understand and easy to use. Airline miles have driven these programs. Unfortunately, they have become quite convoluted and difficult to use. Point programs followed, but when one compares points needed to redeem an item, one realizes that the points have considerable less value than they appear.
Hence, the move to cash back. It is simple to understand. In most cases it is easy to use. And, the user knows the real value. From the merchant’s point of view it is a cheap reward to the most loyal customers/users. Further, the merchant has the ability to increase reward levels for more loyal participants (a la Staples).
Cash back is not related to the economic times. It is about value and simplicity. The programs will grow and likely become more complex but no matter how complex, the user/consumer will understand the value because it is in pure and simple dollars and cents.
Lots of great thoughts here, as usual. This also brings back many aspects of even S&H Green Stamps! Bottom line, cash is good, however the bigger question is if true loyalty is being rewarded here, or is it just a frequent-shopper discount? Unwarranted discounts, in that the consumer would’ve made the purchase anyway, without the reward.
Having cash returned is a nice feeling, like finding money in a pair of pants that you haven’t worn in a long time. It’s immediate, without a lot of qualifications and small print. In any economy it’s good; today, it gives the customer the feeling they are dealing with a reputable company.
The CVS program has actually turned me off as a customer. The ExtraBucks have too short of a lifespan to be of value to me. When I read their sales circular and then see the cents off in the form of ExtraBucks, I no longer even bother. I’m not going back to the store if I don’t need anything and am certainly not buying something I don’t need to redeem those bucks. I would actually go to CVS more often if the cents off were real, immediate discounts.