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Can loyalty schemes be unethical?

Loyalty schemes exist in many shapes and sizes.

From the humble Stamp (Greenshield stamps for UK readers) to more recently introduced Airmiles, gift vouchers, tokens of many and various sizes, club cards, loyalty discounts, frequent flyer clubs, store cards, credit accounts and referrer bonuses, golfing weekends and the hospitality industry etc etc.

There are, have been and will be many techniques organisations deploy to maximise customer loyalty. Many are valuable in the battle for customer retention.

Companies failing to retain their customer base are doomed to either higher promotional spending or to see their business shrink.

It generally costs more to persuade a new customer to try you the first time than to persuade an existing customer to return. Successful customer acquisition and retention are essential if you intend to grow a business so it is not surprising so much effort is expended on many and various loyalty schemes.

The aim of loyalty schemes

The central premise of most of these schemes is that loyalty can be rewarded which it is hoped will in some way persuade people to remain loyal.

Can there be instances when loyalty schemes are unethical? I think there can, especially when more than one party is involved in the buying decision but not all are rewarded by the loyalty scheme.

No one would normally associate loyalty schemes with bribery or corruption

As I hope to point out, in some instances these two unlikely bedfellows can appear to operate in exactly the same way. If a proportion of your customers perceive your loyalty scheme as less than fair it may need further development.

I am not completely clear exactly where the line is between a legitimate business payment in cash or kind and illegal bribery. Politicians in the UK get regularly tied in knots about hospitality and they have some relatively clear codes of conduct. In the Middle East as I understand it, business practice is often not to the Western European model. In Germany, the US the Far East, practice may be quite different to your home market.

This clarity, or lack of it, is important to the point of this article. I wager that many people, like myself, are unclear where the line is or should be drawn.

If you are in the business of communicating, "received perceptions" are reality and if people perceive your scheme as dishonest then..... for all intents and purposes, it is.

Individuals can be accused of bribery when they pay a third party to enable a bit of business with someone else. The circumstances become quite clear when this "bit of business" is illegal, for example:

if while drug trafficing, a payment is made to a law enforcement officer to look the other way, the legal systems of most countries would consider this a bribe and public opinion in most countries would be aligned with that view.

There are often a group of individuals in the selling team.

In legitimate business there are often payments to middlemen or enablers who "make the business happen", remove obstacles or make introductions. If these individuals are critical to your organisation getting that bit of business there is no question that it is usually quite ethical to make payment for their work.

Sales agents, commissioned agents, distributors and the suchlike are often members of trade associations and are respected professionals in their respective fields. They enable sales to be made, often making the introductions, presenting the products, sometimes stocking the products, solving technical problems, asking for the order and sometimes processing the payments and taking the payment risk. These individuals are part of the sales team and form an essential link in your channel to market.

Now consider the situation when the group is on the buying team.

For the sake of argument there is a buyer whose job it is to place business, obtain the best terms, reduce supplier numbers and enforce quality standards working with the quality department.

For this example there are specifying engineers who make a technical judgement on the suitability of offerings from different companies and rule out companies whose offerings lack essential requirements. The buyer is also interested in the choice as is the quality department which is working on supplier evaluation and with the buyer on supplier reduction.

If your company (the selling party) made a payment of some kind, this could be money or excessive hospitality, to the specifying engineer to ensure an offering remained in the list of potentials, you start to move into the grey area between ethical and unethical operations firstly because the quality people and the buyer are not a party to it and secondly because you may start to compete illegally using un-registered under-the-counter payments.

Further and perhaps the most significant point is that these three, buyer, engineer and quality people are working in the interests of another body, rather more important and in law often a separate entity, the organisation itself.

So payments could be being made to individuals to influence a decision they should be making on behalf of an organisation.

Does the organisation get these payments?
Does the organisation benefit from these payments.

Pretty unclear so far, lets consider two examples:

Petrol retail: Fuel companies used to run a voucher scheme intending to persuade their customers to return to win more vouchers to be able to trade in for products.

Airmiles: Many organisations selling all sorts of items give "Airmiles" with their products, you can combine Airmiles you receive from various companies together eventually to get a free flight, perhaps save on the cost of your next holiday.

Is there a problem with that? It is this clarity thing again. Sometimes, and in some markets always, the entity (person) making the purchase is not the entity paying for it. This is this "buying group" thing again.

Example 1: "Fuel"

I am / was a company car driver, for the sake of argument I drive / drove 50,000 miles a year and buy a load of petrol.

The fuel bill for my company is pretty steep, (especially in Europe!)
Who pays? The company pays, it is not my money we are talking about here.
But it is great, I can get personal benefits if I buy my fuel from retailer XYZ, which I can turn into products for myself and my family.
There is no such thing as a free lunch and in fact the fuel from retailer XYZ has to be more expensive than it would have been if these benefits were not included. In fact if I buy from different fuel supplier "ABC" I save my company money on the fuel bill but do not get any personal benefit. So a personal inducement makes me buy a product for my company that is more expensive than it should be.

This is in fact a real example, I did this and with the benefit of hindsight it was one of those perks that is not really completely ethical. I justified it at the time that I did not have time to hunt for the best deal on petrol prices I had a job to do.

Interestingly, the fuel retailers in question (global players) were forced to stop this loyalty scheme because of pressure from no frills competitors like supermarkets to which the private motorist, who pay for their own petrol, flocked in ever greater numbers. Should the retailers have been doing it at all? In hindsight I think probably not. Should I have been taking advantage of it? also in hindsight probably not but it was common practice for retailers and buyers.

Example 2: "Airmiles"

Lots of the flying public are flying on business, (yes I know Airmiles also apply to other purchases). The same situation exists for Airmiles as does for the fuel example, people are tempted to buy a more expensive service for their organisations because they receive a personal benefit.

Such is the increase in costs for organisations that some have taken steps to ensure that all Airmiles from flights paid for by the organisation become the property of the organisation.
I could reveal you how much one large "governmental" organisation saved on its annual travel budget from this change but then I might be giving an incentive scheme to "no win no fee" lawyers all over the place so you will have to make estimations yourselves. In this case significant is too small a word :-)

Is your loyalty scheme that much better... than simply making your offering better than others?

How long would your loyalty scheme last if really slick operators arrived in your market offering excellent service and lower costs to the user, can you not be that slick operator yourselves?

[Author mark@sticky-marketing.net date 10/03/01]