The effect of inflation on loyalty schemes

Earlier today, Sainsbury’s supermarkets sent out an email informing people that they were reducing the rate at which they would earn reward points on the Nectar scheme – halving the amount, in fact, from 2 points per pound to one per pound.  They were also removing the bonus points available for reusing carrier bags.

Nectar has been running for a long time now, and there have been relatively few changes to the scheme. A few partners have entered and left (notably Barclaycard, one of the founding members, who have since set up their own rewards scheme), and there was one instance of a point devaluation – however, as both spending power and earning rate were changed in synchronisation, there was only an impact on anyone holding points.  One reason for this is that an abstract scheme like this does not need to adjust for inflation in the same way as a currency; the spending power of points is automatically related to the amount of money spent to acquire them.

As Sterling reduces in value, consumers will need to spend more on their shopping in order to buy the same goods.  This means that, if there is no change in earning rate, consumers will earn more points in each shop.  However, simultaneously the cost of using points will go up, with more points needed to buy any reward.  The system will remain in equilibrium.

There are two exceptions.  Again, any points held by customers and not spent will depreciate in value as their buying power is reduced by (Sterling) inflation.  Also, not all points are earned through a flat rate scheme.  In the email from Sainsbury’s, the shop appeared to reassure customers:

While this means you’ll earn fewer points on your shopping, you’ll still earn 1 point per litre of fuel as before.

While this reads as a positive, it is in fact very negative.  In the UK, a litre of fuel currently costs around £1.30, meaning that customers would be better off if they earnt one point per pound on petrol purchases.  What’s more, as the price of petrol increases over time, the amount of points earnt will not – despite the cost of rewards also rising.

This is a curious move by Sainsbury’s, occurring at the same time as rival Morrison’s is introducing a loyalty card for the first time.  It is clear that Sainsbury’s does not see that it is getting enough benefit from the scheme to continue to offer a 1% reward rate, but it may find that other supermarkets are then able to offer better rewards to tempt customers away.

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