The Economics of Loyalty Pricing: Are Discounts Worth the Data?

Supermarket loyalty pricing, where members pay less than non-members for certain products, is becoming ubiquitous in the UK, accounting for a whopping £5 billion in revenue over just three months in late 2023. Loyalty pricing raises fascinating economic questions about consumer behaviour, competition, and fairness.

The Mechanics of Loyalty Pricing

At its core, loyalty pricing is a form of price discrimination—charging different prices for the same product based on membership status. Supermarkets like Tesco, Sainsbury’s, and now Lidl, offer thousands of products at reduced prices to loyalty scheme members. These schemes encourage repeat business, provide supermarkets with valuable consumer data, and influence shopping habits.

Economically, loyalty pricing operates on the principles of elasticity of demand. Price-sensitive shoppers are more likely to join schemes to access discounts, while less price-sensitive non-members effectively subsidise these promotions by paying higher prices. This segmentation of the customer base maximises supermarket revenues while appearing to reward consumer loyalty.

Are Discounts Genuine?

The Competition and Markets Authority (CMA) recently conducted a deep dive into loyalty pricing, analysing 50,000 products. Their findings? Good news for bargain hunters: 92% of loyalty price promotions offered genuine savings compared to the usual price. However, 55% of surveyed shoppers still suspect non-member prices are inflated—a testament to how anchoring biases shape perceptions of fairness.

Interestingly, loyalty prices often match or beat competitors’ prices, but not always. In 14% of cases, cheaper alternatives were available at non-loyalty supermarkets. The takeaway? Even loyalty pricing can’t replace the benefits of price comparison.

Loyalty Schemes: What Drives Membership?

Nearly all shoppers (97%) belong to at least one loyalty scheme, with an average of three memberships per person. While the lure of discounts is a major factor, other benefits like personalized offers and rewards also play a role. Notably, younger shoppers are more likely to switch stores to chase discounts, reflecting their higher price elasticity compared to older demographics.

However, loyalty pricing isn’t without its critics.

Almost half of shoppers (43%) believe it’s unfair that non-members pay more for the same product. This tension highlights a classic equity versus efficiency trade-off in economic policy—loyalty pricing is efficient in driving sales but raises fairness concerns.

Privacy: The Hidden Cost of Discounts

Loyalty schemes don’t just collect memberships; they collect data. Supermarkets track purchase histories, preferences, and even shopping frequencies, using this data to target offers and optimize stock. Surprisingly, data privacy concerns don’t seem to deter most shoppers. Only 7% avoid loyalty schemes due to privacy fears, showing how behavioural economics influences decision-making. The perceived benefits of discounts often outweigh abstract concerns about data use.

Winners, Losers, and Market Competition

From a broader market perspective, loyalty pricing reflects game theory in action. Supermarkets compete not just on prices but on loyalty programmes, creating a dynamic where participating retailers gain a competitive edge. Smaller retailers without such schemes may struggle to keep up, raising questions about market concentration.

Interestingly, loyalty pricing hasn’t significantly reshaped shopping patterns—most people still shop at three different supermarkets regularly. This suggests that competition remains healthy, with consumers savvy enough to shop around for the best deals.

Final Thoughts: What Should Shoppers Do?

The CMA’s analysis reassures us that most loyalty price promotions are genuine, but skepticism remains justified. Loyalty pricing offers real savings, but only if you’re strategic. Here are the key takeaways for smart shoppers:

1. Compare Prices: Loyalty prices aren’t always the cheapest. Shop around to maximize savings.
2. Know Your Data Rights: Understand what data supermarkets collect and how they use it.
3. Access Matters: If you’re under 18 or without a smartphone, ask about alternative ways to join loyalty schemes.

For policymakers and supermarkets, the challenge is ensuring fairness while maintaining the benefits of these schemes. Making loyalty programmes more inclusive and transparent could boost consumer trust, keeping competition healthy in the grocery sector.

Retrieval Questions for A-Level Students

1. What is loyalty pricing, and how does it differ from traditional price promotions?
2. Explain how elasticity of demand influences the success of loyalty pricing.
3. What did the CMA find about the fairness of loyalty price promotions?
4. Why might some consumers perceive loyalty pricing as unfair?
5. Discuss the role of data collection in loyalty schemes.
6. How does loyalty pricing affect market competition among supermarkets?
7. What steps can supermarkets take to make loyalty pricing more inclusive?