Millions of Australians are members of loyalty schemes – but it turns out these schemes have been gaining more from us than we might think, Jason Murphy says.
Millions of Australians are members of loyalty schemes – but it turns out these schemes have been gaining more from us than we might think, Jason Murphy says.

The dark side of frequent flyer schemes

Do you use Qantas Frequent Flyer, Woolworths Rewards or Flybuys? We call them loyalty schemes, but they're more like profit schemes.

Loyalty implies a two-way street, and these schemes have been gaining a lot more from us than we might think.

Qantas Frequent Flyer is the king of them all. You might think of Qantas as just an aviation company - but it gets a bigger contribution to its total profit from Qantas Frequent Flyer ($374 million) than from flying internationally ($285 million).

Exploiting our loyalty is lucrative - the margins in the loyalty business are 22 per cent, compared to 4 per cent on international travel.

Charging a premium price for lounge access is a big part of it, of course. But Qantas also gets a lot of value from the data it collects on what we buy and when.

You may not know that Qantas runs a marketing company called Red Planet that sells data it collects. Red Planet promises to reveal to other companies information about their customers and "how they behave".

Of course, Qantas itself insists it gives plenty back for the value it takes.

"Millions of Australians choose to be Qantas Frequent Flyers because they see real benefits and value from being members, like the 5 million reward flights which were taken last year" a spokesperson said.

Qantas CEO Alan Joyce is a huge fan of the brand’s loyalty scheme. Picture: Adam Yip
Qantas CEO Alan Joyce is a huge fan of the brand’s loyalty scheme. Picture: Adam Yip

THE WATCHDOG IS GROWLING

Loyalty schemes are in the spotlight again because Australia's consumer watchdog, the Australian Competition and Consumer Commission (ACCC), has just put out a big report on them. I really love the ACCC. It never gets nervous about biting powerful companies on the leg, and this time is no exception.

ACCC chairman Rod Sims gave the supermarkets a hard serve.

"Many consumers would be shocked to find that some supermarket schemes continue to collect their customers' data at the checkout even when they do not present their loyalty cards. They do this by tracking customers' credit or debit cards from previous transactions," Mr Sims said.

I asked Coles if they did this and it directed me to Flybuys. I asked the Flybuys spokesperson too. They said: "The final full report has just been released so we will take some time to read and consider it before commenting."

Flybuys felt it was too early to comment on the ACCC’s claims.
Flybuys felt it was too early to comment on the ACCC’s claims.

DIFFERENT PRICES FOR EVERYONE

Woolworths did specifically deny another allegation in the ACCC report.

The ACCC warned of companies exploiting our data so that different consumers are offered different prices for an identical product or service. Which is to say, if an airline knows you like to travel on a Wednesday, they could raise the price. Or if a supermarket know you like a certain brand of dishwashing liquid, they could make sure you never see it go on special.

Woolworths said in no uncertain terms that it doesn't do this. That's very good news. Because if this starts to happen, we're in a very bad situation indeed. The whole point of a consumer economy is the companies offer one price to everyone. That means oftentimes things are great value.

For example, I really like pasta. I can buy pasta really cheaply even though I'd happily pay more for it. The fact it is cheap is a big benefit. Many things I buy are similar, and the same will be true for you.

Consumer benefit is something economists celebrate - it is a big part of why we have capitalism at all.

It's usually good companies have to offer one price to everyone. The reverse is called price discrimination, and it involves companies shifting the price depending on how much people are willing to pay.

When companies get good at price discrimination, nothing ever seems like good value, everything seems to be right at your maximum willingness to pay, and profits soar.

Woolworths has stridently denied engaging in price discrimination. Picture: Cameron Richardson
Woolworths has stridently denied engaging in price discrimination. Picture: Cameron Richardson

To be fair to the concept of price discrimination, it's only 100 per cent bad where prices are already low and competitive. In some categories where prices are high, price discrimination might involve the company cutting prices for some customers so it can sell extra units.

For them, the price actually falls. So it's not always bad. For example, airlines could use price discrimination to cut prices for some people to help fill up empty last-minute seats on aeroplanes.

IT'S COMING

So far, the ACCC says, it has not got great evidence of price discrimination happening. But there are warnings of it happening overseas already, and warnings that a new data standard in aviation (called the "New Distribution Capability") could make it easy for airlines to do here.

As data on our consumer behaviour gets richer and richer, the temptation for companies to do price discrimination will get higher and higher.

In which case, loyalty schemes will start to seem more like exploitation schemes. We'd be mad to give away data that allows companies to simply charge us more. The risk is companies will be able to identify us even if we're not part of loyalty schemes, just via the payment method we use.

It's clear consumers are going to need more and more protection as data gets better - we better hope our consumer watchdog stays fit and lean and ready to bite.

Jason Murphy is an economist | @jasemurphy. He is the author of the new book Incentivology.



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