What business really wants from your loyalty card

And for people like Leona Watson, juggling multiple credit cards, shopper schemes and frequent flyer accounts means that supposedly mythical pro-gratis meal can become a veritable feast.

"Nothing feels better than walking on to a business class flight knowing you haven't had to pay for it," says Watson, whose carefully planned points-earning strategy usually earns her two trips in the pointy-end of a plane every year.

The trick, she says, is knowing which of her three credit cards to use for different expenses running her business, Cheeky Food Events, which along with personal spending totals between $30,000 and $60,000 a month.

American Express might deliver more frequent flyer points for booking hotels for her five employees, for example, while her NAB or CITIBank could be more lucrative for other expenses.

Watson also orders ingredients for her team cooking classes through Coles, earning flybuys points she uses to buy equipment for future events.

"Of course you kind of pay for it along the way, nothing's ever totally free," she says. "But it really works out for me."

While not everyone has the expenditure to make points hunting quite so lucrative, Australians on the whole appear equally committed to carrying around a wallet full of loyalty cards.

Roy Morgan research shows that more than 13 million Australians are signed up to a loyalty scheme, covering 65 per cent of the population aged 14 and above - a figure that has been steadily increasing over the past five years.

The largest programs - Coles' flybuys, Woolworths Rewards ,Qantas Frequent Flyers and Virgin Velocity - have a combined 37 million memberships, representing a treasure trove of personal information that can be used to offer previously unimaginable insights into what customers want, and in turn, turn those customers into a product themselves.

What's the point?

At their simplest, the programs encourage people to become repeat customers with the lure of getting something for nothing, says Lance Blockley, managing director of payments and reward consultancy The Initiatives Group.

"Once I've got 25,000 points in Qantas, it's not necessarily loyalty, in the true sense of the word, that's causing me to continue to use their service. I can't afford to move to Virgin because I've got these points," he says.

And that's an effective ploy for the airlines, says Maquarie aviation analyst Sam Dobson, who estimates Qantas is able to charge at least a 5 per cent premium on its fares over Virgin Australia because many frequent flyer members will pay extra to earn the points.

But experts say loyalty cards are less effective for retailers. Coles and Woolworths' schemes give shoppers one point per dollar they spend at the supermarket, and it takes 2000 points to earn a $10 reward, making many shoppers more likely to shop wherever has the lowest prices.

"Shoppers have become less loyal, and we know that because in most wallets there's between six to eight loyalty cards," says Gary Mortimer, associate professor of marketing at Queensland University of Technology.

The real value for companies, he says, is the data they collect every time shoppers swipe their loyalty cards.

Knowing what a customer buys, how much they spend, and how often they shop lets retailers build up a sophisticated profile of a customer's life, and then market product and services to them more effectively.

So a flybuys or Woolworths Rewards member who has just started buying nappies will soon receive emails offering deals on baby formula, while those who buy pet food might find a cat litter special in their inbox.

Citi retail analyst Craig Woolford says information harvested from loyalty cards helps Coles and Woolworths make better decisions about what products to place where in supermarkets.

Checkout data alone will tell a supermarket if discounting a certain product shifts more units, but tells them nothing about what kind of shopper it attracts.

"The holy grail in all forms of retail is getting the more lucrative shoppers - the bigger basket, the higher frequency shoppers," says Woolford.

"And when you know that if you put product 'A' on promotion, and that means they do their entire shop with that supermarket, that's very different to knowing that a particular shopper may cherry pick and just buy the promotional product and not buy anything else."

UBS analyst Craig Woolford. Photo: Josh Robenstone

Woolworths also turns its loyalty data into a revenue stream by opening it up to suppliers who sell their products at the supermarket chain so that, for a fee, they too can see if their promotions are attracting the type of shopper intended.

Know the customer

The insight into a shopper's life becomes even more powerful when data from multiple programs is combined to create a fuller picture of their lives.

Qantas' head of loyalty Lesley Grant earlier this year boasted of being in charge of "one of the most valuable data sets in Australia", which it was using to the benefit of "both the Qantas group and also external clients".

Powered by 27 years worth of frequent flyer membership data, the airline has set up a marketing and analytics group, Red Planet, which third parties can use to target relevant members with advertising.

In 2015 Qantas took a 51 per cent stake in Taylor Fry, a data analytics and insurance risk consultant, and last year it bought a 16 per cent stake of Sydney start-up Data Republic, which promises a way to share and combine data from multiple sources while protecting customers' identities. NAB and Westpac are also investors.

Qantas Loyalty chief executive Lesley Grant Photo: Sasha Wooley

"Most companies are collecting data about their customers just through the lens of how they interact with them, which might only be 1 per cent of their lives," Data Republic's chief analytics officer Steve Millward explains.

"But there's a lot of insights from other organisations that can help them get a better insight to their customers."

Sharing data across companies means a bank, for example, could pick up on far more clues that someone might be looking to buy a house or take out a car loan, and could target offers to that customer accordingly.

Millward says that retailers' own loyalty schemes only tell them how much someone is spending with them, when how much they're spending at other stores is just as important.

"You can have two people on a loyalty database that spend $500 a year - that might be 100 per cent of one customer's spend, but it might only be 10 per cent of the other," he says.

"A retailer is probably going to put the same amount of effort into each of those. But for the first customer they're already collecting all the money they spend on clothes; the second one there's huge opportunity of growth."

Data Republic's platform can aggregate a customer's history from multiple loyalty schemes, and highlight to clients which of their members are high spenders and therefore worth pursuing with special offers to try and capture more of their spend.

Qantas says it doesn't share any customer-specific information and that its data is "de-identified", meaning it is reduced to "demographic or purchasing traits", in Data Republic's system.

Virgin's Velocity only shares customer data with service providers, but does collect information about its members from third-parties to improve its understanding of customers, and "on occasion we use anonymised data to help us target our marketing efforts", a spokeswoman says.

Dealing in data

Woolworths dealt itself into the data game in 2013 when it paid almost $20 million for half analytics firm Quantium - an investment that has reportedly grown tenfold in value as big data becomes even bigger business.

Quantium has found success using shopper databases to measure whether advertising campaigns have encouraged sales at bricks and mortar stores, and has worked with the likes of Myer, David Jones, Qantas, Kellogg's, Unilever, Coca-Cola, Medibank and online gambling outfit Sportsbet.

In one piece of work for the supermarket giant, Quantium cross-referenced Woolworths Rewards sales records at its discount chain Big W with viewing data from pay TV provider Foxtel, to see if members who saw an advertisement for Big W's toy sale spent more than members who did not.

Quantium is now doing similar tests for Facebook, after entering into an agreement with the social media giant in mid-2016.

For example, the pair tested a campaign for a new range of L'Oreal eyeshade by targeting women aged 18 to 54 with advertising on Facebook. It then used loyalty membership data to see if those women bought the products more than women who were not shown the ads.

Woolworths says its does not share any of its members' personal information and that data is "anonymised and aggregated in line with best practice data security processes" before it leaves its system.

flybuys has limited its data play to sending members special offers from its points partners - including health insurers Medibank and AHM and power company AGL - but says it does not share customer information with those partners. Coles says it doesn't have access to details of what a flybuys member has spent elsewhere.

The Office of the Australian Information Commissioner last year found the two supermarket giants' loyalty schemes had appropriate privacy notices, that were consistent with how they handled data. However the privacy tsar warned customers to make sure they were "getting a fair deal" for the valuable information they were giving away.

"I would hazard to guess that consumers still give away a lot of information for free," says Mortimer.

The deep dive

An infamous example of how money might be squeezed from all this information emerged in 2014 in a recording of Woolworths' then-director of group retail services Penny Winn.

"Customers who drink lots of milk and eat lots of red meat ... are very, very, very good car insurance risks, versus those who eat lots of pasta and rice, fill their cars with petrol at night, and drink spirits.

"So what that means is we are able to tailor an insurance offer ... that give us those really good insurance risk customers a really good deal and helps to avoid the bad insurance risks."

There's no evidence this level of marketing is being deployed, but what is certain is that companies with large customer databases are diving head-first into these types of services.

Data is being used in more far-reaching ways. Photo: Adam Fulton

Woolworths and Coles are selling home, car, pet, travel, landlords and life insurance, each have their own credit cards, and both have been rumoured to be considering a crack at home loans.

Qantas has branched into health, life and travel insurance and launched its own credit card, while Virgin's Velocity is leveraging its customers onto home loans through Virgin Money.

"There's definitely an issue of informed consent," says Justin Clacherty, an IT and digital security expert and an Australian Privacy Foundation board member.

"Most people would understand that some of the data is being used ... but I think in a lot of cases the data is being used in far more reaching and longitudinal studies of people".

Clacherty says consumers had no reason to be confident that highly detailed portraits of their lives were being held securely - with data breaches at major companies becoming a regular occurrence. He says the companies commanding this information's move into financial services is also cause for alarm.

"It's quite unfair for someone who's been out there using these programs to be unduly affected by that when going for things like home loans and health insurance," says Clacherty.

"You only have to look at the moment at what's going on with Centrelink, where they're wanting to do drug testing of clients. Are they going to start using information from other sources to make decisions about whether or not some of us deserve to get social security?"

Changing habits

There no easy way to put a dollar value on most retailers' loyalty programs, but the seriousness with which they run them is telling.

Woolworths hastily backflipped on its disastrous January 2016 loyalty revamp - which did away with its Qantas points tie-up and used a confusing orange ticket system to earn "Woolworths Dollars" - and brought in a simpler offering after significant customer backlash.

With Amazon to soon start trading in Australia, and a grocery offering on the cards, Woolworths has recently combined its loyalty and online operations into a new division dubbed "WooliesX".

Amanda Bardwell, who's been appointed to lead the new division, says the move means it can better harness the strength of its loyalty data to drive sales both online and off.

"Everyone knows customers are changing the way that they shop ... and what we've been able to do is create far more personalised experiences for those customers," she says. "That's particularly resonating."

For the airlines it's easier to quantify, as their schemes receive direct revenue by selling frequent flyer points to banks and other partners, who in turn dish them out to their customers as rewards.

Woolworths says it has created more personalised experiences for customers. Photo: Bradley Kanaris

The cost of an airline honouring loyalty points is less than the price they sell them for, so they make a profit. They make even more money if the points expire or are never redeemed, plus they receive attractive cash flow benefits from the average 24 months between selling the points and them being redeemed.

Virgin earned $142 million from Velocity last year, while Qantas' loyalty unit returned underlying earnings of $369 million in 2017, representing one fifth of the airlines' earnings.

Qantas' loyalty boss Grant has forecast earnings to grow between 7 to 10 per cent a year to top $500 million by 2022, with about half that growth to come from its new business ventures.

It would be "crazy" for Qantas to forecast earnings that far in advance in its core airline business, says Maquarie's Dobson, because of the industry's notorious unpredictability.

He says that highlights another advantage of building a side business in loyalty schemes and insurance: giving certainty to investors, and helping support Qantas' record-high share price.

Value for money?

But the flow of rewards points that has kept airlines' coffers overflowing and consumers happy has recently been stemmed. The Reserve Bank put new rules in place as of July 1 this year that capped how much banks can charge businesses when taking credit card payments.

These fees have traditionally funded banks' rewards schemes, and the change saw the frequent flyer points dished out reduced on average from 1 point per dollar spent to about half or 0.6 a point per dollar, according to Steve Hui, of travel consultant iFLYflat.

Monthly earning caps have also been put in place and American Express companion cards - a popular choice for high-spending point chasers - were brought under the same rules as Visa and MasterCard.

That has increased the amount a customer needs to spend on their rewards credit card to make it worth the annual fee, says Blockley from The Initiatives Group, who estimates that - depending on the specifics of the card - $20,000 of spending might be needed to earn frequent flyer points worth the $100 dollar annual fee.

"The average spend on a credit card is about $16,000 a year, so if that's the average, there's a lot of people spending less than that and they should not be using a rewards card," he says.