Data Mining in Loyalty Programs

Executive Summary
 Loyalty programs have evolved rapidly since their inception in the 1980’s to the point where now they are a requirement, or in some cases, a competitive advantage for companies in retail and services sector. In 2010, the total value of loyalty currency issued across financial, travel and hospitality industry was $48 billion dollars which was a significant contribution to U.S. GDP when compared to other industries. Loyalty or reward based programs are structured marketing behaviors that reward for being a loyal customer of the company. The program is based on the premise that it is much less expensive to retain an existing customer than to acquire a new one, hence a direct impact on a company’s bottom line.

The paper determined that an essential element of any loyalty program is data mining. Retailers or service providers such as Target, Starbucks and United Airlines lure customers to providing personal data and purchasing habits. In return, customers are offered either tiered or non-tiered rewards along with targeted marketing to collect further revenue. The paper discusses several different types of loyalty programs covering the full spectrum of companies across different industries.

The research discovered that many consumers are unaware of the sizeable amount of personal data that they have to sacrifice when they sign up for a loyalty or rewards program. Hence, it was found that privacy is becoming a big concern for clients of these programs as approximately 50% of memberships become inactive after a certain period. The paper examined the steps taken, by both the customer as well as the company offering the program, to protect privacy of the data collected as it was beneficial to both parties.

The paper investigated and found that there are almost no laws protecting the privacy of data collected through loyalty programs, hence leaving customers vulnerable. Federal Trade Commission has indicated that they would like to see more regulatory oversight on data mining, however no laws have been passed to date.



Introduction

History

Current Trends in Loyalty Programs

Privacy Issues

Steps to Mitigate Privacy Concerns

Laws and Legal Issues with Data Mining

Conclusion
References