The British supermarket chain, Tesco, has grown very successfully over the years and is now the world’s third largest retailer. According to one source more than 15 million people in the UK had a Tesco Clubcard (it’s loyalty card) in 2010 – that’s almost one third of the adult population.

On the face of it it’s not hard to see the appeal of Tesco’s ‘loyalty’ card: shoppers tell themselves that they would be shopping there anyway and, by using their Clubcard they receive ‘free’ points that they can save up and spend later. Further savings in the form of offers for selected products are also mailed to them from time to time.

The psychological appeal of such a scheme is obvious enough: evolution has equipped many of us with a strong basic desire to save. That we no longer need to hoard nuts and berries to get us through the winter doesn’t switch off that part of us that feels motivated to save in one form or another.

Leveraging this desire is particularly astute for a supermarket like Tesco: much of the attraction to supermarket shopping that drove its growth (and still drives marketing today) is the opportunity to shop conveniently and, above all, cheaply.

I still recall when Asda opened up a large supermarket in my home city when I was a child: my parents would drive several miles once a month to fill the car with food (much of it for the freezer), motivated by the chance to reduce their monthly food bill.

But here’s the thing: with so many people having a Clubcard and receiving these ‘free’ points and discounts, it must surely be costing Tesco a fortune, mustn’t it? How can they be making a profit? (Don’t worry, they’re doing fine.)

In fact, through a combination of growing profit in the UK and global expansion, they have posted record annual profits every year since 2001. Part of the UK profit is driven by introducing new product categories and services but, as you’re about to see, those discounts on shopping Clubcard members receive aren’t all they are seen to be by customers.

The Clubcard plays on the mechanisms of the unconscious mind to impressive effect: it takes advantage of the broad rules of thumb (or heuristics) consumers rely on to make shopping efficient.

Here’s an example of vouchers that my wife received recently:

How is this playing on unconscious processes?  What is the consumer psychology behind the use of the card?

1. Whilst the data is captured in response to my wife’s willing use of her Clubcard, she still experiences a positive response to receiving offers for products she regularly buys. Without such data directly mailed offers are frequently uninteresting, leading to people not even bothering to open the envelope. The envelope from Tesco isn’t perceived by my wife as ‘junk mail’ because the offers resonate with her shopping behaviour: opening the envelope is psychologically rewarding.
2. The basic unconsciously processed rule of thumb is that a discount represents a saving. There is no evidence for this and none in the mind of the shopper (in this case my wife). When I asked her how much the named products cost, and as we know she buys them reasonably often, she wasn’t sure. Intriguingly her guesses were mostlyabove the actual price they were currently selling at. So 75p off Tesco Finest Meatballsfeels like a good saving, but there’s no relevant frame of reference and no reference to whether the regular price has been increased at some point before it was discounted.
3. The discounts are taken in good faith – Tesco is essentially trusted. However, in this instance, those 25 bonus points on condiments are likely to be obtained for buying the tomato ketchup my children are fond of: it just so happens to be priced 25% higher in Tesco than Asda at the moment. The Ainsley Harriet Chicken and Leek Soup, another favourite, is half the price at Asda.
4. Even when or if deals are genuine, the savings and bonus points obtained on four or five items is relatively inconsequential against the total number of products bought in one visit. And it would only require a similar number of, how can I phrase this, ‘less competitive prices’ to be applied to other routine purchases that are not ‘known price’ items to offset any cost to the retailer.
5. Tesco is also aiming to get you to act and come into their retail space (not one of their competitors). With that in mind the vouchers carefully leverage loss aversion – the desire to minimise future loss – that is such a powerful driver of human behaviour. They are only valid for a few weeks. If they haven’t been used by then my wife may feel a small amount of regret that she has missed out. Although, the amount Tesco will have lost through her not getting around to shopping there will be a substantially greater sum!

When it comes to this type of loyalty scheme consumer psychology often shares a lot with gambling psychology:

• Each likes to believe that they’re the one who is ‘up’ on the deal.
• The focus is on big wins (or discounts) not on losses (or other purchases) and their value.
• There is little empirical reflection. People like the feeling that they get from the experience: an objective assessment from outside the complex workings of our own mind might well draw a very different conclusion about the amount we win or lose.

Tesco has been extremely astute with its Clubcard. It has seduced customers into telling the brand how they can be marketed to effectively. A mark of their success is that, even when you point out the true nature of the card’s influence, customers still want to use it. They have worked hard to make using their Clubcard a habit that shoppers don’t want to kick.

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