Consumers are now better informed than ever, thanks to the richness of information available on the internet. People can find out all sorts of information on products from social media sites, news groups, blogs and the like, along with online reviews, and where to go to find the cheapest offer.
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They have spent a lot of time trying to understand the customer better, through loyalty card schemes and sophisticated customer relationship management systems. But these are now under pressure from social media.
Web inventor Sir Tim Berners-Lee recently named Facebook as one of the biggest threats to the web. But the social-networking giant could also threaten retailers' traditional loyalty card programmes.
The launch of Facebook Deals this month allows retailers to offer customer promotions specific to location by allowing customers to 'check-in' via Facebook Places using their smartphones and receive tailored deals.
Rob Bamforth, principal analyst at Quocirca, says, "The potential for [Facebook Deals] to have an impact on the physical loyalty card scheme is similar to how online commerce impacted high street commerce."
Impact of social media
But will social network and mobile offers alter existing loyalty card schemes and change how retailers collect customer information?
With large organisations, such as fast-food chain Chipotle, McDonald's and retailers such as Macy's and Gap, all launching Facebook Deals promotions, the social network could drive some loyalty programmes online.
Hung LeHong, research vice president of retail at Gartner, says, "Facebook Deals and equivalents take personalisation and distribution to the next step. Not only are they a "call to action" to go get a deal, they also bring context-aware information to the mix."
LeHong believes location-specific offers can be broadcast to friends, increasing retailer sale opportunities. "This takes the regular CRM offer into new territory by making the deal more pertinent to the consumer's location and leverages the social networks ability to 'serve up' the deal to friends."
So do retailers need a new approach to lure consumers to their high street and e-commerce shops?
Richard Dodd, spokesman for the British Retail Consortium, is sceptical. He believes traditional loyalty card schemes have a stronghold on the retail industry and are unlikely to be dented by new applications in the social networking space.
"Loyalty card programmes are firmly embedded within the retail industry. A scheme which relied on Facebook is unlikely to replace the traditional loyalty-points based system but it may provide a useful add-on to reach new parts of a retailer's customer base," he says.
Adopting new channels online may also be beneficial to retailers' data warehouses of customer information.
Brian Hume, managing director at Martec International, says when Tesco started its Clubcard scheme, it cost between 0.5% and 0.75% to run. Tesco had to pay for its data. "With e-commerce, people voluntarily give their name, their address and other details, so companies now have detailed data on their customers for free," he says.
"I'm not aware of much of a connection between social networks and loyalty cards at the moment," he continues.
Hume cites US retailer Tory Burch as a company using a private website with its loyalty data. "It provides online access to a secure area of its website for its better customers, where it shows designs that could be put into production," he says.
A growing number of retailers have Facebook pages to promote their company, brand and products, Hume adds. "So far, I don't know anyone that has taken the next step of trying to link to loyalty cards, but I think it will be inevitable before long. Once companies like Marks & Spencer have a Facebook page you know everyone else will have to."
Despite the rise of online shopping, retail analyst Ron Margulis says it has done little to change the principles of loyalty programmes. It's still about price advantages, services that make you feel special and having a product range that meets your preferences, he says.
Margulis believes, however, the nature of commercial loyalty programmes has changed. He says that when Diner's Club started, it was about giving customers more access to exclusive things. Now it's about discounting. "But that's not a good way to attract and keep customers," he says.
Ever since 'big box' retailers like Wal-mart - which does not have a loyalty card - Target and Toys R Us became the price leaders, programmes are designed at least partly to get prices in touch with the price leaders, he says.
"And there are similar scenarios in hospitality and financial services," Margulis says. "What the non-price leaders have found is that they can use analytics to find ways to compete on grounds other than price, and that means on service or product assortment."
He also cites Amazon's US Prime programme to waive shipping fees in return for a $79 (£48.80) a year membership fee. "That's incredibly powerful in this context," he says.
"Then there are its recommendations, and the anniversary reminders and present suggestions and the one-click to purchase - it's all designed to make it as easy as possible for you."
Can it go further? Margulis once asked the head of Intercontinental Hotel Group what he wanted from a loyalty programme. "I want everyone to have Intercontinental as a tab on their browser," he said.
Today, that's unusual. But it won't be. "Mobile real estate, like having your tab on a shopper's cellphone, is going to be very important, but it'll be next year or the year after. For now, it's a laptop issue," he says.
Roger Sniezek, operations digital director for Groupe Aeroplan, the company which owns the Nectar card scheme, says it's important now.
"The big thing at the moment is mobile. We've launched an iPhone application for Nectar and Sainsbury's," says Sniezek.
"Your mobile is always with you. It's easy to forget e-mail offers but your mobile is always with you so customers can take offers with them," he adds.
"The take up has been huge. We had 3,000 downloads since we launched in the middle of August. It's driving incremental business and incremental results for manufacturers," Sniezek says.
With a magnetic strip card, online shopping portal, Nectar e-stores and an iPhone app, Groupe Aeroplan is now looking at new technologies, such as NFC, says Sniezek.
However, the magnetic strip loyalty card is unlikely to replaced by social networking or e-commerce channels just yet. While retailers' loyalty principles remain the same, the adoption of new technologies means infrastructure is needed to support the wealth of customer data on offer, to turn customers' transactions online, in store and on mobile phones into business information.
Managing social media interaction
Why should retailers manage social media interaction? Hung LeHong, research vice president for the retail sector at Gartner, explains.
Negative comments can go viral
There are a wealth of comments about brands and products online. Retailers need to monitor these comments and discussions to get a more complete "voice of the customer". Negative comments can quickly escalate and go viral. Retailers need to have the pulse on what's being said and have a response plan for when these negative events escalate.
Retailer must monitor and interact
Social media is becoming a two-way interaction channel. Whereas in the past, retailers just monitored social media, it has become good practice for retailers to respond to comments on their Facebook site as well as on Twitter. Not only does it help build the brand online, these interactions also provide customer service - making social media both a marketing and customer service channel.
Use analytical tools
Sentiment analysis tools are the current tool of choice to monitor reputation online. They monitor and interpret the negative and positive sentiments towards brands and products. The problem is that they only monitor - which is only one piece of the puzzle. To manage reputation requires these tools plus processes and a team of accountable individuals to decide what to do, and do it, when reputations start to go awry online.
Case study: How J&P Cycles manages Tweets
J&P Cycles is a multi-channel retailer and the largest provider of motorcycle aftermarket parts and accessories for motorcycle enthusiasts, The company also provides free technical support and 24-hour customer service.
With an increasing number of customers turning to social channels for support, J&P set out to extend customer support and engage with customers and incorporate their feedback. Using RightNow Cloud Monitor, J&P followed and responded to marketplace messages from consumers, suppliers, and competitors as well as posts on YouTube and Twitter.
J&P Cycles now maintains two Twitter accounts, one promotional and the other to provide customer support. Since J&P Cycles launched on Twitter and started using RightNow's Cloud Monitor, the company attributes increased online sales to Twitter and other social media interactions.
British Retail Consortium says...
The growth of the internet has been accompanied by a parallel expansion in all types of social media which smart retailers know they shouldn't ignore. Customers can interact with stores via their mobile phones, debate their purchases on Facebook or Twitter and browse blogs looking for recommendations.
All of these options drive up choice and information for consumers and increase competition among retailers. The traditional roles of buyer and seller are being replaced by a far more interactive relationship.
The challenge for retailers is working out where the value of social media lies and how best to maximise it. Current approaches vary widely but most retailers recognise the importance of being at the table.
Some stores place a premium on responding to customer reviews and comments. Evidence so far is that consumers like this personalised approach, although retailers recognise some customers could regard it as corporate intrusion if it's taken too far.
New technology, particularly in the form of mobile phone applications, can be used to alter the shopping experience in a more direct way. One supermarket has created a barcode scanner app which can save shoppers time in store and could perhaps replace the traditional shopping list.
Retailers are at the forefront of technological advances, being in an ideal position to drive forward developments which will give all consumers more power over how they spend their money.
But the speed of progress makes it hard for legislation to keep up. Both the UK government and European Commission are reviewing e-commerce laws and the BRC is lobbying hard to see rules and regulations kept to a minimum, for the benefit of both retailers and customers. Get this wrong and UK businesses face being at a disadvantage compared with other countries - a disaster in the current climate. But the prize for getting it right is potentially huge.