Do you have a Macy*s card?

If you ever shop at Macy*s, you have heard the all-too-familiar question, "Do you have a Macy*s card?" A similar question awaits you at Herberger's (Carson-Pirie-Scott), Dilliards, and JC Penney. Virtually all department stores market their own credit cards.

But, why does the sales associate ask this question? Quite simply, most department stores pay sales associates for each account they initiate. At first, this seems strange: most people go to a department store for clothing, not high-interest credit. Strangeness aside, the fact that department stores pay employees to sell credit cards suggests it is profitable to do so... provided that department stores know what they are doing.

From my inside source on department stores, I learned that a primary reason department stores sell store credit cards is that "Customers who have store credit cards buy more than customers who do not." This motivation to sell store credit cards saddens me because it is such bad logic.

This is horrible logic because correlation does not imply causation. The department store wants to know whether selling a credit card to a customer causes that customer to buy more. Knowing that cardholders spend more than non-cardholders tells nothing about causation for two obvious reasons:

1. Customers who agree to holding a store credit card are different than customers who refuse to sign up. Those who obtain cards know they'll be more likely than average to use the card. They're the big spenders, and big spenders stand to benefit more from the credit card offer. For you econ nerds, this effect is adverse selection.
2. The second effect is even more obvious. Having a store card entitles the customer to lower prices, extra discounts, and special store coupons. As introductory economics students know, people consume more when the price is low. If people are especially responsive to prices, the effect of buying more outweighs the discounted price in the revenue calculation. Expenditures go up, but only because of the special discounts: it had nothing to do with the card.

Given these reasons to expect customers with cards to spend more, it seems unlikely to me that people spend more money because their card has a Macy*s logo on it. But, don't tell that to managers at department stores. The number of "loyalty accounts" (as they are called) is an important metric for employee performance. At performance reviews, credit card peddling is almost as important as actual sales of clothing! These stores even have special managers whose sole purpose is to get associates to initiate more "loyalty accounts."

If the cards do not actually cause more customer spending, all of these efforts are a pure waste of time, energy, and company resources. Without spending so much time on credit cards, sales associates could focus on selling merchandise and providing good customer service. Such efforts would have a more direct (and perhaps, more effective) link to the company's bottom line.

This explanation really troubles me because the practice of selling store credit cards is a pervasive practice in the retail clothing industry. If selling credit cards is just pure waste of profits, wouldn't we expect someone to figure that out and make millions? To the readers, do you see other profit-seeking reasons to peddle credit cards? I have some ideas, which I will share in Tuesday's post, but I want to see what the readers think before I reveal my hand.