At this time of the year you’ll hear all the various gift card statistics; especially the fact that gift card sales will account for in excess of $50 billion dollars of volume for the year. What seems to fall through the cracks of transaction journalism is the loyalty transactional volume that successful retailers capitalize upon each year.
Of course there are many reasons for the lack of coverage of loyalty, most of which can be traced to the fact that it is a more esoteric concept that is difficult to track, as opposed to the more tangible gift card sale concept, and the ease of reporting of gift card revenue.
The loyalty dollar “value” to consumers in the form of free or discounted goods is easily in the tens of billions as well, but again, it is hard for an ISO to get their hands around the concept and translate it into a sale at merchant locations. What compounds this issue is the fact that merchants themselves can’t even figure out if they should offer and implement a program, and if they were to do so, what would be a good benefit for their consumers? And merchants have to justify the new expense of implementing a program.
We have some single units operations that have loyalty programs in place, but the chance of selling an owner operator of a single unit is difficult for various reasons; one popular merchant objection is that the owner is always there and knows everyone by name, face, etc. So for the purpose of this article, let’s think of small but growing store locations, maybe three or more units where an owner is not always on premise, and there are many hourly employees interacting with customers. Another assumption that we will go forward with is that a loyal customer is defined as someone who visits a particular merchant more than a competing location for the same market basket of goods or services.
Here’s our first problem as it relates to the sale; merchants need simple core information such as how many customers they have, how often they visit, and what the average dollar expenditure is, as well as high and low sales ticket data. To no one’s surprise, most merchants have an amazing lack of first hand knowledge of these key indices of their businesses, or have very incomplete data. Here again, we will make another assumption; our goal is to increase or improve the existing shopping profile at the merchant location.
Whether the concept of implementing a loyalty program is your idea, or the merchant’s, there tend to be diametrically opposed views within a merchant’s upper level management team. For example, people involved in finance at an organization tend to relate to or embrace cost cutting measures rather than implementing a loyalty program which can be seen, rather myopically, as expenditure. So it would appear then, that marketing departments and finance departments may be on opposite ends of the spectrum with their views. The ISO also has to contend with the front line managers who disseminate the program information to the unit level sales clerks, cashiers and others that will handle
point-of-sale processing and possibly new transaction procedures. Even the bookkeepers get involved as these new loyalty transactions may have to be “logged” on a daily sales report differently than the traditional sales or return transactions. As you can see with just these few personnel examples, it’s easy to imagine the impact of a loyalty program on many different human resource sectors of a merchant operation.
So whether your merchant has brought up the proposition of a loyalty or rewards program to you or, you have suggested developing a program, you’ll need to bring the team together on the justification of implementing a loyalty program. The good news is that there are many hard facts that can bring all related parties together on going forward with a program.
- Loyal customers visit 4 times more often than transient customers
- Loyal customers spend over 40% more per transaction than their counterparts
- Loyal customers spend over 3.5 times as much per year at a location
- Loyal customers usually account for over 60% of overall sales
If you couple these kinds of statistics with the widely understood notion that it is more cost-effective to sell to an existing customer than recruit a new one (a recent business school article pointed out that the differential here is almost 5 times on a cost basis), you can begin to rally the troops. On the heels of these kinds of discussions, we have often utilized a simple theoretical exercise to drive home the point even further.
If a merchant location retains 75% of existing customers, or has 25% attrition each year, in essence, over the course of 4 years, it has turned over its entire customer base. Hopefully, it has replaced these customers with new customers during this time. A mere 10% change from 25% attrition to 15% attrition would extend the life expectancy of the overall customer base from only 4 years to almost 7 years. The direct correlation between the increased retention rate of the existing consumer base, the hopeful addition of customer base growth over the same period of time, and the overall impact on merchant profitability can not be overstated.
The Costs: We don’t discount, we reward.
Now the team is all leaning in on the table and they are hanging on your every word because you laying out your case in a most logical, agreeable manner. All the decision makers are filling in the blanks for each other: average ticket, volume of customers a day, high purchases etc. Now is the time to lay down probably the biggest ground rule:
The Customer has to demonstrate their loyalty before they get rewarded.
No rewards should ever be given for purchases that would have been made anyway. This is probably the biggest single pitfall to a loyalty program that exists in our processing world. If this notion peeks over the table, it must be slapped down and it must remain underfoot during the whole discussion of the program, yet paradoxically, it must be kept in the back of the mind during the development of the “rules” design phase of the rollout. Again to the point previously stated, the loyal customer spends over 40% more than their less loyal counterparts, (in gift card terms this is known as “lift”, so to the same terminology is appropriate for loyalty) hence, this increase on the average ticket will justify a reward as the overall increased margins are covering costs and dropping to the bottom line.
The loyalty program’s rules can be exceptionally simple and straightforward. A combination of store visits and dollar volume thresholds can be tiered up for future discounts, or rewards towards the same goods and services that would normally be purchased at full price. For the sake of this article, we will assume that all parties involved have laid out some affordable rewards scenario based on these parameters.
Since we are asking the merchant to literally go into their pocket for these reward discounts, we always have to be cognizant of the fact that there are going to be other costs as well which have hard dollars attached to them; for example, the design of literature that advertises and markets the program. In addition, there may be new hardware involved, actual rewards cards and the administrative paperwork.
Again, for the sake of this article, we’ll assume that you are an ISO that will be utilizing one of the many loyalty applications that can peacefully co-exist with credit/debit on an existing merchant’s point-of-sale device, or that the upgrade to a new terminal will have an overwhelming assortment of new features that throttles new hardware concerns. But you have another tool that you can use to help move the sale along.
Co-op money is available for your merchant
Billions of dollars in co-op advertising dollars is sitting in the operating accounts of the companies that your merchants buy from. Many merchants already utilize these co-op funds in the form of freestanding inserts in radio spots, yellow page ads, flyers, or newspaper circulars. Many times these funds are easily directed towards a loyalty program as a more permanent imprint on the promotional pieces or the loyalty cards or the key fobs that consumer’s use and these co-op pieces provide for more valuable long term exposure for the companies that provided the funds for their implementation. Estimates of as much as $75 billion dollars a year is allocated by manufacturers towards advertising allowances, marketing development funds and promotional allowances.
A great discussion to engage your merchants in is to make a list of the top ten selling items in their store, who the manufacturer or distributor is, and who is their sales representative. When approached from this perspective, you’ll be amazed how your merchant pushes off from the cost side of the implementation component.
The fact is, the budgets for these manufacturers and their distributors have allocated funds that are to be spent for co-op or promotional items which always disappear on December 31st, and sometimes at the end of each quarter.
We recently attended a dinner at a restaurant that had a major New York City liquor distributor’s rep “working” the long bar, literally buying rounds of drinks of a major national brand for patrons. We bore witness to at least five hundred dollars of cocktails being purchased and thought to ourselves how better these co-op dollars could have been
spent if they were tied to a more long term loyalty campaign that benefited both the restaurant and the manufacturer. It also should be noted that many products lend themselves well to the kick off of a new loyalty or rewards program- the initial sign up of a consumer, the proverbial free gift with purchase scenario.
While we don’t want to discount the enormous transaction volume that is generated by the sale of gift cards, and their subsequent redemptions, the hard fact remains that over 60% of the yearly transactional gift volume is skewed to the last quarter of the year. A good loyalty program generates a far more balanced transactional volume all year long, with a slight spike during peak sales volume seasons, such as the last quarter of the year. So even though loyalty transactions are “sold” to merchants at a deep discount to gift (usually half the price), the per card loyalty transactional volumes are far higher than the typical gift card, which according to our internal statistics is 2.3.
So as we look towards the first quarter of the new year, and the height of the gift card giving season is behind us, let’s think about generating higher transactional volumes and revenues by helping our merchants help themselves with loyalty; for the benefit of all parties concerned.