Retailers have been slow to adopt database marketing. Plagued with paper thin margins, and wedded to mass marketing, full page ads, periodic sales, and discount coupons, grocery and other retail chains couldn’t quite see how database marketing could be profitably used in their businesses. Until recently.
Beginning just a few years ago, retailers began to issue proprietary cards to frequent shoppers. When these cards are presented at the checkout counter, point of sale equipment permits the retailer to know what every household is buying and when. Retailers use this data to build databases to study their customer’s shopping habits. They discovered, to their amazement, that the top 20% of their customers over the course of a year spend about 50 times the amount of their bottom 20%! Combine this knowledge with modern POS technology, and it becomes possible for any retailer to “make one offer to a frequent, high spending customer, a completely different offer to a low spending customer, and yet a third offer to a new customer with moderate spending habits.”
“How does all of this relate to telemarketing?”, you might ask. To me, the message is this: We are moving into an era when we will know a lot more about our customers than we have in the past. This information can be used by teleprofessionals to provide helpful, personalized services to customers that will keep them loyal for a lifetime. As you read the rest of this article, think how the knowledge that retailers are accumulating can be used in your business. It may well open your eyes to some interesting possibilities. These findings come from Customer Specific Marketing, a fascinating new book by Brian Woolf, President of the Retail Strategy Center in Greenville, SC.
The Evil of Average Pricing
Trapped in mass marketing, retailers have always had to charge the same price to everyone. When they announce a sale, everyone gets the sale price – loyal customers, and occasional transaction buyers. This is the way it has always been. But this is changing. Retail stores are now issuing their customers proprietary shopping cards and rewarding them for using them. The cards then become the basis of the store’s customer database. With the database set up, the stores adopt two basic principles:
- Customers are not equal.
- Behavior follows rewards.
To put these principles to work, retailers have to see that different customers receive different offers. Occasional, unknown customers pay full price. Loyal, regular customers pay a lower price – on certain merchandise, or on all merchandise. Furthermore, the loyalists are made aware that they are the favored ones. They are treated as gold card customers – as long as their behavior warrants it. What retailers have discovered, is that they can modify customer behavior by appropriate application of rewards. Brian cites some interesting examples:
- A retailer offered a free turkey to those customers spending an average of at least $50 a week in the two months prior to Thanksgiving. The number of households spending over $50 per week sky-rocketed 20% over the preceding year!
- A retailer told customers that 1% of their spending would be donated to the church of their choice. Result: participating cardholders increased their annual spending by more than 5%.
- Senior citizens were given a 10% reduction at a chain if they purchased on Mondays. As a result, 67% of the senior’s shopping took place on Monday. That was five times the spending level of all other customers on Monday.
New Marketing Focus
“We are no longer trying to take customers away from our major competitor. Our focus is to make money on the customers who are already shopping with us!”, according to one retail chain executive. Customer specific marketers reduce their advertising costs because they know the low profitability and low loyalty of the promiscuous shoppers who are attracted to their stores by heavy advertising. The new customer specific marketing has three approaches:
- Withdraw low margin offers to unprofitable customers
- Offer the best customers aggressive pricing and special benefits
- Switch from item pricing to total pricing.
The effect? You…
- Increase prices for customers with low profitability
- Decrease prices for high margin customers
The result can be significant profit increases. As an example, one food retailer took two steps:
- Took a quarter of their newspaper ad items and aggressively priced them but only for cardholders
- Converted 1,000 of their 3,000 temporary price reductions to cardholder specials.
The result was a jump in some store sales by 6%. Gross profits were 1% higher.
How the System Works
When the customer presents her card at the checkout counter, she gets cardholder priced items at a lower price than other shoppers. When she buys multiple units, she also gets additional discounts not available to non-cardholders. Many retailers adopt straddle pricing. This is a system in which regular shelf prices are higher than the competition, but cardholder prices for the same items are below those of the competition. In this way, the non-cardholders subsidize the cardholders. As computer power is further enhanced, total customer profitability can make it possible to provide even better treatment for large annual purchase customers than that extended to regular cardholders. In some cases, rather than have deep price reductions on advertised merchandise, upscale retailers can offer heavy bonus points instead. This keeps from destroying the retailer’s price image.
Sweepstakes can be fun
Big Y, a supermarket in Western Massachusetts spiced up their Express Savings Club with a grand prize sweepstakes of $1 million, plus numerous weekly prizes of $1,000 in cash and $50 gift certificates and state lottery tickets. A card holder did not know whether she had won one of the fifteen $1,000 weekly cash prizes until she shops the following week and her card was swiped. If the card carried a winning number, a red light started flashing in the ceiling and alarm bells sounded in the store. Everyone in the store stopped to see who the lucky winner was!
Neiman-Marcus offers their best customers lunch with the store manager, along with two of the customer’s friends, followed by a private fashion show. Caesar’s Palace penthouse is available only to those who have at least a $1 million line of credit for gambling at the hotel. Paw Paw Shopping Center in Michigan sends customers prior to their birthday, a gift certificate for a free decorated birthday cake. As a result, total cake sales increased tenfold in one year!
At Lees Supermarket in Westport, Massachusetts, when the customers cards are swiped, the computer flashes information to the store clerk that he can use in conversation with the customer: how long has she been a customer? Is she one of the best store customers? How big a cash check is she authorized to cash without the manager’s approval? Mark Dodge of Easy Access in Wisconsin has set up a program to activate a store manager’s beeper whenever any particularly good customer or group of customers use their card in the store. Albert Lees of Lees Supermarkets thought he knew the identity of his best customers until he set up his database. He was amazed to find that he didn’t even recognize his top customer who was spending over $10,000 per year in his store.
Customer Category Management
The database permits retailers to group customers not by where they live, but by how much they spend per week. Woolf does not recommend demographics as a primary segmentation basis for retailers because there is little correlation to profitability. Instead, by classifying customers by spending, it is possible to determine what Woolf calls the capitalized value of customers – (CVC) – a variation of the Lifetime Value used by direct marketers. The CVC is the net present value of all customers, broken down by customer and product category, with no time limit.
How else can this customer data be used? One retailer had a 40 foot aisle devoted to candy. Candy was profitable, but was that the best use of his space? Looking at his customer database, he found that his top customers (top 30% who provide 75% of the sales) did not buy much candy. What did they buy? Baby products! So he cut his candy counter to 20 feet, and added twenty feet to baby products. The reasoning? “We are concentrating on our top customers not our top merchandise. It is more profitable that way.”
Reasons for Failure
Not all attempts at customer specific marketing achieve success. There are a number of reasons for failure. They include:
Timidity – Top management is not committed. If you have only 30% of your transactions recorded on your cards, there is no obvious profit gain from the system.
Puny Rewards — The electronic discounts are not meaningful. If the savings are minuscule, the customers will leave their cards at home.
Over reliance on vendors. — If the retailer thinks that all mark-downs can be transferred to the vendors, the program will be based on those slow moving items the vendors want to push, instead of those items the customers want to buy. There is a big difference.
Information Starvation. — Companies that use their system as a shelf electronic discount without capturing customer purchases lose the real value of customer specific marketing, which lies in the information it can provide.
Non-differentiated. — Where there is insufficient differentiation between the best and the worst customers, the system will not reward profitable behavior sufficiently to improve the bottom line.
Non-Core. — If customer specific marketing does not become the core marketing strategy, the program will fail. Existing marketing practices are continued unchanged. The new initiative becomes simply another promotional program.
Internal political problems. — The bigger the chain, the greater the resistance to change as the princes of the organization defend their organizational castles. Unless top management is behind it, internal squabbles will kill it before it’s potential can be realized.
But does it pay off?
“Fine. Good theory”, I can hear you saying. But what is the payoff from customer specific marketing when it works? Listen to a practitioner: Daniel Lescoe, VP of Sales and Marketing of Big Y Foods in Springfield, MA. Big Y adopted the system in 1991. “I believe that a comparison of our 1990 Vs 1993 sales and market share in Western Massachusetts tells the whole story. In 1990 Big Y sales in the four counties were $272,400,000 which represented 25.37% of the market. In 1993 we moved into the number one position with sales of almost $364,662,474 and a market share of 28.75%…Every marketing program we develop has one mission: to promote our Express Savings Club. It is a religion for us, not just another promotion.”
Roger Morgan, Managing Director of Morgan’s Tuckerbag Supermarkets in Melbourne Australia reported in 1995 on his first full year of customer specific marketing: “In an industry that has seen average customer transaction values dropping, and customer visits increasing, our stores with this program in place radically went against this trend. We experienced increased (and still increasing!) customer transaction values with increased customer traffic as well! Some identical weeks, this year versus last year, have experienced over 40% sales increases, with year to date increases in the 20%+ range above the comparable period last year. The best news however, is a better bottom line — a very much better bottom line!”
Brian Woolf’s book is published by Teal Books.
Arthur Middleton Hughes, vice president of The Database Marketing Institute, has presented 28 seminars on database and email marketing. Arthur has also authored several books includingStrategic Database Marketing 4th Edition (McGraw-Hill 2012). He and Andrew Kordek, chief strategist and co-founder of Trendline Interactive, are hosting a two-day Email Strategy Study Group in Fort Lauderdale March 26-27, 2013, featuring group competition for email marketers responsible for subscriber acquisition, lifetime value, ratings and reviews, boosting their email budget, and doubling their ROI. To learn how to attend the Study Group,click here
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