Sandra Gudat, President & CEO, Customer Communications Group
Retailers often have trouble balancing their overall promotions plan with offers and discounts for their loyalty program. In fact, it may be enough of an issue that they keep loyalty as an independent P&L entity, or even steer clear of loyalty altogether to avoid the problem. After all, every retail business is about profit, and adding another layer of promotional discounts into the mix could be seen as a threat to the bottom line.
But loyalty promotions can be integrated with regular promotions in such a way that they can actually help retailers manage their margins. How? The key lies in getting corporate and merchant stakeholders to agree to adjust the total promotion markdown (PMD) budget to make room for loyalty.
Smooth Sailing … at First
During the initial launch phase, executives typically aren’t worried about the loyalty program’s impact on margin, as the incremental promotions are balanced by the incremental lift in sales they produce. To encourage program enrollment without reducing traditional markdowns and potentially impacting sales, the c-suite is willing to allow loyalty to function independently. As the program matures, however, pressure to merge the promotional efforts and manage margin becomes more intense.
Testing the Waters
The first step in creating a tighter, coordinated PMD budget is to aggressively test targeted program-currency loyalty offers against traditional markdowns — or even combine them based on the overall champions. Rather than focusing on response rates, look at incremental margin. Are reward redeemers more likely to respond to a loyalty double points offer on top of the regular PMD of $25 off? Is the best margin rate achieved by targeting recent redeemers with double points only, while the top five deciles receive a combination offer?
The key to successful testing is finding a merchant who is willing to work with you to determine that sweet spot. Typically, merchants will react in one of three ways:
1. Early adopters will aggressively begin planning bonus offers leveraging loyalty currency. They understand that bonus points can provide a competitive edge; particularly in commodity categories or for big-brand products.
2. Test and learn advocates will not be totally sold, but will be willing to try offers — nothing too aggressive in case response over-performs projections.
3. Rejecters will decide to take a wait-and-see approach: They will schedule one test offer, wait for reporting, get feedback from other merchants that are trying it and learn from their experience.
Fine-tuning the Sails
You’ll also want to look into the “earn versus burn rate” to understand where members are earning and redeeming the most points. What merchants are taking a margin hit on redeeming rewards that were earned in a different category? For example, one retailer reported that customers earned a large volume of points — 20% of sales — on the purchase of a washer and dryer combo. But the burn rate on home appliances was only 1%. Instead, customers redeemed the majority of their points in other categories such as apparel and footwear.
Work with the merchants on creative ways to drive customer redemption by using analytics, such as a market-basket analysis, to help equalize the hit on margin. This makes your merchant partners more likely to become loyalty advocates. Or find vendor or manufacturer funding to help offset costs and manage margin. The quality and depth of loyalty purchase data often leads to new co-op opportunities.
All Hands on Deck
Once you have some results under your belt, take your findings to a senior advocate to help you negotiate with merchants. Often times this is the chief financial officer (CFO), who acts as guardian of the PMD budget. Your advocate should use your results to revise the PMD budget and also communicate the new goals to the operating unit and merchandising team.
Lifting the Anchor
The takeaway is that loyalty promotions don’t have to replace traditional markdowns, nor do the two programs need to run parallel to each other, which can make managing margin a nightmare. Instead, the two types of promotions are integrated in an evolving process that takes shape over time. Gradually, you’ll be shifting your overall promotion budget to focus more on customer-driven incentives, which can result in higher sales — and a healthier margin.
Sandra Gudat is president and CEO of Customer Communications Group, the full-service loyalty and marketing agency with a consultancy approach and a dedication to providing measurable, sustainable results. She can be reached at firstname.lastname@example.org.