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A Guide to Earning and GrowingCustomer Loyalty

David P. Williams

President, LoyalTec, LLC1725 Mendon Road Suite 106Cumberland, RI 02864LoyalTec Partner:

www.RetailAdvantEDGE.com(866) 598-3343

Are You Giving Away Margin for No Good Reason?

How Retailers Blow It with Conventional Loyalty Cards, Coupons and Promotions

The Problem

More and more retail shops and restaurants are using loyalty cards, coupons, andpromotions to encourage patronage and track customer spending. In general, it’s a verygood idea. The merchant can obtain valuable information about customer behavior,highlight specific products, motivate desirable customer behavior, and build relationshipsimmune to competition.Unfortunately, very few such promotions achieve even a fraction of their intended results,and instead lead to business-damaging negative consequences. Yet, because most of theseproblems are errors of

omission

, business owners do not recognize them when they occur andtherefore cannot act to repair the damage.

Why Should You Listen to Me?

I’m David Williams, the founder and President of LoyalTec, LLC. We help retailers increasetheir profits by mining their own data. Our methodology allows retailers to analyze andleverage the information they collect (or should be collecting) about their customers andtheir customers’ behavior. Our clients increase profits by dramatically growing the value of their customers, keeping good customers longer, and getting them to refer other customers.Previously, as founder and Chief Technology Officer of Retail Solutions, Inc., I pioneeredreal-time visibility and analysis of retail point-of-sale (POS) data throughout the entiresupply-chain. My clients and strategic partners have included Revlon, Unilever, Pfizer,Bayer, Bristol-Myers, Wyeth Healthcare, American Greetings, CVS/Pharmacy, Eckerd,Walgreens, Duane Reade, L.L. Bean, and Toys ‘R Us.Before starting Retail Solutions, I designed continuous replenishment programs thatautomatically placed replenishment reorders on behalf of individual retail stores based onactual consumer take-away – an industry first for national drug retailers.My twin passions are analytics and loyalty marketing. In my career, I've seen companies thatcollect amazing data about their customers and fail to capitalize on it. I've also seencompanies committed to creating raving fans of their customers who couldn't pull it off because they didn't have the means to treat each customer as an individual. My mission is toplace the cutting edge of information technology in the service of enlightened permission-based, one-to-one marketing.

What You’ll Get From This Paper

This White Paper deals with one of the major unintended consequences of promotions:Subsidization of purchases that were going to happen anyway.First, I’ll define subsidization and give three examples. Next, I’ll describe the four mainproblems with subsidization. Finally, I’ll explain a few simple ways to prevent subsidizationand ensure that your promotion achieves completely positive and profitable results.

Are You Giving Away Margin for No Good Reason?

How Retailers Blow It with Conventional Loyalty Cards, Coupons and Promotions

Am I Subsidizing My Customers? Subsidization in Action

You are subsidizing customers when you pay them to take actions they would have takenanyway, or when you attract customers on whom you lose money over their lifetime as yourcustomer.

Example 1: “Buy One Nail Clipper, Get One Free”

This is a ridiculous example – I only bring it up because it was actually used and because itmakes the point clearly. The company printed a coupon that offered a free nail clipper witheach one purchased. The problem was, nobody needed to buy two nail clippers. They’regenerally not considered great gifts (“Oh, a nail clipper, just what I always wanted!”), andeven the most talented individual can just use one of them at a time. So what was the resultof the promotion?Shoppers hanging out in the nail clipper aisle started strategizing with one another: “I’ll buytwo with the coupon and you can pay me half.” The company sold nail clippers for half price and didn’t even collect information on the second, “hidden” purchaser.

Example 2: “$1.00 off Pampers”

I have young children, one of whom is still in diapers. So, most Sunday newspapers containcoupons for Pampers and Huggies.My wife is an avid Pampers buyer; it’s the only brand she’ll use. She takes that coupon, andshe uses it to buy Pampers. She would’ve bought Pampers anyway, but since the coupon ishere, we’re going to pay less for them.Now, I have neighbors down the street, and they only use Huggies. So, an interesting thinghappens, because that neighbor cuts out the Pampers coupon, and gives it to my wife. Mywife cuts out theHuggies coupon,and gives it to her.So what’s happening? The Pampers buyers, us, are being subsidized for buying what wewould have bought anyway. My neighbor is also getting subsidized, because she’s getting herHuggies coupon.More interestingly, down the street, I have another neighbor. Both herchildren are well out of diapers. She takes those coupons, she cuts out the Huggies andgives them to my neighbor, and takes the Pampers and gives it to my wife. Now, she’s gotthree coupons for Pampers and can buy all her diapers at a discounted price. The samediapers she was going to buy all along!

Example 3: “Buy 12 Cups of Coffee, Get Your 13

Cup Free”

Many establishments use punch cards to reward frequent purchases. There are a lot of things wrong with this strategy aside from subsidization, but that’s beside the point I’mmaking here.