Do Stores Over­pay for Loy­alty?

Loy­alty pro­grams are a vi­tal part of keep­ing shop­pers com­ing back to a par­tic­u­lar brand. But not all con­sumers need that ex­tra in­cen­tive.


Charg­ing what peo­ple are will­ing to pay is an ex­act science, claims First In­sight’s Jim Shea, who con­tends the loy­alty pro­grams and price perks that mer­chants of­fer aren’t al­ways nec­es­sary.

“Not all con­sumers are the same. One may be will­ing to pay full price, but the other may want 30% off,” said Shea, the chief com­mer­cial of­fi­cer of First In­sight, a Pitts­burgh-based cus­tomer data and an­a­lyt­ics com­pany, which re­cently added a new client, vine­yard vines, a Stam­ford, Conn.-based cloth­ing re­tailer.

First In­sight uses on­line so­cial en­gage­ment tools to gather prod­uct pric­ing and sen­ti­ment data, then feeds that in­for­ma­tion into pre­dic­tive mod­els to en­able mer­chants to make de­ci­sions such as de­sign, buy­ing and pric­ing.

One of the con­cepts it con­sid­ers is price elas­tic­ity, or the price point at which con­sumers will no longer buy a prod­uct. Pric­ing is ob­vi­ously a big part of mar­ket­ing, and it also feeds into mer­chant-funded re­ward pro­grams, which are of­ten con­sid­ered com­ple­men­tary to mo­bile wal­lets and other new dig­i­tal pay­ment op­tions.

What­ever the form, loy­alty and re­wards have the ef­fect of low­er­ing the price of prod­ucts. It may not al­ways be nec­es­sary to lower prices to the same ex­tent — or at all — to get con­sumers to buy, ac­cord­ing to Shea.

“The re­tailer doesn’t know which one is con­sumer A, who wants the dis­count, or con­sumer B, who doesn’t. So they of­fer the dis­count across the board,” Shea said. “They’re sac­ri­fic­ing for a con­sumer who didn’t re­quire the loy­alty.”

By an­a­lyz­ing how con­sumers talk on so­cial me­dia or re­spond to email cam­paigns and other mar­ket­ing, re­tail­ers can de­ter­mine which dis­counts would be most ef­fec­tive for which cus­tomers, Shea said.

This anal­y­sis can not only in­form pric­ing and dis­counts, but also serve to im­prove sup­ply chains and bring more pre­ci­sion to brick-and-mor­tar mer­chants that are chal­lenged by Ama­zon’s grow­ing dom­i­nance.

“You can col­lect feed­back that can de­ter­mine what price the mar­ket is will­ing to pay,” Shea said. “Re­tail is at a tipping point, you read sto­ries ev­ery week about re­tail­ers go­ing bank­rupt and clos­ing stores while Ama­zon grows. Brands are re­ally strug­gling for rel­e­vancy.”

There is a risk in the loy­alty-re­duc­tion strat­egy, and First In­sight is not at­tempt­ing to get rid of pro­grams, but more to right size them.

“The in­cen­tive busi­ness has got­ten re­ally big,” said Michael Moeser, direc­tor of pay­ments at Javelin Strat­egy & Re­search. “You don’t want to in­cent some­one that’s go­ing to go to the store any­way.”

But there is a po­ten­tial pit­fall to a strat­egy that looks for op­por­tu­ni­ties to re­move dis­counts or loy­alty pro­grams, ac­cord­ing to Moeser, who said in to­day’s mar­ket there’s al­most an ex­pec­ta­tion of some form of dis­count, coupon or mer­chant loy­alty pro­gram.

“There’s a leap of faith that a store owner has to take...cus­tomers tend to be fickle,” Moeser said.

Vine­yard vines did not make an ex­ec­u­tive avail­able for an in­ter­view. In a re­lease, the com­pany did ex­press a de­sire for im­prov­ing “full-price” sales.

“We val­i­dated the ROI of the First In­sight so­lu­tion through mea­sur­ing a di­rect in­crease in on­line con­ver­sions and full-price sales. Ul­ti­mately First In­sight is help­ing us de­liver on two of our cor­po­rate goals; build­ing great re­la­tion­ships with our cus­tomers and driv­ing prof­itable sales,” said Mike Gaumer, pres­i­dent of vine­yard vines, in the re­lease.

David’s Bri­dal, one of First In­sight’s longer-term clients, uses First In­sight to re­duce mer­chant funded re­wards.

The re­tailer re­ports it has ben­e­fited from the tech­nol­ogy’s abil­ity to im­prove speed to mar­ket and test new cloth­ing styles.

“I am a huge pro­po­nent of mixed­meth­ods anal­y­sis, us­ing tech­niques that pro­vide both quan­ti­ta­tive and qual­i­ta­tive in­for­ma­tion,” said Mark Chrys­tal, se­nior vice pres­i­dent and chief sup­ply of­fi­cer of David’s Bri­dal, in an in­ter­view.

These meth­ods, in­clud­ing First In­sight, help the re­tailer un­der­stand not only what hap­pened, but why it hap­pened, Chrys­tal said. “Putting this into con­text, the quan­ti­ta­tive data col­lected through First In­sight al­lows us to un­der­stand how cus­tomers ranked our prod­ucts, and the prices they would be will­ing to pay. Then, the qual­i­ta­tive cus­tomer feed­back on each style al­lows us to un­der­stand why they were ranked the way they were.”

Chrys­tal said David’s Bri­dal has ini­ti­ated a project to study price elas­tic­ity. “Our Re­wards pro­gram is squarely part of that study. How­ever, we don’t ex­pect to have im­ple­mentable re­sults un­til the mid­dle of next year,” he said.

“As part of this broader study, we have been de­vel­op­ing price elas­tic­ity mod­els for all of our coupons, pro­mo­tions and mark­down price changes since late last year.”

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