Creating the Store Best Customers Want

Mar 29, 2004

By John Hennessy

Using shopper purchase history to better serve your best shoppers will improve your performance.

There’s a lot in the article but that, in a nutshell, is what I take away from Harvard Business School professor Rajiv Lal’s “Loyalty: Don’t Give Away the Store,” article in
the March 22nd issue of Working Knowledge. He terms it loyalty through non-price offers. To me, it means listening to what the shopper purchase data is telling you and
responding with relevant marketing and merchandising.

In the article, professor Lal points out that loyalty rewards often change the behavior of your worst shoppers but have little impact on your best shoppers. He correctly claims
that many loyalty programs make offers on products your best shoppers were going to purchase anyway.

As he explains it, “Retailers thereby begin to lose money on the program. In a grocery store, this is particularly bad. The marginal cost is almost 75 percent, so every time
you give a dollar to someone in the form of a turkey, or a ham, it’s costing you 75 cents. In contrast, if you look at offers from the airlines, the cost of miles rewards programs
are virtually zero because airlines can predict the load factor on a flight. If it is too high, they can always give you a different flight.

“The behavior you do end up affecting is that of your worst customers. In fact, if you are looking at the profitability of the program, the profitability is coming from
the behavior change that you see in the worst customers rather than the best customers.”

To avoid supporting undesirable behavior, Professor Lal further suggests adding a best shopper review when looking at your assortment. Use what you know to stop the delisting
of slow moving items that are primarily purchased by your best shoppers.

The goal is to make your store look like the store your best shoppers want. If you create personal offers based on best shopper profiles, it will be apparent that you’re paying
attention and understand their preferences. You also need less margin incentive to get someone to purchase something you know they enjoy. As professor Lal points out, that’s good
for your best shoppers and good for your business. You may lose a few of the less valuable customers you formerly helped subsidize, but you’ll get over it.

Using your loyalty program defensively to drop prices and give away dollar rewards is easy but it can be costly. Loyalty programs executed based on shopper purchase data are
less costly AND more effective.

Moderator’s Comment: What do you think of professor Lal’s contention that retailers need to concentrate on rewards
for their best customers? By dropping widespread loyalty discounts and rewards, will they be endangering their relationship with their other clientele?

Anderson – Moderator

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