Part 2 of 5: Let’s talk about the cost
“I’d love to generate targeted, personalized offers for each individual customer,” I hear you saying, “but we can’t afford it!” I’m here to say, “Yes, you can.”
In my last post, I argued that we simply can’t afford not to offer e-commerce, and that there’s really no way to compete without diving into the world of personalization. The cost of alienated customers and the associated lost revenue should itself be incentive enough to find the budget. But there’s more.
We can find budget by redeploying dollars currently going into ineffective trade promotions. A lot of traditional trade promotions simply don’t deliver a return on investment. Sure, they may help us sell more items on a volume basis, and if that’s what the sales team is measured on then they’re feeling pretty successful. But once we introduce metrics like incremental gross profits, ROI on trade funds, incremental category sales/profits and percentage of sales from valuable customers versus cherry-pickers, we reveal a very different picture.
Using ROI-based metrics, most retailers find that more than 30% of promotions should simply not be run as they add no incremental value and have negative ROI. When we add in metrics such as the appeal of the promotions to the retailer’s most loyal shoppers, this percentage increases dramatically.
And here’s the opportunity: re-deploy those under-performing funds to personalized promotions, creating a viable funding source to enable a greater push for personalization.
The challenge in personalization isn’t ROI, it’s how to drive incremental sales. How do we prove personalization will drive the value you’re looking for?
We can send out lots of offers via digital channels that appear to have zero marginal cost, but it can be easy to lose sight of something important: how to ensure all communications are relevant and deliver incremental sales. By identifying under-performing trade promotions and re-deploying those funds to building a customer engagement intelligence platform that can truly deliver relevance and incremental sales at scale, we can deliver the proof points to showcase the full potential of personalized promotions. The perfect mechanisms (e-commerce, email offers and smartphone apps) are now easily accessible for retailers to hone their skills at personalizing prices and promotions. The industry is full of examples of retailers successfully deploying approaches today, such as the Kroger loyalty program or Safeway’s Just4U program.
Another thing to remember is that we don’t need to give deep personalized offers to every single customer. The mix of offer types should be specific to each individual customer based upon their level of current engagement. For example, a customer who gives a retailer 90% of their spend should naturally receive more thank-you offers, whereas someone who only gives 40% of their spend should receive more cross-sell, upsell and spend-stretch offers.
Incentive levels can also be tailored by individual customer. One customer may require a discount of 35% while another may only require a discount of 15%; if the first customer happens to be a valuable customer, the deep discount is probably justified. But if the customer is a “cherry-picker,” (one who cherry-picks good deals with no regard for brand), we likely shouldn’t offer the discount at all, due to their lack of loyalty.
This may feel like a daunting task given your millions of customers, which is why it’s important to employ offer optimization technology to ensure each customer receives the right content, offers, products and prices, all delivered through their channel of preference.
In my next post, I’ll look at the technology involved with getting this right.