Wednesday, July 6, 2011

Look at the Whole Picture in Profitability

The consumer behavior study was carefully done. But the recommendations to the retailer don’t make sense. Can you figure out why I say that? Here are the details:
     Ryerson University researchers developed a mathematical model to assess the ongoing effectiveness of customer loyalty programs—-sometimes called frequent shopper programs—-which reward customers for their continuing business. Retailers assume that, when well-designed, loyalty programs motivate customers to keep coming back. The Ryerson researchers believed their mathematical model would refine this assumption and suggest how to maximize the monetary return from loyalty programs.
     To generate data for the mathematical model, it was postulated that loyalty program members who purchased an item were given a coupon for a 15% discount on a subsequent purchase to be made within two months. I see this as a good example, since prior research has shown that, overall, the loyalty program reward most popular with customers is a percentage discount on future purchases of items selected by the customer and a 15% discount is usually sufficient to motivate a shopper.
     The resulting mathematical model reflected how loyalty programs do indeed influence consumers to become repeat customers. Then further analysis showed how once the habit is developed, there is no evidence of further gain from continuing the loyalty program. In fact, the model indicated that, in order to compensate for the revenue lost from the 15% discount, it would be necessary to raise the price on that item or on other merchandise.
     Therefore, concluded the Ryerson researchers, you should discontinue the loyalty program once you’ve established the initial habit.
     What’s wrong with this conclusion? Well, here are two flaws:
  • If the program is effective, the retailer should continue using it to build loyalty in more shoppers, including those coming into the store after the program began.
  • A frequent shopper program has objectives other than building a general tendency to return. For instance, it also allows you to track each customer’s purchase history in ways you can use to target sales promotions.
     The mathematical model was overly limited in scope. It didn’t match real retailing life. Maybe I should have spotted that immediately when I saw that the article about the research was published not in a retailing or marketing journal, but in Computers & Industrial Engineering.
     When someone suggests a profitability tactic to you, take care that they’re not basing the suggestion on an unrealistically limited perspective.

Click below for more:
Give Loyalty Program Members Prestige
Offer Frequent Shopper Benefits Beyond Discounts
Thank Shoppers Freely

1 comment:

  1. Benefits of profitability in businesses: Client will be fully aware about the solution provided. Increase in Referral Sale, Satisfied Employee, Lower Attrition, Better Productivity as well as Increase in Overall Revenue and Profitability.