In this issue’s Outlook article, we make the case for avoiding the pitfalls of a too-narrow program and instead offering a loyalty program with broad appeal, meaning it is rich in reward variety and full of offers that drive the behavior you want to increase. But how do you expand your program’s offering against the tide of a tough economy and perhaps even reduced vendor support? Self-funded rewards.

1. Structure the reward so it covers the cost of goods
2. The reward should create a change in behavior that delivers margin gains

These work especially well when targeting the rewards towards focused opportunities, like moving customers to higher margins, greater frequency, into clubs, and from the pumps into the store.

Converting Members to Higher Margin Items

Last month we talked about converting members to higher margin items. The example converted packaged carbonated beverage buyers to fountain drinks. We used a stealth club to identify the packaged beverage buyers that were not buying fountain drinks. That kind of targeting ensured we were creating new behavior and not over-rewarding existing behavior. We sent them a targeted offer to convert them. Then we locked them in using a fountain drink club. How do we make this self funding?

Let’s assume that the cost of goods (supplies, equipment, real estate, and labor) on the largest size fountain drink is $.25 cents. A self-funding coupon offer would be, “ Get a fountain drink, any size, only $.25 cents!” When the coupon is redeemed, the member is automatically enrolled in the Fountain Drink Club, where increased visitation and basket sizes will deliver long lasting increases in margin (see Spotlight: Clubs).

A $.25 cent fountain drink is a nice reward when compared to a $1.25 packaged beverage. Members who redeem the reward demonstrate that they are willing to change behavior and pay for a fountain drink. The cost of that behavior change is nothing if your cost of goods is truly covered-off in the offer. The club locks in that change in behavior by giving members something to lose if they chose a packaged beverage and something to gain if they repeat the desired behavior.

If you find the offer works, you might even test charging more for the fountain drink, say$.30 or $.35 cents, to successfully gain more margin. If the redemption rate on the $.35 coupon remains close to the original $.25 cents offer, you can go with the $.35 fountain drink coupon.

• persuading deli sandwich buyers to try and also become breakfast sandwich buyers
• getting packaged sweet snack buyers to switch to your fresh baked items
• training lunch buyers to come back for dinner-time fried chicken or pizza
• turning diaper buyers also into active milk club members

Increasing Frequency

If you create an offer that gets members who normally visit every 2 weeks to start coming weekly to your sites, you will have added new margin to your bottom line. Here’s one approach you might try; Offer this coupon, “Save a $1.00 on your next store purchase of $5.00 or more!” to members who have not visited in the last 14 days. Set the coupon to expire in seven days. Members who redeem the offer will have added a new transaction in between their normal, 2 week or longer visit schedule. Keep the offer in place all the time and you will automatically inspire every member who waits more than 14 days to come in more often.

This particular offer, “Save a $1.00 on your next store purchase of $5.00 or more!”, is self-funding if you assume you make an average margin of 30% on your in-store sales. Here’s the math: The coupon requires a spend of at least $5.00. On that $5.00 sale, your average margin earned is $1.50. Subtracting the coupon value, your net margin will be $.50. Thus you will have gained $.50 in this transaction, but more importantly, you will likely have helped create a new WEEKLY buying pattern for this member. It make take a few times for the coupon to create the change, but once the member starts coming more frequently, they will no longer qualify for the coupon, and the entire 30% of margin will be yours. Multiply that across multiple customers and multiple stores and your impact on margin is significant.

Moving Fuel-Only Customers into the Store

For this example let’s assume you have 1,000 members per site, 20% having never shopped in your store before, and your average loyalty member transaction yields a minimum of $4 in margin.

The goal: Convert fuel-only customers into store buyers as well. If you could convert just 10% of your fuel-only members, you could add an additional $400 in margin per site per month!

In this case, the only transaction information available is fuel purchases. This target group’s product interests are likely as broad as your whole customer base. The best bet is to offer self-funded rewards on products that have broad appeal. Also, a 25 cent coffee or fountain beverage might be a good test. Especially if you have clubs to lock them in. special offers on your trademark fresh food offering is also worth testing. When in doubt, create self funded offers around your top selling items. Since these fuel-only members never shop in your store, every new in-store transaction that is driven by self-funded rewards is incremental margin.

Adding Smart Rewards = Good Economic Sense

Targeted use of self-funded rewards gives retailers the power to have a broader, richer, more effective program without additional investment. Plus, the gains self-funded rewards deliver means more growth from your member base, even in these tough economic times.