When Green Hills Market of Syracuse, N.Y., first opened its doors, it understood the need to use consumer behavior to create better and more loyal customers.
After spending almost 14 years developing a loyalty program, the 73-year-old company today gets 90% of its sales from participating customers, says CEO Gary Hawkins. And half of those sales come from a new biometric-payment program that not only tracks loyalty but also provides targeted offers based on customer behavior.
As merchants seek better ways to increase customer loyalty, some payments players are well-positioned to help them collect that valuable information at the point of sale. And the demand from merchants to have these loyalty programs makes it critical for transaction processors and program operators to use their data and analyses to become more valuable to the retailer.
"The differentiation is the key," says T. Jack Williams, president of Las Vegas-based eCommLink Inc., a prepaid and debit payment-processing company. "The real effort is to get the merchant to use your company for a variety of services so it's painful, if not impossible, to leave."
With market competition growing and margins tightening, merchants ranging from high-end retail stores to supermarkets see the growing importance of garnering more loyal customers to maintain revenue growth. And that means more than just getting consumers to come into the store on a regular basis. It also involves taking regular shoppers to the next step, which is getting them to spend more and visit more frequently.
More retailers also want to target offers that motivate consumers to alter their shopping behavior. This involves predictive marketing, where merchants offer deals on products they anticipate the consumer will buy.
"Customers hate getting information that is not relevant," says Viv Goldstein, vice president of consumer value propositions at GE Money-Americas. GE Money operates more than 30 cobranded and affinity card programs for such merchants as Old Navy, Banana Republic and J.C. Penney Corp. Inc.
Virtually all the data needed for these souped-up loyalty programs are collected at the point of sale, where the transactions happen. As such, third-party transaction processors and other organizations such as GE Money that handle those payments are perhaps in the best position to help merchants use the data to drive more customer traffic.
'TRUSTED PARTNER'
"We are a trusted partner of the merchants, and we already have the front-end connection to the merchants," says Doug Dwyre, senior vice president of product and business development, prepaid and loyalty, at First Data Commercial Services. "So we can use the same point of connection to send us the loyalty information."
Merchant card issuers also are playing a role. "We're in the business of managing big, complex amounts of transaction data," says Brian Hughes, managing director of client development and marketing at HSBC Card and Retail Services. "It's not a big extension to manage loyalty. We work with retail partners to report that information to them." HSBC operates more than 60 private-label card programs, including for Gottschalks department stores, Casual Male and Liz Claibourne.
Turning regular customers into better customers using POS data requires well-managed loyalty programs. Cookie-cutter discount offers, such as 10% off for any customer, no longer can satisfy the merchants' need to bring in more business, industry insiders say.
"The worst thing for a retailer is to give away money," says Dwyre. "Retailers can't get targeted customer information [from generalized offers.] Retailers want to target customers better to make them better customers. They can do that when they understand their shopping behavior."
For a loyalty program to work best, merchants require such information about the consumer as how much they spend, what they buy and when they buy it, all of which can be gathered at the point of sale, experts say.
"Retailers really like something that says, 'Here are your best shoppers, and here's what we can do to woo them," says Marianne Berry, managing associate at Westbury, N.Y.-based Auriemma Consulting Group. "That's really the holy grail there."
The latest trend in loyalty is to offer highly specific target marketing. For example, First Data's Loyalty Solution system can use historic transaction data to create promotions designed to alter behavior, such as using discounts to get customers who never order dessert at a restaurant to buy dessert. Or the system can use discount offers on the receipt specific to customers who dine regularly on Thursdays to help encourage them to come in another day, Dwyre says.
First Data in June added item-level processing to the system. When a customer checks out, the First Data system gets the SKU (stock-keeping unit) information that is integrated into the point-of-sale system, as well as other transaction information, which is then analyzed to determine a targeted offer for that customer, says Dwyre. The system also can see how successful a promotion was by analyzing the data over a period of time.
Portland, Ore.-based Chockstone, which operates prepaid card programs and is a gateway for debit and credit transactions, runs a similar program for Subway restaurants and several coffee companies, including Baton Rouge, La.-based CC's Coffee House. The Chockstone Transaction Platform identifies customers by their loyalty card number at the point of sale and offers targeted deals via sales receipts based on the frequency of their visits, such as offering a free item after a certain number of visits.
"We manage all the data that are collected at the point of sale," says Jeffrey Lipp, CEO of Chockstone. Chockstone holds the data in multiple data centers, which it uses to analyze customer behaviors. The system allows the retailer to make offers immediately at the point of sale, he says.
For example, if a coffee shop wants to promote a new blended drink, the retailer can set up the system to offer double points for buying a new drink. "The system looks for specific SKUs to make the offer on the sales receipt," says Lipp. The system also tracks the extra points earned from the promotion.
FREQUENCY REWARDS
In addition to promoting deals for new products, loyalty programs can make offers based on when and how often a customer visits the store or restaurant. Lipp says retailers who use frequency-based programs see "tremendous results," with sales increases of 4% to 15%. "That's really meaningful because the program is driving incremental sales," he says.
In Subway's program, customers can use a prepaid card on which Chockstone tracks loyalty behavior. The stores' POS systems are integrated with the Chockstone host system, so any time a customer swipes a card it gets sent to Chockstone to deduct value and track the loyalty points. The system is set up to drive customers back to the store more often and even during certain times of the day, for example, to drive dinner sales or promote its breakfast products.
"If a customer comes in so many times per month, we can offer them a certain incentive, like a free cookie, to come in even more often and at specific times," says Carman Wenkoff, president of Value Pay Services LLC, a subsidiary of IPC Co., which manages the supply chain, covering the ordering of goods and services for all Subway restaurants. The loyalty program is running in more than 1,000 stores, and 22,500 locations participate in the prepaid card program.
While he could not give details, Wenkoff says Milford, Conn.-based Subway has seen "a measurable difference in both sales and profitability." He says the investment in the card programs at Subway has been "substantial," though he would not elaborate.
DATA TRACKING
Lipp also says there is an increasing interest in tracking which payment card customers use and in using that transaction data to track behavior patterns and to make offers based on that behavior.
Chockstone is a gateway for credit and debit transactions, so it sees which cards customers are using. Lipp says a merchant might not have an explicit loyalty program, but it can create one with the Chockstone system around credit card volume. "Retailers can build a customer profile and make an effective offer based on past card usage," says Lipp. "It makes it really easy because the customer does not have to sign up for another card or program."
Taking targeted loyalty offers one step further, some programs predict what consumers may need to buy to fit their lifestyles.
HSBC Retail Services is marketing a new product launched in March called OptiPay that allows a retailer to issue a store loyalty card that is linked to the Tempo debit network. Tempo processes PIN-debit transactions using the automated clearinghouse system.
As part of the program, HSBC has partnered with Concept Shopping Inc., a Lisle, Ill.-based company that specializes in loyalty programs. Concept Shopping is able to target specific individuals with deals that are relevant to their purchasing habits and can offer deals based on predicted purchase needs.
"We create deals by coming with rules, such as, when we see action "A", take action "B," John Hennessy, Concept Shopping's vice president of sales and marketing, says of the Automatic Marketing product. "When we see someone buying Gerber baby food, we know they are going to move to the next level of food. So we can make offers based on what they will likely need to purchase in a couple of weeks."
Customers who have the OptiPay card get these personalized deals by printing out a list of 12 offers using a store kiosk or by opening an e-mail message sent by the retailer. Concept Shopping eventually plans to enable retailers to notify customers of new deals via text messaging, says Hennessy.
HSBC expects to have OptiPay clients within the next three to six months, according to Daniel Eckert, head of venture acquisition and development for HSBC Card and Retailer Services. "The interest we're seeing with merchants is extraordinarily strong," he claims.
San Francisco-based Pay By Touch, whose system allows customers to use a finger image to link to a checking account for payment at the point of sale, offers merchants who use its system SmartShop, a targeted loyalty program that also bases offers on customer shopping habits. Pay By Touch would not disclose the cost of using the SmartShop system.
"The whole goal of SmartShop is to provide savings on offers that are relevant to each customer," says Green Hill Market's Hawkins, who also consults for Pay By Touch in addition to running the first rollout for SmartShop. "We pull items that are on sale around the store and put them into an offer pool. Then we run that list against customer shopping history. Each offer is scored, and each customer gets the 20 most relevant offers for them."
Green Hills Market has been using SmartShop for about a year. Food Town stores in New York and New Jersey and Shop'n Save in Pittsburgh also are using the system.
SmartShop participants can get the list of offers by visiting a store kiosk to get a printout, by opting to receive them by e-mail, or by going to a SmartShop Web site, says Hawkins. "All the customer needs to do is to pay for the purchase with their finger at checkout and they will receive the relevant offer."
SPENDING UP
Hawkins says the SmartShop program is helping to create better customers, as spending has gone up 8% among participating shoppers. "What we are seeing is that the customers that have enrolled in SmartShop are spending more and shopping more often than those same customers did a year ago," says Hawkins.
SmartShop also is easy for merchants to use, as they have the ability to access the system with a password and to configure whatever deal they want to promote, says John Costello, president, consumer and retail at Pay By Touch. "We can help them develop the most effective offers to meet their objectives," he says.
Chockstone also has a system that allows the merchant to manage the loyalty system via a Web site. Concept Shopping, however, provides on-site services to retailers to run programs.
Although there are new payment players getting into the loyalty market, some financial companies that cater to merchants, such as GE Money, HSBC and Alliance Data Systems Corp., long have been working with merchant partners to develop and manage loyalty programs as part of private label and cobranded credit cards.
Such programs can help merchants develop better shoppers by communicating directly with loyalty cardholders through card statements and e-mails. They also can target offers based on consumer shopping behavior identified through card use.
Billing statements also are important to loyalty marketing, observers say. "We are talking to the customer every month. I can't overemphasize the fact that the billing statement is a very powerful marketing tool," says Ivan Szeftel, Alliance Data president of Retail Credit Services. "If someone is a jeans customer, they'll get certain verbiage on their statement that supports that promotion. The idea is to understand what the customer is buying and make sure that the marketing approach is consistent with that."
Another way private-label and cobrand programs can use information they collect to better manage loyalty is by using the consumer's credit card information.
An example of how GE Money uses customer data to improve loyalty is when somebody moves out of a store's area, says Goldstein. GE Money can determine how far a customer's new home is from their regular store and find a closer location to his or her new area.
"We may recommend they continue to shop at the retailer's Web site if they are not near the store they used to shop at," Goldstein says.
GE Money receives such information through external data providers as the U.S. Postal Service and credit bureaus, as well as from cardholders who notify the company of a new address.
As merchants seek out more support in developing better shoppers, processors and other payment providers clearly have room to grow within the merchant loyalty segment. "Payment providers that touch both sides of the relationship have the opportunity to provide a lot more information back to the merchant and can provide more of a conduit between the merchant and the customer," says Berry.
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