To Target Offers Effectively, Look to Transactions

Merchant rewards, via coupons and special offers, are a tried and true marketing strategy to drive trial, volume, and customer acquisition for retailers. But in most cases, the untargeted nature of coupon and reward offers through out-of-store media severely impacts a retailer’s ability to maximize return on investment.

If retailers can understand the value of a particular consumer in terms of her level of spend and loyalty, not only in their own stores but with other retailers in the category, they can significantly improve both the immediate and long-term value and ROI of any rewards program. They can also customize the actual value of the offer to the targeted shopper based on that consumer’s relative potential return on their marketing objectives.

Consider this example. A restaurant chain is seeking to increase sales in the short term, but perhaps more importantly is hoping to win new high-value customers who currently don’t eat at the chain or eat there only infrequently. Those new customers are important because, in addition to driving an immediate uptick in sales, their future visits represent a long-term improvement in revenues.

A simple "Save $5" offer via newspapers or online destinations may drive an increase in sales during the offer period. However, it also may have a diminishing impact on profit margins with little positive impact on the goal of winning new long-term patrons. How many of the consumers who use the coupon would have eaten with the restaurant anyway and paid full price?

Because the offer is distributed in mass, these loyal buyers do not perceive the discount as a reward for their loyalty. How many are simply active savers, or coupon clippers, who will take advantage of the savings but never eat there again? How many of them are actual high-value consumers, who spend freely and frequently on dinners out with other restaurants and who therefore have the potential to register significant long-term sales? If you could give these customers a larger incentive, would you?

Untargeted merchant rewards simply do not address these questions. They are blunt instruments for driving short-term volume but lack precise levers to address more finely tuned marketing objectives and a more measurable return on the marketing investment.

A new, much more precise approach to merchant rewards is now gaining uptake among retailers. It’s called transaction-driven marketing, and its appeal to retail marketers is easy to understand. It transforms a merchant rewards program into a highly targeted and measurable campaign that gets the right reward to the right consumer to maximize its impact to change behavior and increase ROI.

Transaction-driven marketing taps into the most precise kind of consumer segmentation possible: the actual shopping behavior and spending levels of consumers. Based on analytics of debit and credit card transactions by banking customers, transaction-driven marketing allows the marketer to segment a large consumer base in a given geographic area based on where they shop, how much they spend, the frequency of their spend, and a range of other parameters. The offer is then delivered to the right consumer via their online or mobile banking statement – a personal transaction report that is closely read by almost all consumers.

Consider the same scenario described earlier: the restaurant chain seeking to increase short-term sales and win new customers. This time, rather than placing a coupon that anyone can clip or download, the retail marketer decides on a three-tier strategy to maximize the return on marketing spend. First, the marketer decides to target consumers who frequently eat with two of its major competitors but have not had dinner at his restaurants. Second, he decides to also target some of his own customers who eat out regularly but also frequent competitors on regular basis. Finally, he also wants to provide an offer to some of the restaurants’ highly loyal consumers to increase their frequency during the campaign.

Each of the three offers has a different monetary worth based on the value of the consumers being targeted to the marketing strategy. The frequent high-value shoppers who have never eaten with the restaurant receive a $10 reward offer, enough to entice them to try something new and potentially become a new customer with long-term incremental value to the business. Existing customers who more often eat at a competitor receive a $5 offer, with the goal of increasing their frequency and the restaurants’ share of wallet.

Some highly loyal patrons also get a reward, but for $5 when they spend $25. The goal here is to reward them and incent them to "bring a friend" to their favorite restaurant. The amount may be sufficient to drive another trip to the restaurant to increase short-term sales, but not so much that it significantly impacts margins. Because the marketer knows he is delivering the reward to an existing loyal customer, he can position the offer as a loyalty reward and gain added loyalty from the customer.

A study by Cardlytics of results achieved by real-world merchant clients demonstrates that transactional marketing can achieve a powerful ROI. The study, which looked at campaign results for all Cardlytics merchants during a six-month period ending December 2010, found that clients using the solution to target new customers achieved a 35% to 45% share of category spend among their targeted consumers during the first two months the offers ran.

Just as significantly, these merchants retained more than 20% of category dollars from those same first-time consumers during the next three months following the offer period. Over the six month period, customers spent $6.25 for each $1 the merchants invested in the rewards program.

The Cardlytics client study also found that rewards to loyal customers drove an 89% increase in revenues. These loyal customers spent $5.49 cents more during the period for every dollar the merchants invested in the rewards program.

The ability to segment and reach consumers based on actual retail category purchasing behavior represents a major advancement in merchant rewards effectiveness. Transaction-driven marketing leveraging bank card transactions delivers that precision, allowing merchants to provide rewards that have more value to consumers and to their businesses.

Rod Witmond is senior vice president of product management and marketing at Cardlytics, a solution provider linking marketing opportunities to purchase behavior.