|Analysis From Richard Postrel
Founder, CEO Swift Exchange
December 12, 2012
There’s a reason the popular 60’s game show “Let’s Make A Deal” is still on the air today here and around the world. It’s not the silly costumes – it’s because everyone is excited by the best deal they can get. Today’s economy, coupled with an information age that provides ubiquitous, unfettered knowledge, forces merchants to use aggressive deal tactics to attract customers. But remember, “everyone” includes the merchant. The best deal for the consumer is, of course, “free.” The best deal for merchants is full MSRP or that plus a premium. The best deal “possible” strikes the perfect balance between consumer value and merchant profitability. But this tipping point is a tremendous challenge to find today when the formula for consumer value (price x quality) weighs so heavily on the price factor.
Brand, customer experience and added value are still important, but final price is today’s consumer’s golden ticket. Face it, Ikea’s free meatballs won’t keep customers coming back if a better price can simply be found elsewhere. So retailers have turned heavily to discounting — an addiction that can have detrimental long-term effects and whose cycle can be hard to break. This addiction offers retailers a quick sales hit and once it’s over they quickly crave another.
But if we step back and consider all the members of the sales chain, including the payment partners and manufactures, a solution can be found. Call it a retailing intervention. If merchants and reward providers could drastically increase collaboration, discounting could be refocused as a negotiation tool between them allowing consumers to be weaned off discounts by, instead, shopping with their already accumulated reward points. This solution drives customer acquisition, lowers loyalty program operating costs, increases sell through, shortens new product cycle times and boosts everyone’s margins. Simply said, this solution ensures everyone gets the best deal possible.
A Brief History of Discounting.
Before jumping to the solution, let’s further examine the problem. Some of us can remember back to a day when sales were a once a year occurrence. Stores simply held end-of-the-year inventory clearances. At some point, this once-a-year deal turned into end-of-the-year holiday season sales. This expanded to include all holidays: Presidents’ Day, Mothers’ Day, Father’s Day, Graduation Day, Memorial Day. Plus, these “day” sales last a week or more. Heck, Santa is promoting deals in the window at Hallmark when we’re still a month away from Halloween.
Sales are not just frequent; they are expected. Add to this one-day, special in-store sales, Internet specials and the dozens of daily deals being offered by Groupon, Living Social, Google Offers, MasterCard Offers Services and the likes and it’s become pure midnight madness. What started as a way for retailers to differentiate themselves and drive additional store traffic has become a necessary evil that is haunting retailers year round.
Regardless of business, size or location, all merchants behave similarly. A shop stocks inventory of a new item, in the real or virtual world, and offers it for purchase at full retail price. As long as sales go well, the price doesn’t budge. When purchase sales begin to flag (or if, as often happens, they never leave the starting gate), a discounting strategy comes into play. The retailer’s first move, for example, may be to knock 20 percent off the retail price. This discounting will increase and accelerate depending on a number of factors, including how poorly the item is selling and difficulties in the merchant’s current economic environment. Discounts eventually climb through 30, 40, 50 percent and beyond until the item makes its way into the outlet store or to liquidation.
Consumers are no longer loyal to brands; they’re loyal to the discount.
Eyes no longer light up for the 20 or 30 percent off that are regularly promoted in Sunday newspaper circulars; that level of discounting is today’s standard operating procedure. Consumers are after discounts of 40, 50, 60 percent or more, and increasingly merchants are offering those discounts to their existing customer base, so that in effect merchants are simply exchanging high-margin dollars for low-margin dollars — that is, by serving up discounts to regular customers who already spend the higher-margin dollars in their stores anyway. Today’s discounting environment, “enabled” by competitive merchants jostling for customers, has created a community of consumers who are conditioned to shop only for discounts: if it’s not discounted in a meaningful way, they’re not buying.
Deep discounting has become so bad that some retailers tried going “cold-turkey.” JCPenny began a strong media campaign two weeks before new pricing policies went into effect on February 1, 2012. Ads featuring frustrated, deal-bombarded shoppers screaming “NO” at the top of their lungs highlighted the move to everyday deals and gimmick-free pricing as opposed to discounting. But as the Wall Street Journal reported, Penny’s sales were down 20 percent in the first half of 2012. This no-discount strategy is not working and “coupons” have since been reintroduced as “gifts”. In another example, Lowes home improvement also switched to an everyday low price strategy. Consumers have not jumped on board and Home Depot has outpaced Lowes with continued promotions and discounts.
The Solution – Re-target the Discount
It’s time to shake things up — time for a smart, fresh, disruptive solution to the problem. One built on technologies, which until now, were not available. Swift Exchange’s tools represent just such a bold answer, transforming deep discounting itself from a liability into a customer-acquisition-and-retention tool of unprecedented power and scope. In simplest terms, the patented Swift technologies comprise a web-, mobile-, and point-of-sale-based exchange where merchants can trade their discounts to reward providers in exchange for access to those providers’ members and the accumulated reward currencies they wield. With the average American household belonging to over 18 reward programs1 and $48 billion of reward currency issued in the United States alone each year2, the opportunity for merchants to increase traffic, basket size and conversion through reward currencies is enormous. In limited form, this is already being done today through merchants funding card-linked offers and utilizing their gift cards for redemption. But these tactics are limited in scope, untargeted and don’t provide the data needed to take advantage of new customer relationships. Swift represents what’s next in this arena, allowing providers to form spontaneous, automated, long- or short-term alliances with a nearly unlimited number of merchants both large and small for targeted offers resulting in rich, actionable data.
Through Swift Exchange, discounting still effectively drives new traffic but no longer needs to tarnish a merchant’s brand. Moreover, these new customers are not motivated solely by discounts, but rather by the ability to “shop for free” using accumulated rewards.
Here are the basics: Merchants access Swift’s Deal Management System through a web-based Control Center and offer a discount to any provider, group of providers, or all providers in the system. The merchant says, in effect, “I will give you x percent discount on any sales of my products (by store, section, or SKU) that are made to your membership.” This discount, if accepted by a rewards provider in the system, is served directly to the provider to reduce his cost of redemption on products that are purchased by his members using reward points with that merchant. If the discount offered is not appealing enough, a provider can make a counter offer through the system. Once a deal is struck, the discount can be passed to the consumer in full or in part, fund bonus rewards to incent future purchases, or be reinvested back into the program further reducing liability.
Reward providers, too, manage the relationship and set the rules by which merchant alliances will be considered or, if desired, automatically established. Each provider creates a simple template of business rules to be applied when any merchant seeks to establish a trading relationship with that provider. The provider can, for instance, choose to consider offers only from merchants that have been in business for more than five years, or that are of a certain size or annual revenue, or that have at least a B+ credit rating—or any combination of a number of such factors. Swift’s internal search capabilities instantly analyzes each relationship and filters out those that don’t match the provider’s pre-established rules.
Through Swift’s Deal Management System, it’s possible to establish multiple one-on-one alliances or clusters based on a flexible combination of geographic or psychographic parameters. Once alliances begin forming, benefits quickly begin to accrue for every constituency in the merchant-manufacturer-consumer-rewards provider chain. And the technology to allow this partnering to happen automatically, twenty-four hours a day, as all parties involved are going about other business is on the horizon.
Benefits for all
Merchants will find an answer to the dismaying effects of irreversible deep discounting. Instead of resignedly handing over the expected discounts to the same old customers, a merchant aligned with a rewards provider (or providers) suddenly has a means of drawing new customers. Consumers participating in the aligned issuer’s rewards program will be happy to patronize stores where their rewards points are worth more and are easily spent. Finally invited onto the loyalty playground, merchants of every size will see their former discounting liability repurposed into a customer-acquisition engine. Swift offers other beneficial tools for merchants as well, such as Swift’s Age Discount Progressive Algorithm, which enables real-time incorporation of an inventory-discounting schedule into the overall rewards system (automating SKU-specific discount adjustments based on inventory levels and the rate of sale).
Rewards providers will no longer be tethered to a limited number of merchants and the need to manage a rewards catalog. They can actually get back to focusing on their core business. They will suddenly find themselves freed from controlling costs through devaluation or breakage, enjoy far greater control over their loyalty program operations and costs, and forge stronger customer engagement than they’ve ever created before. Customer satisfaction will increase, leading to greater rates of adoption, utilization, and spend, which ultimately leads to profitability.
Consumers will find themselves graced with more choice, autonomy, and utility in spending rewards currency than they’ve ever known. The exponential growth of alliances between rewards providers and the ever-expanding universe of merchants means consumers’ redemptions will no longer be limited to a relatively meager selection of rewards from a pre-packaged catalog, and rewards will increasingly be used as part of consumers’ everyday spend. Swift provides consumers increased payment flexibility through cash, credit, debit, rewards, coupons and combinations thereof with the system crafting and suggesting the most meaningful payment solution. Of course this solution can then be adjusted to meet the consumers’ specific preferences. In addition, consumers will become better-informed shoppers, as communications let them know about reward-enabled deals that are available wherever they happen to be shopping.
Manufacturers are invited to participate as well. They will be able to incorporate their own discounts and coupons into the system, aggregating them into the promotional wallet for consumers. Manufacturer’s discounts will be used more often, and, from the manufacturer’s point of view, they’ll be more useful than ever, as purchases made through the Swift Exchange system will be able to link customer profiles to coupon use. Manufacturers will be better able to produce and sell merchandise for their target markets. Manufacturers will also be able to use the Swift Exchange system to discount and liquidate merchandise already in the distribution chain. Merchants who discount specific SKUs at the manufacturer’s request will build up a credit toward the purchase of new inventory. Older merchandise moves out, new product sales are locked in, and, most importantly, the cycle time of bringing new products to market is collapsed.
Taking the game out of “Lets Make a Deal”
Swift Exchange is truly a disruptive, game-changing technological solution that is poised to redefine both retail and loyalty. The new holistic economic ecosystem heralded by Swift will combine offers and discounting from millions of merchants with billions in promotional value from rewards providers — dynamically, in real-time — to drive sales and customer acquisitions in a powerful new way. Down the road, Swift’s new advanced, patented search and filter capabilities will cut through the endless array of product information befuddling consumers today and deliver the best possible deal instantly. By tackling the persistent challenges of cost management and brand devaluation while reshaping discounts into a new economic force, Swift Exchange creates much broader engagement among merchants, providers, consumers, and manufacturers. And at the center of it all will be the well-served customer, enjoying unprecedented fungibility, utility and ease-of-use from her rewards points. The mechanism for brands to seamlessly negotiate with one another to serve up a variety of offers to consumers has arrived. Finally everyone gets the best deal possible – without costumes or having to trade for what’s under the box.
1. COLLOQUY, The Billion Member March: The 2011 Colloquy Loyalty Census
2. Swift Exchange & COLLOQUY, Buried Treasure: The 2011 Forecast of US Consumer Loyalty Program Points Value