Beating the discounting habit with personalised offers
Digital technologies have transformed many areas of our lives – the way we communicate, the way we travel, even an activity as fundamental as the way we find our mates.
However, most retailers and brands still rely on 20th century technologies to drive sales. The dominant tool remains store-wide discounting, communicated through analogue media such as shelf tickets, in-store displays, newspaper ads and paper catalogues.
While many retailers do use digital media, usually it is only as another channel to broadcast store-wide promotions. If I go through the last ten retailer emails I received, nine led with products on discount. Only Amazon made recommendations drawn from its entire range. The recommendation was highly relevant to me, so I bought it.
Most retailer marketing leads with the products on store-wide discount
Amazon leads with personalised recommendations from its full range
I believe the widespread use of store-wide discounts by mainstream retailers and their suppliers is a key reason for the growth of Every Day Low Price (“EDLP”) and pure-play online competitors. EDLP retailers like Aldi avoid altogether the costs of managing store-wide promotions and get ahead by offering lower average prices. Pure-play online retailers like Amazon win by making more personalised and relevant recommendations. COVID-19 will increase these inbuilt advantages as consumers become both more value-driven and digitally-savvy.
Pure-play online and EDLP retailers are winning at the expense of the mainstream
(ANZ, North America & UK Average Market Share in Apparel, Electronics, GM, Grocery)
So, how can retailers beat the discounting habit and its inefficiencies? I believe the answer lies in capitalising on the power of digital in physical stores.
Successfully implementing digital technology in stores is easier said than done. I talk to hundreds of retailers and many find technology-driven change challenging to navigate. With so many options and people claiming to be experts, it’s hard to know where to start. To help explain how technology can help increase return on marketing spend, I offer the model below which identifies the levels of personalisation available to store retailers and the corresponding computing power needed.
The path to personalised offers in store retail
- Traditional above-the-line marketing (in-store signage, newspaper ads etc.) requires no personalisation and no additional computing power.
- Segmented offers are the most popular approach right now. Customers are segmented by behaviour and communicated the most relevant in-store promotions. This approach requires a means of identifying the customer so they can be allocated to a segment, typically through a loyalty program. This involves limited additional computing power in the store.
- The current boundary for most retailers lies in targeting individual customers with a selection of products on discount. The data analysis to build the recommendations may require significant computing power. However, because the prices customers pay do not change, there is no impact on computing power needed in-store. Note: this approach is sometimes called personalisation. However, it is not really personalisation because (i) every customer receives the same discount; and (ii) the main driver of the recommendation is the set of products on promotion, not the customer’s preferences across the entire range.
- The big challenge comes when transitioning to truly personalised offers. The retailer in effect issues each customer with a personalised digital catalogue in which both products and incentives reflect the individual’s preferences. The technology challenge is that because every offer is personalised, a retailer may need to issue hundreds of millions of offers a week. When a customer is at the checkout, the point of sale must access these offers in the moments after all products are scanned but before the customer sees the total to pay. The computing power to perform this calculation in around half a second is far beyond traditional point of sale hardware. To overcome this bottleneck, global digital leaders such as Loblaws (Canada’s largest retailer) make sub-second calls from the checkout to cloud computing engines such as Eagle Eye AIR. Note: Retailers with loyalty schemes can partially overcome this challenge by issuing personalised points rewards after the customer pays, i.e. not in real-time. However, points offers are unsuitable for customers who have not joined the loyalty program, or when retailers and brands want to issue personalised offers through third-party digital channels such as Facebook.
I have experienced technology-driven retail transformation before, having worked for Tesco.com in the early years of online retail in 2001. I saw then how some leaders got left behind because they didn’t understand why the new technology had the power to improve the lives of customers. I believe the application of digital technology to physical stores will be just as transforming for retail as e-commerce. The risk I see is that some leaders will again be late to understand the full potential of digital technology, this time to both improve the store shopping experience and lower the costs of retailers and their brand partners.
Jonathan Reeve is general manager ANZ for Eagle Eye, a software as a service digital loyalty and promotions platform.