Dynamic incentives needed to boost customer lifetime values

Customer acquisition costs continue their inexorable rise and are in danger of hitting unsustainable levels because the cost incurred to attract new shoppers to a retailer is now all too often a greater amount than their ultimate lifetime value to the business.

In her much awaited annual ‘Internet Trends Report’ for 2019 technology guru Mary Meeker suggested that for many companies the primary goal should be to find a model that combines low customer acquisition costs with high lifetime value.

For far too long the focus for many companies has been heavily skewed towards acquiring customers at the cheapest cost with insufficient attention given to the potential value of the customer longer term. This was fine for a time, but as the cost of buying positions on search pages has exploded many retailers are now finding the first transaction of a new customer is unprofitable and this is placing them in a tough spot. They have forgotten about the all important ROI (Return on Investment) aspect of their activities, not just at acquisition but once the dilution of generic future discounting, free delivery and other offers are combined.

This situation has crept upon them as the number of new brands online has increased dramatically and they are all vying to build a presence online. Once the sweet spot was to have a store on Oxford Street but today the place to be is at the top of the search page on the likes of Google. The tech firm is now the landlord demanding high rentals for a digital spot having usurped the Duke of Westminster and his formerly in-demand physical space.

What are retailers to do?

They absolutely need to create a business model akin to that espoused by Meeker. Whereas it is hard for retailers to influence the customer acquisition costs as set by the likes of Google what they can impact is the post-customer-acquisition phase and seek to engineer a high lifetime value from new shoppers.

Companies have typically performed badly in this area because of their adoption of broad brush strategies deployed to stimulate loyalty and drive sales and also from the outdated belief that they can create a scenario where individuals will buy 100% of products from a single retailer. In reality a more realistic objective for retailers should be to garner the loyalty of a customer to buying a specific type of product from them.

To deliver this they need to consider the incentives and rewards that are most relevant to the individual customer. Retailers need to break down customers’ into their specific behaviours and look to act on this. It’s not about simply giving everybody 15% off. It might be better offering certain people free deliveries at specific times, or offering a discount based on the desired frequency of the repeat transaction, an incentive on razors at the end of their expected lifecycle for example

You could call this personalisation but that’s too broad a description. It’s about stimulating customers through adaptable incentives in order to make the offer more compelling, and drive more sales. In today’s landscape shoppers are savvy and they need a highly compelling reason if they are to make a purchase now and with you. Let’s call it dynamic incentivisation.

If we take a retailer like the Co-operative, it’s all about convenience shopping so how can it enhance the level of convenience it offers? How can it stimulate a person who shops there three times per week for bread and milk? It’s about getting them to go a fourth time each week or to add one more thing to their basket.

Co-op took a big step forward creating a partnership with Deliveroo in Manchester, as this provides even more value to customers, which for the Co-op comes in the form of convenient access to their products and services. It removes the physical limitation of the time required to shop and the amount of food they can actually carry home. This value-add will likely increase average order values, which can be further stimulated through tactical incentives based on historical shopping behavioral data.

Certainly what supermarkets and other retailers need to do is use many different data sources like financial data, in order to better understand the wider behavior and actions of their customers. This data should enable them to track these individuals when they shop online and also in-store and to then assign the relevant incentives to drive the most desirable behavior accordingly.

Knowing more about customer behavior would enable larger supermarkets that capture the online big weekly shop but miss out on the smaller convenience drop-in-shopper, to reward the customer for making all the transactions with them by linking the combined desired behavior and incentive together.

The introduction of a dynamic incentives programme moves the relationship between retailers and customers on from the old school broad brush approach – with generic discounts offered – to a situation where the rewards are delivered when certain shopper behaviours have been stimulated.

This helps to increase the loyalty of these customers in order that their lifetime value can be maximised and in so doing it moves retailers closer to operating the perfect model of low customer acquisition costs and high lifetime value.

Ben Stirling, Managing Director of Northern Europe, Webloyalty