Right to the “3rd” power”: Mobile Payment the POS and ROI

The arc of loyalty/payment programing, particularly as it relates to mobile, is now mature enough for retailers to set long-term strategic goals. The high level strategy is about consumer engagement. The objective is to create a more intimate consumer shopping experience that is contextual in nature. The requirement being: “Right to the 3rd power”; the right offer, to the right person, at the right time. The tool set for loyalty, payment and the integration of omni-channel marketing in the mobile channel is the POS.

Mobile is the most important next generation service, in many ways it is here today. Consumer adoption of mobile services is exploding. The consumer is willing and ready, even waiting for the retailer to catch up. First to market retailers will be in the lead and have an advantage. Ignore mobile and you risk losing both the Millennials and the X-er’s. Is there any doubt that the next group will only be more mobile? Cards, checks and cash will exist, and will require attention, but having a mobile strategy is the key to future success.

While EMV will drive NFC to the POS, consumer engagement will be driven by merchant rewards. The days when retailers give over control of their customers to banks and associations will end as mobile payment becomes the norm. In this war for the mobile consumer, the POS and cloud-based mobile payment is supreme. The transaction is changing from the legacy model of capture/authorize and settle to a robust IP based dialogue. This dialogue is between the consumer and the POS and is about the relationship between the retailer and the consumer. Unlike today where the transaction begins when the item, coupon or loyalty card is scanned, tomorrow’s consumer will begin the engagement long before they arrive at the location. Mobile app based solutions will leverage Geo Fencing, Wireless, and BLE to engage the consumers according to their preference. The IT environment required to deliver these services must be tightly coupled to the POS at the Transaction Services Layer (TSL). This important change in the transaction flow means that payment, rather than being outside of the TSL, is now a part of the TSL. This change means that the entire legacy payments network may be disintermediated from the mobile transaction. We see this with companies like National Payment Card Association and believe MCX shares this goal.

Retailers are understandably concerned about ROI. ROI is a result of more profitable shopping. ROI is more than a function of “frequency and shopping basket”, it is about shaping the consumers purchasing decisions. People are asking about ROI and Mobile and reluctant to allow legacy payment fees into the branded app. To the extent that consumers react through the use of offers, coupons, push notifications, points etc in the mobile channel, payment is required to close the transaction within the same user experience. The notion that the mobile consumer will be interactive with the mobile experience and then be asked to use a card for payment does not make sense. Using a card in the mobile channel would destroy the user experience and make it impossible to measure conversion.

Certainly, there are many issues impacting retailers and the POS environment. The key questions is: which IT solution makes the most sense and how does it set the retailer on the road towards a larger goal of implementing a successful consumer acquisition and retention program that is “Right to the 3rd Power”?

New Bank fees set the stage for Merchant Issued Debit and Rewards.

The stage is set for an epic battle between the merchant community and the financial industry to win the consumers method of payment (MOP).  This week, BoA joined the list of financial institutions announcing either fees, or cut backs in consumer rewards programs, for debit card use .  Senator Dick Durbin sounded surprised when he said of BoA’s actions; “It’s overt, unfair” adding that “Banks that try to make up their excess profits off the backs of their customers will finally learn how a competitive market works”. Many in the industry had long predicted that this would be the immediate result of the regulation (see my June 13, 2011 Blog).  Regardless of the merits of the regulation, or the banks reaction to it, one immediate result is that merchants have the opportunity to steer consumers to a lower cost form of payment (debit): the question; will they be able to leverage this opportunity, or will the payments industry adjust their payments offerings steering consumers to unregulated forms of payment with higher fees i.e. credit, pre-paid cards, etc.

The pivotal decision for merchants is how to recapitalize the anticipated saving from swipe reform and use that money as an incentive for consumers to choose a lower cost form of payment.  Many merchants, particularly in the petroleum and grocery industry are already actively competing for method of payment by offering ACH decoupled debit card programs (merchant issued debit) or cash discounts. For these merchants, and vendors offering alternative payments  like PayPal or National Payment Card Association, the Durbin Amendment is living up to expectations providing them with a strong tailwind to the merchant and consumer.

Merchants are understandably cautious as they approach payment.  While technology, investment and ramp time look like the heavy lift, the real challenge is to understand the economics.  Traditionally merchants have relied on the bank and card associations to deliver payments.  During the lead up to regulation one argument was that; “there was no competition for payment”. Merchants’ successfully argued this point, irrespective of the intense competition between banks for consumers. What was missing from the debate is that the reason consumers use one form of payment over another is often rewards. These rewards had been paid by the issuers of the card using interchange fees (as much as 50%), and now with regulation, that funding source has disappeared.  Therefore merchants can provide consumers with the same incentive to use a low cost form of payment by offering merchant issued rewards.

Finally, there is a saying “He who enrolls; controls”. Issuance or enrollment is a critical question for merchants choosing to compete for MOP using rewards. Assuming that the merchant chooses to offer rewards for a specific MOP, which MOP should it be, cash, PayPal, Google, or perhaps a merchant issued debit card.  The smartest strategy might be a flexible approach to payment where rewards are based on the costs associated with the method of payment, regardless of whether the rewards are paid for by the merchant, or a 3^rd party.

Customer Engagement; network effects and building long term customer value using a loyalty platform.

The need for customer engagement in retail business is critical to effective marketing programs. Societal changes in the way information and communication is received have diminished the ability of traditional “Top Down” marketing strategies to reach the consumer. Media fragmentation and smaller audiences have reduced the effectiveness of mass; “interrupt and repeat”, newspaper and other print media advertising models. Easier access to information about retailers, products and brands has increased consumers’ choice. The internet and emerging social media along with decreasing brand loyalty and lower entry barriers have increased competition. New products and services reach consumers rapidly bypassing traditional sales and distribution channels. Mass-market discounter’s makes customer loyalty hard to achieve as retailers fight to capture a share of the consumer’s wallet by selling at lowest possible profit margin.

Retailers can avoid the “rush to the bottom” by focusing on “Customer Engagement”. Customer Engagement is about strengthening the emotional and psychological affinity a customer has with a retailer. Consumer loyalty is the best measure of current and future customer purchasing behavior. The most effective way to increase a consumer’s engagement with a retailer is by stimulating the consumer’s loyalty. Retailers can change the consumer engagement paradigm by utilizing a loyalty platform to create and leverage “network effects” to drive affinity.

Customer Engagement typically refers to the engagement of customers with a retailer rather than a brand; a loyalty platform can change that paradigm. When retailers add vendor supported incentives to a loyalty program, the program develops network effects. Network Effects are in play when consumer’s access brand (and retailer) supported benefits through the platform. The retailer, who owns the platform, experiences the value of the network effects when consumers shop in their store. Proprietary loyalty programs are closed loop platforms that leverage network effects to drive customer engagement. Coalition point based programs like “Air Miles” is an example of an open-loop loyalty program that exhibit network effects. Like all platforms, loyalty programs require two different parties to adopt the network to be viable; in this case it is either the vendor or retailer offering incentive on one side of the loyalty platform with the consumer and their desire to enjoy the incentive on the other side.

Loyalty platforms are the tool retailers can use to create the customer engagement needed to compete and win in this new social, technological consumer market. Creating an engaging dialogue with consumers and motivating their loyalty with the retailer is the key to driving both sales and margin. (http://www.linkedin.com/in/peterguidi)

Incentives or Discounts; increased profit or eroded margin? Are you using buckshot, or firing a rifle?

When it comes to loyalty programs and promotional strategy there are two schools of thought in retail. On one hand, there are those who believe that everyday low pricing is the surest way to gain consumers trust and their business. These businesses believe that loyalty programs are just about giving bigger discounts to your best customers. Certainly one very large retailer with “every day low pricing” has reached the pinnacle and it is hard to argue with their success. But, with the giant sitting on top of the low price heap, what can the rest of the retailer community do to gain market share? Certainly you can not compete on price and stay in business very long. Nevertheless, many retailers cling to the monthly coupon flyer or web site promotion offering today’s new deal; the Buckshot approach.

The second school of thought has a different perspective on pricing and strategy. These retailers believe that consumer’s make purchasing decisions for a complex set of reasons and that their behavior can be motivated by incentive. In this model the customer’s loyalty is critical to business success. The concept is to track, measure, and then provide specific incentives to individuals based on their demonstrated purchasing behavior. This science is the most effective use of marketing budgets and is focused on increasing business with each current customer. This is the rifle shot, one bullet for each customer.

At the end of the day it’s all about profit. Profit is the difference between success and failure.  When it comes time to pay the bills, or dividends, the only number that matters is the “bottom line”, you either earn a profit or you go out of business, “no margin, no mission”. Regardless of strategy, every program, and every effort must have an ROI. The objective is to make money; buy low, and sell high. It’s hard to make up a loss on volume!  Successful retailers negotiate for the best price, terms & conditions and then set prices and launch promotions that will motivate more profitable customer purchasing thus, maximizing profit. Earning a profit is the battle you fight with yourself as you pick the right price point to execute your sales strategy.  It takes cunning and courage to set solid price points, avoiding the traps of promotional discounts that erode margin simply to increase “top line” performance. Does your sales strategy drive more profitable sales, or is your strategy to be the low priced retailer turning over inventory for increased sales?

In every contest there is a moment when the game is decided. A touch-down or goal is scored, a home run hit, or a competitor’s doors shuttered. Retail is a lot like sports. Taking the lead and then winning the contest is about momentum and emotion. Employees and customers must be engaged, excited and motivated to participate. Success is defined as both top-line and bottom-line growth. Company strategy needs to set realistic goals designed to achieve long term success. Retailers use incentives to motivate employees and engage customers.  Incentives without loyalty programs are simply discounts.  Discounts erode margin. Loyalty programs increases both top line growth and increased profits. 

(http://www.linkedin.com/in/peterguidi)