In our previous blog we discussed the best practices and science that are required to build an effective offer pool. AI and machine learning innovations like ciValue have helped retail marketers to deliver on the promise of personalization.
The second critical element is to understand the economics of the program and specifically the biggest investment driver, the actual discounts offered by the program. In the current post, I share highlights from our new e-book – “Supplier-funded personalization “, which provides a framework for setting up an “everybody wins” personalization program that make the retailers, their suppliers and customers happy.
A. Building the right foundation
As I mentioned above, a personalization program has three primary stakeholder groups – customers, suppliers, and of course, the retailer.
Customers want offers that save them money, cover the full range of products that they buy, and recommend products they will probably like. More importantly, they want offers that make them feel valued and understood, not trick them into spending on products they do no need.
Retailers want to grow sales at the store level, typically by winning sales from competing retailers, while suppliers want to improve the effectiveness of their marketing spending by profitably growing the sales of their products.
This brings me to a key difference in suppliers’ and retailers’ perspectives – retailers need the program as whole to be profitable, whereas suppliers need their offers to be profitable. However, putting the customer first creates more than enough opportunities for both retailers and suppliers.
This is why the ideal starting point for a personalized offers program is asking “What does the customer want?” Keep in mind that using this approach means that certain tactics, like hounding customers to switch from a brand they like to one that they don’t like, are off the table. Finding the sweet spot where supplier, customer, and retailer needs intersect is the art and the science of designing a successful personalization program.
Therefore, an effective personalization program will…
For the customer
- Give customers a reasonable mix of “things I already buy” with “things customers like me buy”
- Avoid trying to switch people away from clearly preferred brands (cannibalization)
For the Retailer
- Entice customers to visit the store regularly, setting the stage for additional purchases
- Provide customers a range of offers that cover their whole needs (see our previous post)
- Give customers reasonable opportunities and incentives to trade up to premium products
For the supplier
- Grow profitable sales of its brand
- Switch shoppers from other competing brands
- Promote niche products (many if not most of their products) for which traditional trade promotion cannot increase sales
- Measurable results that demonstrate that their offers provide a highly positive return
B. Building the financial model
The right financial model is key in gaining supplier funding. Here are the recommended steps for setting up the financial model:
- Decide the investment per customer – how much should the average customer save from the program? This then gives us a starting budget for the cost of the program.
- Determine the supplier portion of investment in offers – That is, if suppliers account for 50% of sales Vs. store brand and non-branded products, at least half of the investment in offers should be made by suppliers.
- Determine the mark-up charged to suppliers. Running a sophisticated personalized offer program costs money, and it is therefore reasonable to charge suppliers a premium. If a supplier offers $1.00 off an item, a retailer may charge an extra $0.25 to cover for the costs associated with running personalized offers on behalf of the suppliers.
- Determine how much each individual supplier should invest One way to determine brands’ investment is to consider their percent of sales and charge proportionately. This way, each brand’s coverage is more or less a reflection of customers’ spending habits.
- Establish a pricing scheme approach that generates the desired response. Different level supplier packages incentivize suppliers to provide a higher level of investment. For example, Platinum or Gold suppliers (the highest investors) may receive a proportionate discount on their investment or other benefits, such as greater flexibility in customizing and targeting offers.
Once you have worked out the financial model, you will need to sell it to suppliers.
C. Tips for retailers on the program sales process
1. Time the pitch properly. Are you pitching suppliers before or after their budget has been closed?
2. Test drive the pitch. Hold initial meetings with a few trusted suppliers to help test and improve your pitch based on their feedback.
3. Show support from the top. Show suppliers that support for the initiative, comes all the way from the CEO.
4. Show support from the relationship owners. Category managers and merchants need to be front and center in the selling process.
5. Understand your audience. Typically, a CPG manufacturer has one person assigned to each major retailer. If sales of their products increase in your stores, they also win. The real task is to give them the data they need to convince their boss.
The success of a personalized offers program hinges on its ability to provide offers that cover customers’ needs and deliver actual value. Technologies like ciValue select the optimal set of offers for each customer and even facilitate effective supplier collaboration, but the first step is to win adequate funding from suppliers. The key to achieving this is to design a program that is fair, with clear benefits to suppliers, which incentivizes suppliers to increase their investment level over time.
Were the tips in the current blog post useful? If you are a retailer that wants to delve further into to supplier funded personalization, we invite you to read ciValue’s full e-book.