Target to Provide Immediate Incentive to Use REDcard
Holders of Target’s REDcards will soon have good reason
to expect more (savings) because they will indeed be paying less. The retailer
announced that "guests" who use the company’s credit and debit cards in its
stores and on Target.com will get an additional five percent off on all purchases.
The
new program, which will launch in the fall, replaces the 10 percent off coupon
that cardholders receive for a day of shopping with the current plan.
"We’re excited to offer this outstanding value to our REDcard
holders across the country," Gregg Steinhafel, chairman, president and
chief executive officer of Target, said in a press release. "We believe
guests will appreciate the simplicity and compelling value of this program,
which will lead them to choose to shop more often at Target. As a result, we
expect this new program to drive profitable incremental sales, which will more
than offset the cost of providing this everyday discount to our cardholders."
Target
has been testing the program in its stores in Kansas City, Mo. since October
of last year and both the chain and consumers were happy with the results.
The chain believe it will add a percentage point or two to same-store sales
as a direct result of the move.
Another element of the program is a pharmacy
rewards offer where guests will receive a coupon good for five percent off
a future day of shopping every time they fill five prescriptions at a Target
pharmacy using the card. Currently, shoppers get 10 percent off a future day
of shopping after filling 10 prescriptions.
Discussion Question: What do you think Target’s new REDcard incentive program
will mean for the chain and its competitors?
This card has always been underutilized due to the confusion over the value statement and benefits. Nothing screams benefit in this economy like 5% or 10% discounts.
As a Target shopper, this doesn’t really change my behavior any. But I don’t think you could really get a greater share of my wallet than Target already gets today. However, the convenience of always-on savings is nice–I no longer have to coordinate my 10%-off days with things I’d like to purchase online vs. in-store.
I think the real question is, does it get marginal shoppers to spend more by always having the discount? Or does it at least capture a greater amount of customer spending on Target’s customer program by offering that added incentive? It appears that the answer is yes.
This makes tremendous sense. 5% off for your most loyal shoppers is a great value for them and it is an inexpensive way to keep them coming back.
Up until January Duane Reade had a program that paid gave you $5 every time you accumulated $100 in purchases. Simple and effective. Keeps a loyal customer coming back. Shoppers know that whatever the price for an item is, they get 5% more off. (Duane Reade changed the program and they say it is better and simpler. But, I haven’t figured it out yet.)
More retailers will go this way. The more generic the program is for the shopper, the more effective it will be.
Target has likely opened the flood gates to card discounts. I expect many to follow. Target seems to have regrouped on numerous fronts and has its new offensive plans in full operation.
At a high level, here are the pros (+) and cons (-) I see for each entity involved:
Customer:
(+) 5% off
(-) Another card to carry
(-) Another bill to manage (for the Target Credit Card and Target Visa Card)
(-) for non-RED card users, prices may creep up to subsidize the RED card discount
Net for Customers: I expect many more customers will sign up for and use their RED cards, and the price impact on non-RED card users will be minimal.
Target:
(+) more individuated consumer data, allowing better targeted marketing, more consumer insights, better-informed merchandising and marketing
(+) larger baskets and more trips from RED card users
(+) save on fees to outside card companies
(+) potential revenue from VISA (depending on the arrangement)
(-) losing 5% of revenue on RED card purchases
Net for Target: 5% is a lot to pay for more, bigger trips and lower transaction fees, but if Target is smart about leveraging the increased customer insight and the marketing and merchandising opportunities, then it will be worth the cost.
Competitors:
(+) none that I can think of
(-) price pressure
(-) lost trips and deeper baskets to Target
(-) shift in consumer expectations for reward levels
Net for Competitors: Not good. Will need to step up with heftier rewards or other differentiators for members and non-members alike.
Net-Net: This is a smart, disruptive move by Target, but only if they actively use the increased data and customer insights to drive top and bottom line growth.
A smart move on Target’s part, as it makes matters easier for their loyal customers to conduct a transaction with them. It also places them in a position whereby it is not easy for competitors to follow them. Target has had their own card system in place for some time, and while they chose to sell off parts of it following some pressure from New York investors, they still hold a great deal of experience in the area.
Using both credit and debit for the value proposition is equally appealing, as debit expenditures continue to grow at the expense of credit.
Maybe it is a small percentage of shoppers, but I believe there are many who revolt at being required to carry a “card” in order to receive what is obviously the store’s “right price” for merchandise. No one believes the store is really selling anything at a lower than desired margin–they are simply marking up prices for non-cardholders. In the case of retailers like Target whose “loyalty card” is really an affinity debit/credit card, the imposition is even more onerous. Why shouldn’t I be able to get the “right price” from Target AND the 1% Cash Back from my Discover Card? This is the kind of program that would send me to Walmart.
Generally speaking, I would be inclined to agree with Mr. Ball. The difference in this case is Wal-Mart. Target can’t afford mark-ups that would leave it with significantly higher prices than its primary competitor. No, cardholders will win here and when those not already using the card realize it, they will sign up also. That is what Target is counting on and that seems to be a bet worth wagering.
There are issues with programs such as these.
1) It seems to deny the retailer provides true EDLP pricing.
2) The cost of operating the program may be higher than expected.
3) Does 5% get shoppers really turned on?
I sense I am getting to see the rematch of the “Thrilla in Manilla.” Is this Target’s response to Walmart’s Rollback program? If so, it is a weak beginning. I had to read the article twice because it appeared Target is giving with one hand and taking away with another. You can bet Walmart’s marketing brains are already planning how to counter this.
I do not agree with Target’s big three in one (Chairman, President & CEO) that this will increase same store sales. It is dependent on customer’s buying power and habits in a time where frugality is the key word. Now, if Target has special offers, aka Rollback, then you might see a good battle of the Titans. Then it is the customer who becomes the winner. Isn’t that the way it is supposed to happen?
Target’s new approach to allow 5% discount for consumers that use the REDcard is a strategy that likely will enjoy success for a number of right and wrong reasons. Of course this approach will work well only if the program is black and white without strings and a ton of exceptions and disclaimers.
My prediction is that Walmart will come roaring back with the position that its prices are always low with or without credit card usage. But once again, Target is doing something shrewd to re-create a point of difference.
In the short term I think this may be a competitive and PR advantage to Target. But this sort of thing often has longer-term, unintended consequences in the marketplace that are not so positive–and I believe Ben has well laid out several of the possibilities for such consequences.
With respect to any useful individuated customer data that Target may hope to gain from this discount card, I am not so sure anymore. Over the past 20 months or so I have had a slow motion epiphany concerning the true value of “paying” to collect consumer data on even the most loyal of customers. It has shown itself to be very fluid and therefore less valuable than once believed. Specific data acquired and compiled as recently as late 2008 just does not apply–at all– to the majority of Americans in the spring of 2010.
The weight of the economic malaise, lowered household income (or fear of same), spending habits, home ownership, brand preferences, are all so different as to make existing data nearly inoperable. Retailers need to be very clear about what they expect to gain from such data, and also sure that they are getting a fair trade-off in what they must give back to obtain and track such data.
This is a big swing for Target as at first blush 5% is not an insignificant discount to apply across the board–and across channels. However compared to other retail loyalty programs (many of which are points-based but essentially discount programs), Target’s 5% discount is only about two percentage points greater, even though some of those merchants have higher margins.
Obviously Target saw a net incremental gain in its test stores that was enough to offset the dilutive effects of mass discounting for these customers. In addition to increased spend from better customers, as cited in the press release. TGT likely also saw a combination of new card acquisition and improved retention of previous downtrending customers
Aside from the base economics of the initial customer behavioral changes, the long-term benefits of lower merchant processing fees, better data and insights to drive relationship marketing all support a program like this, which is more appropriate for Target than other merchants because of the value orientation of their brand.
Last, I disagree with the point above that this will move customers to WMT. Quite the contrary, in fact. Treating cardholders better than non-cardholders does not create an onerous burden. It’s a quid pro-quo for those who are opting into a REDcard and a loyalty marketing best practice.
I can hear it now: Pay less at Walmart without the hassle of a card. What reasonable person would not believe they were paying more somewhere to get the 5% savings? This is more shuffling of the deck without doing anything to win the game. Their position and messages of fashion and style will be diluted.
For Target, the card will solidify their relationship with the current card holders as the Kansas City test demonstrates. The goodwill should be leveraged to create buzz and gain new cardholders and increase participation.
Competition can knock Target for requiring a REDcard to receive discounts, but it all depends on the positioning. It’s not the first time a store requires membership or store credit cards to offer additional discounts, so there are plenty of references.
During these hard economic times, Target held on to their positioning and did not devalue the brand with a “lowest price” message. As times improve–and we all hope all indicators are accurate–Target has the ability to enhance its position among the mass merchandisers.
Chase switched my favorite card–Chase Rewards [5% on all grocery, drugstore and gas purchases]–to Chase Sapphire and has tried unsuccessfully to convince me that this was good for me. It did simplify my life as I switched those cc purchases to a competitors card with a 2% rebate. As a consumer I will sign up for the Target credit card to get the extra 3% (5% vs 2%). However, I do not really think this was a wise move for Target unless they plan on making it back on the finance charges from those who carry a balance. As a retailer, it is somewhat like double coupons. It will be extremely difficult to retreat from that program once it is in place.
Some commentator mentioned the negative of another card to carry. Here in Hong Kong we have the Octopus card. It can be used for mass transit, purchases at McDonald’s and 7-Eleven. Some companies have linked the cards with their own security systems so the employee uses it as a company ID. When will the US link a smart card to all aspects of a consumer/individual’s lifestyle?
Simplicity and transparency is a growing trend in consumer marketing.
Attending the Enterprise Engagement Expo this week, I heard more than one supplier of gift cards and merchandise express concern that the simplicity of cash back programs will fundamentally change their business. It may be so, though consumer preferences are cyclical.
From everything I read, I think the consumer return to basics and value will translate into more of this type of cash-back offer across the retail landscape.
5% off every day vs. 10% on one day seems like another incentive to regularly shop Target, as long as their everyday prices remain a great value. The prescription coupon encourages cross shopping in the pharmacy, food and non-food sections of the store.
Simple is good. People go to Target because they like it and save money.
I like this program. It creates more customer loyalty and usage. Target customers already prefer them over Wal-Mart and this should makes it stronger.