New loyalty programs boost sales at Drugstore.com

From the fourth quarter of last year to the first quarter of this year, a time frame in which retailers often see a drop-off from the holiday sales peak, Drugstore.com has seen sales rise 4%, from $55 million to $57 million, a lift it attributes in part to a three-part loyalty program instituted in last year’s fourth quarter.

“We believe that these programs have had positive impact on both new and repeat customers. Our active customer base now exceeds 1.27 million, up 21% over Q1 of the previous year. And the average annual spend of an active customer has grown by $14 to $163,” says CFO Bob Barton.

After testing various loyalty-geared offers online, Drugstore settled on three elements. They include “Drugstore Dollars,” a rebate credit on future purchases; “Diamond Deals,” promotional offers that are personalized according to customer behavior; and free shipping on offers of $49 or more. Drugstore launched the three-part program with slightly different objectives for each element, Drugstore’s manager of customer retention Ramer Holtan tells Internet Retailer.

The Drugstore Dollars are a more traditional loyalty program in which any of Drugstore’s 3.5 million registered customers get a 5% credit on non-prescription purchases to spend on future purchases. Registered shoppers don’t need to opt into the program as Drugstore tracks each customer’s purchases and presents the rebate status on qualifying purchases to shoppers when they return. The goal is to improve frequency of purchase among repeat customers as well as increase the likelihood of retaining them over time, Holtan says.

“Diamond Deals” presents customers with a virtual sale bin consisting of six items in which Drugstore believes they may be interested, based on past purchases and behavior on the site. Customers can apply a dollars-off discount to one of the six items. Refreshed weekly, they’re the most dynamic loyalty program element, and Drugstore continually tests the effect of different offers, he adds. “We decide how much we are going to give away each week and choose products accordingly,” he says. “For example, if we are going to offer $3 off, we will choose products for the offer that aren’t that expensive. $3 off $20 may not be that compelling, but $3 off $5 gets your attention,” he says.

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“We see free shipping as rapidly becoming a given in e-commerce,” Holtan says. “This is what you need to do to stay competitive online.” The shipping offer, standard on purchases of $49 or more, is a departure from Drugstore’s earlier strategy of using free shipping only periodically or in specific promotions. “We found all that did was train our customers to wait to shop until the offer appeared. We wanted them not to have to wait,” he adds.

Holtan says the free shipping element has had the greatest impact in lifting sales. While he didn’t share numbers on the specific impact on sales of Drugstore Dollars, he says it’s increased repeat customers quarter to quarter. Its impact on frequency of purchase will be a longer-term judgment as the company looks for cumulative effects over time, he adds.

“We like what we are seeing in terms of retention and basket size, but the programs are expensive,” Holtan says. “We want to preserve those benefits while trimming the cost by optimizing them.”

To accomplish that, Drugstore takes measures such as experimenting with different time frames for Drugstore Dollars, for example. The first round of the offer gave shoppers three months to accumulate rebate credits for purchase and three months to redeem them. The current round also gives shoppers three months to accumulate credits, but limits redemption to one month afterwards.

It’s a way to save on costs while still offering rebate credits. “We’ll try to save money on customers for whom it wasn’t a motivating factor, who trickled in to redeem toward the end of three months, and who maybe would have bought anyway, by reducing the window,” Holtan says. “Similarly, we experiment almost weekly with the amount we give away in the Diamond Deals. We are looking for that optimal level of cost and benefit.”

Drugstore has been whittling down its customer acquisition costs. In Q4 2001, for example, it attracted 225,000 new customers at an average cost of $41, but it reduced that number to an average $16 for the 236,000 new customers it attracted in Q4 2002. “That efficiency in acquiring new customers is one of the things that allows us to start investing more in our repeat customers,” Holtan says.