September 30, 2003, 12:00 AM

Rewarding Experience

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Diamond Deals serve a purpose beyond enticing repeat customers with personalized discounts and deals. Drugstore also has experimented with using the heavily visited feature to introduce shoppers to new products and other areas of the store. Though conversions drop on items less familiar to customers, Holtan says that doesn’t necessarily mean the items don’t belong in Diamond Deals. “If you’re looking just for eyes on new products and new product categories, it’s a good place for them to be,” he says. “In that case, we put them there with the knowledge that we are trying to accomplish something different. I’d liken it to the difference between direct response marketing and branding. You don’t expect brand-building advertising to pay for itself immediately.”

Amid internal debate about how to design a rebate-based loyalty program and whether it would pay off, Drugstore launched an experiment for Holiday 2001 that evolved into the third component of its program, Drugstore Dollars. To tackle one of its biggest ongoing challenges-that of turning gift-buying holiday shoppers into repeat customers in the new year-the company tested giving registered shoppers 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 at checkout on return trips. The goal is to improve the frequency of purchase among repeat customers as well as boost the likelihood of retaining them over time.

Redemption windows

The key to accomplishing that-and making the rebate a cost-effective approach-depends in large measure on the windows set for rebate accrual and redemption, Drugstore found. In the initial test, customers accrued points for purchases during December, redeemable throughout the first quarter. Later, to promote multiple purchases during the accrual period and to give customers the opportunity to build a meaningful amount of store credit, Drugstore lengthened the accrual period from one month to three.

Then Holtan noticed that most of the lift in the three-month redemption period was in the first month, with the flow of redemption-driven traffic settling down to normal traffic levels by month two. Drugstore then set the time frame Drugstore Dollars uses currently: a three-month accrual period followed by a one-month redemption. “What we hope is that we get the same lift in the redemptions that we saw in the three-month redemption period, but we’re giving away a lot less money,” Holtan says.

Though the impact of free shipping is most clearly visible in increased average order size, Drugstore is still grappling with separating out the effects of all of its loyalty program elements and tracking the dollar value of each. “We launched them all at the same time, and they are all available to the same group of customers, so it’s hard to determine if one is making a difference, or if it’s all three,” Holtan says.

Yet whether individually or in combination, the programs have helped move the needle on some key global metrics at Drugstore, according to Holtan. As spending on retention has increased, customer acquisition costs, for instance, have plummeted from an average $42 in the first quarter of 2002, before the programs were established to $16 in the first quarter of this year. Average revenue per order, a figure that blends sales from both front-of-store merchandise and prescription drugs, rose from $67 to $71.

Constant tuning

Holtan says Drugstore brainstorms constantly on loyalty programs, though any testing between now and the holidays will likely center on adjustments to the current three rather than new ones. One possibility under discussion could increase the benefits of loyalty to the most loyal customers in the form of a preferred customer program. Drugstore already has tested a program in which registered customers who spent $150 on merchandise received 5% off merchandise purchases for the rest of the year.

Response fell into three segments defined by customer spending patterns. The offer had little effect on the best customers, who continued to spend at about the same level as before they reached the threshold, and no effect on customers who spent at the lowest level. However, the program did produce lift among customers whose spending fell into the middle level. “So is it better to reward the customer who already contributes the most to the bottom line, or to reward the average or less than average customer to try to get more out of them?” Holtan asks. “We are going to try to do both by being smart about how much we are willing to invest in different types of customers.”

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