Article originally published here.
Assessing the value of your rewards programs
In our conversations with more than 100 dealers and distributor representatives in the DC metro area, the Upside team and I uncovered common pitfalls of transaction-increasing strategies.
One such transaction-increasing strategy, and the focus of this assessment, is accepting promotional programs, including branded reward credit cards, fleet cards, and grocery store rewards programs. So what’s the pitfall? It comes down to one simple question:
How much incremental profit do you earn from the discounts you provide through these programs?
8 out of 10 owners say they don’t know. The remaining 2 of 10 who say they do know, say the incremental profits are zero or negative. And all say it doesn’t really matter, because other than fleet cards, they don’t have much choice: their brand pushes them to participate in the programs.
With these programs, owners are discounting products either without full insight into profit increase, or without proof that profit is increasing at all.
Focusing on increased profits
At Upside, we believe you shouldn’t discount your product unless you know exactly how much more money you are making by providing the discount than you would make without the discount. This is known as return on promotion or return on investment (ROI). ROI is central to Upside’s approach. With Upside, ROI is measured, and it’s proven, daily.
Shortcomings of widely-accepted return on investment measurements
Today, the only method available for measuring ROI is to compare overall station sales before a promotion (or rewards program) was implemented to after a promotion was implemented. To measure this accurately, your data must be large enough to measurably change your overall station sales volume.
Most promotional programs today don’t yield enough volume to meet the scale required for a before- and after-promotion comparison. From our analysis, programs like Plenti, the Shell fuel rewards card, and branded reward credit cards simply don’t drive enough volume to measurably change your overall station sales volume. Upside also currently falls into this category (but we are growing quickly: an average of 120% per week since we started 12 weeks ago).
Achieving large enough scale for measurement (and why those measurements aren’t complete)
Some, but not all, station owners we spoke with tell us that grocery store rewards programs can sometimes achieve this measurability threshold. More predictably, station owners have reported that fleet card programs will provide a 2% to 10% increase in volume. However, these stats may not be as good as they sound.
The promotional programs listed above will provide you with summaries of the number of customers who took advantage of the program at your station. But they will not tell you how many of those customers were already patrons of your store. Why is it important that none of them tell you how many of the customers taking advantage of the promotion were already your customer?
Customer tracking is critical, regardless of scale
Whether you have the scale to run a before- and after-promotion comparison or not, that comparison will never paint a complete picture of the success of a promotion and the health of your business. You must be able to track the profit you lost from existing customers who adopted the discount program. (Ideally, you’ll go one step further and implement a platform that enables you to avoid that profit-loss scenario all together.)
Why is customer tracking so important?
Let’s take the story of one station owner we met with, we’ll call him Owen. Owen’s station sells 130,000 gallons per month, with an average profit per gallon before credit card fees of $0.12. Owen started accepting a fleet card at $0.10 per gallon below retail price, and experienced a boost in volume of 5% and profit (after fees) of 1.4%.
This is the story the industry pushes: boosted volumes and profits. While true, it is never the complete picture. Not accounted for or measured are the effects of cannibalization.
In our example, what would happen if Owen’s existing fleet customers started using the newly-accepted fleet card? If just 1% of Owen’s existing volume started using the card, it would reduce the incremental profit earned by the fleet card by 50%. This is cannibalization. And it’s unavoidable without customer tracking and the ability to deliver customer-specific offers that are guaranteed to increase profits, not cannibalize it.
When we detailed this math for Owen, he cursed. Why? Because he was sure he saw some of his current customers adopt the fleet card. He knew his incremental profits were sacrificed. All because he implemented a rewards program without customer tracking.
Unlocking transparency, and unlocking guaranteed return on investment
At Upside, we calculate return on promotion in the same manner as top marketers do for their products, and investors do for their portfolio: Net Profit divided by Costs, which in this case are Promotion Value plus the Upside Fee.
Promoting only profitable actions
Based on an Upside user’s historical transaction history at your station, Upside calculates an expected baseline of that individual user’s profit at your station before they started using Upside. Then, Upside only promotes their next profitable action — an additional fill-up, a purchase in your store, a car wash — so you never discount an action they would have taken without Upside.
Raising transparency, and raising expectations
Upside considers ongoing promotion to attract new customers and increase the margin earned per customer to be an investment activity. As such, we report the daily average return on investment.
As Warren Buffet has stated,
“The economy, as measured by gross domestic product, can be expected to grow at an annual rate of about 3 percent over the long term, and inflation of 2 percent would push nominal GDP growth to 5 percent, Stocks will probably rise at about that rate and dividend payments will boost total returns to 6 percent to 7 percent.”
In other words, over the long term (think 10 years or more) a diversified investor should earn a 6–7% return on an investment. At Upside, our goal is to significantly exceed this rate, even on a daily basis. And we have: our average ROI is 30%
So why do rewards cards exist? What should you do?
Although popular and largely assumed to increase profits, the rewards programs you run and currently accept at your station simply can’t measure or promise increased profits.
So, should you stop accepting brand promotions and reward cards? Of course not — there’s value in the mutual support station owners and brands provide each other. And there’s value in brand recognition from a customer’s perspective. But they do fall short, and cannot be relied upon to increase transactions on their own.
That’s where Upside comes in. Upside isn’t meant to replace your brand promotions, but rather complement them by delivering measurable return on investment. And since Upside promotions are personalized to each customer, you don’t have to worry about a customer layering a brand promotion on top of an Upside offer: Upside’s platform ensures that only profit-increasing offers are delivered, including factoring in whether a customer is using a rewards card, and adjusting the offer accordingly.
While brand promotions may be unavoidable, the choice to use Upside — and increase profits, with daily proof — is all yours.
Upside is the easy-to-use revenue generation platform that gets more customers, buying more, at your station. Ready to get in touch? Sign up to learn more about how your station will profit with Upside’s proven model.