One of the key challenges in designing a loyalty program or any type of promotion is to avoid rewarding behavior that would have occurred anyway.  A colleague of mine uses the phrase “accidental beneficiaries” to describe rewarding existing behaviors. The cost of rewarding existing behavior is easily underestimated or overlooked in designing and assessing promotional initiatives.

Consider the following example:

Imagine you own a Jiffy Burger franchise. Jiffy Burger launched $1.00 off lunchtime “Jiffy Deals” as part of their loyalty program.  With Jiffy Deals, loyalty members can get $1.00 off at lunchtime through the Jiffy Burger App.

Jiffy Burger’s analytics team reports that 1/3rd of these lunchtime Jiffy Deals drove a 50% increase in order size, and that another 1/3rd of Jiffy Deals caused people to come to Jiffy Burger when they otherwise wouldn’t have.  Overall they saw a 75% lift in sales among people who took advantage of these Jiffy Deals.

Those numbers sound amazing.  Lunchtime now must be more profitable for my franchise because of these deals.  Well quite possibly not.

Think about possible use cases

Use case 1: Adam goes to Jiffy Burger, checks the app and sees the $1 off Jiffy Deal. The savings entices him to try a specialty sandwich and he trades up to a $9.00 order instead of the $6.00 order he usually makes.

Use case 2: Bob checks the app and sees the Jiffy Deal.  Instead of spending $6.00 on lunch, he spends $5.00. Bob is an accidental beneficiary. Jiffy Burger accidentally gave Bob dollar, for him the scheme is entirely dilutive.

Use case 3:  Carla. She gets an alert on her phone about lunchtime Jiffy Deals. That’s enough of a nudge to get her to head to Jiffy Burger. Carla spends $6.00 and since she wasn’t intending on heading to Jiffy Burger, her transaction is entirely generative.

These uses cases fit the assertions of the analytics team.   1/3rd of the Jiffy Deals drove a 50% lift in the ticket (Adam).    1/3rd of visits were entirely incremental visits (Carla).  Amongst Adam, Bob and Carla 75% of their spending was entirely incremental.   So instead of 3 Adam’s, Bob’s, and Carla’s; I wish I had 3000.

Well maybe not.  Among Adam, Bob and Carla, I actually lost money because of these Jiffy Deals.

Lets do the math

Even though 75% of the spending amongst customers using Jiffy Deals is incremental; these deals are sucking my profits. The accidental beneficiaries who are getting a discount on spending they would have already made, sinks the promotion.

Lets assume that with food, labor, royalty payments, and other variable costs my Jiffy Burger has an operating margin of 30%.

Figure 1

Figure 1

How is it possible that a promotion that that drives a 75% lift among customers who take advantage of it hurts rather than helps the bottom line?

Consider the P&L by use case:

Figure 2

Figure 2

  • With Adam, even though he spent 50% more, the cost of the discount wipes out all of the margin on those incremental sales. Adam spends $3.00 more, but in a 30% margin business that’s 90 cents in additional margin, and we gave him $1.00 in discount. On every Adam using a Jiffy Deal, I lose 10 cents.
  • With Bob, the promotion is entirely dilutive, the dollar discount goes directly against the bottom-line. Every Bob using a Jiffy Deal costs my restaurant $1.00
  • Carla is purely incremental.  She is making a trip she otherwise wouldn’t have. So every Carla adds 80 cents to my bottom line.

So if Jiffy Deal customers are evenly split among Adam’s, Bob’s and Carla. The 80 cents in additional margin I make on every Carla, is overwhelmed by the 10 cents I lose on every Adam and the $1.00 I lose on every Bob. So every Jiffy Deal customer costs me on average 30 cents.

+ $.0.80 Carla    $1.00 Bob   $0.10 Adam =  $0.30 overall

Despite the fact that 75% of the lunchtime Jiffy Deals sales are incremental, these deals are actually hurting my bottom line.  Those accidental beneficiaries ate all my lunchtime Jiffy Deals profit.

Takeaways

At Sprocket, we counsel our clients to beware of accidental beneficiaries.  As the Jiffy Burger example indicates, even a relatively small percentage of non-incremental behavior can easily sink a promotion.

Some tips and protocols we suggest:

  • When planning a promotion think in terms of use cases and build out a pro and for each persona / use case
  • Identify which personas are potentially accidental beneficiaries, then eliminate them from the promotion. g. Bob in the case of Jiffy Deals
  • Or structure the offer so that customers who would have had a transaction already, receive an offer that requires incremental behavior (e.g. send Bob an offer for $1.00 off when he spends $10.00 or more)
  • Build a projected pro-forma for a promotion and think not in terms of incremental margin not incremental sales

It’s great to drive a lot of spending with an offer. However, as marketers, our job isn’t just to drive topline sales, our job is to increase bottom-line profit. Value propositions that create even a few accidental beneficiaries can eat that bottom line profit for lunch.