Why do customers shop at competitors instead of you? Apart from location, it’s because competitors offer customers a better bundle of reasons. To build your customers and sales, ask yourself these three simple questions.
Here are the three most basic questions marketers must ask of their customer strategy:
1. Why should your customers return?
2. Why should your customers increase their visits?
3. Why should your customers spend more?
Here’s an example from one of the world’s greatest retailers: Costco has hundreds of warehouse stores in multiple countries generating average weekly sales in the millions per warehouse. With two serious marketing limitations—no advertising and requiring a paid membership card to access entry—Costco has had to think very deeply about attracting and retaining customers. Its focus on the three Whys of customer loyalty is very evident. All three questions are interrelated, but each has a different emphasis.
1. Why should your customers return?
To have customers choose to return to their stores, retailers need to provide them with a range of reasons. The stronger, clearer, and more different the reasons, the more customers choose to return. Here are some of Costco’s reasons:
Earn back membership fee. New and existing members know the savings they can make by shopping at Costco. They have a vested interest in returning to earn the fee (and more!) back during the year in savings.
Lowest prices. Costco is committed to having the lowest prices on all they offer on a consistent basis. Because they sell packaged items in large sizes and/or multi-packs, the cost per unit is usually materially less than at regular food retailers.
High quality. Costco never sell “seconds”; only top quality. This quality is reflected in the Fresh Department (Meat, Produce, Bakery and Deli) that generates over $400,000 sales each week per warehouse, all without advertising or promotions. It is the largest seller of fine wines in the world. In addition, the growing range of its high quality, Kirkland Signature private label items acts as a powerful reason to return.
Signature items. Certain items have become part of Costco customers’ mindsets: the $1.50 Hot Dog and 20oz soda offer; its $4.99 Rotisserie Chicken (they sell, on average, over 2,000 weekly per warehouse); and its two-dozen premium roses everyday for $16.99. Such image items reassure and reinforce trust in Costco’s value and quality.
Guarantees. Trust is strengthened with Costco’s return policy. Every product is guaranteed. Some products such as electronics, however, must be returned within 90 days to receive your money back.
Refunds. Trust is further enhanced by Costco’s belief in the value of its membership. It can be refunded, in full, up until the last day it expires.
Experience. Tasting the free samples of new items always adds enjoyment to every visit and provides an extra reason to return.
2. Why should customers increase visits?
There is a direct correlation between Costco customer frequency and annual total spend. Not only that, the more customers spend, the more likely they are to renew their membership. Costco has developed three major reasons for customers to increase frequency of visits:
Treasure hunt. To create a sense of excitement, urgency and a need to visit frequently, Costco continuously provides a flow of in-out items —buy now, it may not be here next week! Finding these non-repeated, while-stocks-last offers creates a treasure hunt environment.
Coupon book. A booklet of “clipless coupons” is mailed to members monthly (and is also available on-line). The strong coupon values are effective for 25 days in the coming month, with rebate limits. To buy more of the item at the rebate price, just visit more often in the 25-day period. It’s simple operationally for Costco: no paper coupons to handle and the rebates are processed automatically at checkout.
Lowest-price gas. Costco’s low fuel prices have proved to be a powerful driver of visits, as indicated by their average weekly per-store fuel sales of over $500,000 - more than ten times the US gas station average.
3. Why should customers spend more?
Showing members how spending more saves them more, whether in a few or many visits, is Costco’s third area of marketing focus. It is seen in various ways:
Large Sizes. Items are sold in large-sized packs to lower the cost per unit measure. Likewise, in its Fresh Departments, such as Meat, the pack-sizes are large. This packaging increases the average selling price per item, but the customer receives greater per-unit value.
Executive Membership. Regular Costco membership is $55 a year for the primary cardholder, but 38% of members choose the more expensive $110 Executive membership, which comes with added benefits including a 2% annual purchase rebate. Not only does Executive membership reward higher spending members, but it also encourages them to seek out other Costco items and services, such as its lower-cost insurance and travel offers.
Credit Card. Costco offers a members-only, no-fee credit card that rewards increased spending at Costco: 3% cash back on gas purchases, 2% cash back on travel purchases, and 1% cash back on other purchases. Cash back benefits also accrue when the card is used outside of Costco. Many credit card holders’ annual cash back total exceeds their annual membership fee.
Costco.com. Costco’s website features 18 diverse categories that include some in-store items together with many others that are available only on-line. In addition, these purchases are eligible for any appropriate Costco program rebates. This encourages value-oriented customers to “think Costco first” when shopping.
Answering the three “Whys”
To build your own three-question marketing plan, start by drawing up a list of your current competitive differences and a list of potential new initiatives. Be prepared to change and even drop some existing practices as you clarify reasons why customers should not only return, but also increase their visit frequency and total spend in your business. The essence of marketing success is differentiation: provide it; strengthen it, and protect it. Customers come to our stores because we are different. The less different we are, the more our fortunes will ebb and flow with our weekly discount offers.
Brian Woolf is president of the Retail Strategy Center and a member of the Customer Strategy Network.