Opinion: The Cost of a Successful Loyalty Program

How HotSpot grew its margins and margin dollars

SPARTANBURG, S.C. -- In 2007, HotSpot Convenience Stores learned that we were soon going to face a massive invasion of stores from a giant competitor. We learned about the new stores quite some time before they actually started building, which was a real blessing, as it gave us time to prepare for the onslaught.

Our company had a rewards program of sorts by selling coffee at 5 cents per cup if a customer used one of our coffee cups. We later changed that to fill any cup, even a competitor’s cup, for 5 cents. The program was very popular but too expensive to keep afloat.

We wanted to offer our loyal customers an opportunity to earn extra discounts for their loyal patronage without losing profit.

As I looked into various loyalty programs, I found more unsuccessful than successful ones. Many who claimed to be successful could not give any proof that they had accomplished anything meaningful in the way of sales and bottom line increases. Many were based on a lowball quote where the real cost of the program was in the vital add-on features.

Even more were solely related to gas discounts, which are great for our fuel distributors but not for our brand or profit margins. At that point, we were not sure increased sales was even a realistic goal. We just needed to survive the outbreak the competitor’s stores. I began interviewing companies to find the right technological expertise to accomplish our goals.

My criteria for loyalty was that I wanted to offer every reward opportunity to my customers that they had found appealing in other loyalty programs. These included:

  1. Customers should receive a reward each time they make a purchase.
  2. Discounts for regular specials should exceed that of my competitors.
  3. There should be a “wow factor” to the program so much so that customers would question “how do you do that?”
  4. I wanted birthdays and major holidays to be recognized.
  5. I wanted to keep something fun going all the time and have contests with large prizes.

I also concluded that the program would have to pay for itself or I would have to have outside help to fund it. I asked my company to believe in the power of loyalty and invest once-quarter 1% of its gross profits, and let me allocate the discounts they were currently giving to raise their sales and gross-profit dollars. The 0.25% went to fund a points reward that occurred for every purchase.

Working with Louisville, Ky.-based firm Electrum, instead of giving discounts to every customer, we started discounting more exclusively for our loyalty customers. That’s one of the smartest things we ever did for our brand.

As an example, when the market would run something two for $4 at a gross of 25%, we would run three for $5 at a gross of 20%. Our gross percentage went down, but our sales volume went up and vendors helped us to achieve at least a break-even margin dollar. As a result, patrons began seeking us out over our competitors.

We also began two-tier pricing, allowing us to sell higher volumes of merchandise while guaranteeing higher levels of margin dollars. It was a hit with loyalty shoppers because they were getting deep discounts, while casual drop-in shoppers were paying top dollar. The only expense we added was a gift to loyalty members on their birthday and to fund a monthly second-chance drawing on a lottery offering 1 million points ($500) to one lucky customer. The program paid for itself immediately.

Because we were proactive, we didn’t lose loyal customers as the new and very strong competition came into our area. In fact, we kept adding to them. Sales grew substantially in a period where others were flat or down. Our margins have grown by 1.5% and gross margin dollars are off the charts.

Ten years later, HotSpot is a leader in coffee, fountain and cigarette sales. As a team, we have grown lottery sales every year, and we take in more with ATM fees than before the program began.

Adding a loyalty program not only saved us from being wiped out by competition but also put us into a different stratosphere of plus profits and customer engagement.

Dan Durbin, before his recent retirement, was the president and CEO of R.L. Jordan Oil Co., Spartanburg, S.C. R.L. Jordan operates more than 40 convenience stores in North and South Carolina under the HotSpot brand.

Photograph courtesy of Electrum Loyalty

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