I walked to my little local market this morning in Boston and saw the latest issue of Barron’s on the newsstand. The cover story is all about U.S. Millennials: those 18- to 37-year-olds who, according to this article, are the future of the U.S. economy because they are poised to drive consumer spending like nobody’s business. I resisted the typical Boomer impulse to buy the paper and instead went home to read the article on my iPad. The article is a fascinating read, but I think they missed a key point.
Milleninals probably won’t drive spending!
First, a little context.
I was always confused about just what age groups represent the Millennials since everyone seems to define it a little differently. This article, and a couple of other sources now, have clearly settled on those born between 1976 and 1995. Many of you reading this even have Millennial kids (or employ them) so probably know them well.
The vital stats associated with this group are these: there are about 86 million of them, a cohort roughly 7 percent larger than their Boomer parents’ generation. Some think that it’s even possible that this group will get a smidge larger in the next few years because of immigration. It’s the most connected generation on the planet. Their early adoption of and subsequent addiction to smartphones has driven the explosive growth of new media channels and the burgeoning industry of tools and tactics that tap into their desire to stay connected 24/7. Pew Research reports that 75 percent of 25- to 34-year-olds own a smartphone and 90 percent of them use the Internet. Relative to payments and commerce, this connectivity and comfort level with accessing the Internet has also fueled their interest in using phones as part of the shopping experience – checking in and downloading coupons and mobile apps that allow them to pay in store. As a result, this group has taken multi-tasking to a completely new level - it’s reported that they toggle between devices and channels about 30 times an hour. So, if you ever wonder what your Millennial workforce is doing during the day, now you know.
But, it isn’t as if their parents are cave dwelling Luddites either. Roughly, 80 percent of Boomers are on the Internet and nearly 50 percent own a smartphone - many do so for no other reason than to communicate with their Millennial offspring. Did I mention I read the Barron’s article on my iPad?
Now to the point of the article.
Millennial spending power is estimated to be 21 percent of all consumer spending, or roughly $1.3 trillion. Many analysts believe that as the economy pulls out of its current sluggish spate, that their spending will restore our annual growth rates of consumer spending to between 3.5 percent and 4 percent - or about double what it is now. But, doing this assumes that said Millennials will have jobs and discretionary money to spend — that is after they’ve paid for housing, essentials, and their massive student debt - and there’s where it gets a little dicey.
At 13.1 percent, they have the highest generational unemployment rates in the U.S. And while 75 percent of Millennials have recovered the jobs they lost during the financial crash, many have taken jobs at a much lower salary rate (anywhere from ~6 percent to 12 percent lower) just to earn income (or because Mom and Dad told them to). The bad news here is that a lower base means a harder time making up the difference longer term. According to the National Bureau of Economic Research, 70 percent of all overall wage growth takes place in the first 10 years of employment. And, speaking of Mom and Dad, some analysts report that nearly 40 percent of Americans between 18 and 34 still live at home; numbers that experts say haven’t been seen in over 70 years. (Roughly 19 percent of men 24 – 34 live at home and 10 percent of women that age do as well.) Trust me, Mom and Dad will eventually give these kids the boot and they’ll have to spend their income on, oh, housing themselves.
Not to pile on, but the unemployment/lower wage-earning picture is compounded by the fact that this group comes out of school owing about $1 trillion in student debt. Un/underemployment, plus student debt, has also caused many Millennials to postpone or even shun altogether the prospect of having kids. Birth rates for this group are way down, which means a smaller workforce to support them in their retirement years and more pressure on them to save for their own retirement. Actually, that’s one of the reasons that Barron’s is so bullish on the Millennials. They believe that the necessity for this group to buy stocks and invest for their older years will drive continued growth in the markets. Well, at least that’s something positive for all of our 401Ks! These kids also probably can’t count on cashing in on Mom and Dad when they do their final checkout since the Millennial parents are going to live for a long time (have you seen the new Boomer bumper sticker …. Don’t mind me, I am spending my kid’s inheritance) and many had their assets really whacked during the financial crisis.
So, while Barron’s may think that Millennials are the silver lining in the consumer spending cloud, it just may well be that those 76 million Boomer parents save the day.
Nielsen reported at the end of the summer last year that Boomers will control 70 percent of all disposable income within the next five years, and today drive about half of all consumer package good spending. In part because they lost their jobs in the financial crisis (and had to do something to support their Millennial kids still living at home, perhaps), those 45- to 65-year-olds dominate new business creation and not only generate income but spending in B2B categories as well. And even though this generation has taken a hit in terms of median family net worth, the Economic Policy Institute tells U.S. that their net worth is three times that of Millennials, and that those 55 and older control about 75 percent of the wealth in the U.S.
That means that this group, unlike the Millennials, has money to spend.
In fact, the Government Consumer Expenditure Survey reports that Boomers outspend other generations by some $400 billion each year on consumer goods and services. And, females drive a bulk of that spending – in fact, this same survey reported that Boomer women over 50 spend $21 billion on clothes annually. Turns out that girl power is both stylish and powerful!
But, as we’ve seen, just because Boomers have money doesn’t mean that they’ll spend it. The financial crisis has caused Boomers to hang back and keep their wallets closed shut. Sure, Millennials are moving into the time in their lives when they buy homes and accumulate possessions to furnish those homes, and those who are inclined will even start families. But even so, the number of Millennials spending won’t overtake the volume of spend that the Boomers will drive on the things that can move the consumer spending needle. Boomers spending will be focused on the discretionary items that they want and/or like to have, not that they need to have – and often with much higher ticket prices. When Boomers feel comfortable enough in the country’s economic prospects, I believe it will be they who propel consumer spending and economic growth and not the Millennials.
The implications for payments and commerce are, I think, interesting. One of the other stats that Nielson reported last summer was the amount of advertising directed to Boomers - less than 5 percent - favoring instead the Millennials who are out for a “fun” and “high tech” experience when contemplating purchases. It’s the same thing in payments when thinking about the application of mobile payments and commerce strategies. Many of the initiatives play on what’s appealing to younger group and how they use mobile technologies - instead of what may be useful to those who may actually drive a great deal of spend. It’s what’s driving the intense focus on mobile-enabled points of sale and commerce, leveraging the smart mobile device on and offline. JC Penney may have fallen prey to this a little bit at their peril when it went whole hog into a makeover driven by new technologies in store, and messages and merchandising pegged for Millennials – the target group they wanted to court as customers. As we have now seen, it unfortunately turned off their Boomer customer base that drove sales. (There is a lot more to this story, of course – see my piece on JCP here.)
Now, all of this report’s broad sweeping generalizations across tens of millions of people and those sorts of things can be misleading. There are, of course, common themes that cross generations. Affluent Millennials and Boomers, for example, are both early adopters of new technologies - all one has to do is stand in line at a Starbucks and observe who whips open their Starbucks app to see that in action. Pew reports that nearly 70 percent of those with incomes over $70k own a smartphone. These groups – regardless of age - have similar tablet-centric use cases and spending patterns, and habits and are clearly spurring the growth in mobile-enabled commerce. That’s why it’s dangerous to make broad-sweeping decisions about mobile functionality and adoption and use cases based strictly on age cohorts - it overlooks other important inputs that in this case can directly link spending power to device adoption, as well as use cases that can ignite mobile commerce.
Now, I’m not suggesting that we all rethink mobile commerce by doing things like making the fonts larger so that Boomers can read things easier , but it might not be a bad idea to take a closer look at where the bulk of spending happens today, and who drives it. And, then create a mobile commerce experience that adds value to that consumer and her shopping journey. The pendulum seems, thankfully, to be shifting away from mobile commerce as “cool” to mobile commerce as a value-add to the shopping experience. The debate though is who is pushing the shopping cart - the Millennial or her mother - and who will most influence the adoption of a mobile-enabled commerce experience. It’s marketing 101 that when introducing new products and services, one always targets those with money to spend. In the case of mobile commerce, though, the bet the industry seems to have placed is on those who might spend someday. Big spending Boomers will be sticking around for a long time – the oldest ones today are mid 60’s and have another 20 years to go - further increasing their importance for spend (and perhaps reducing what will flow to their Millennial kids). And they love their iPads and iPhones.
So, could it be time to revisit our thinking just a little bit?
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Three guesses – and the first two don’t count – on who said this about what topic and when.
“I think it’s in its infancy, I think it’s just getting started. Just out of the starting block.”
That would be Tim Cook, Apple CEO, on mobile payments, Tuesday, April 23, 2013. In the process, he dashed the hopes and NFC dreams of many a payments players worldwide.
But his comments are oh, so Apple-esque in how the company approaches new markets and new opportunities – points that I went out on a limb to make back in September 2012 in advance of the launch of the iPhone 5. (Remember that? The whole world was convinced it would include NFC and it didn’t.) Here’s why I wasn’t surprised then and am not now.
1) Cook’s right – mobile payments at the retail point of sale is in its infancy. There are lots of experiments and lots of players trying new things to move consumers away from the good old reliable swipe (in the US) or dip (in Europe). Successful mobile payments solutions need to be attractive to both consumers and merchants. We’re a long way from knowing what that solution is.
2) Apple is manic about the customer experience – and today, the mobile payments experience can be a bit clunky at the physical point of sale. Now, early adopters could give two hoots about that, since they happily accept the trade-offs associated with new stuff – thus the “early adopter” label. Thank goodness for the early iPhone adopters on that front since they put up with A LOT when it was first introduced, too. But, as has become a familiar refrain in payments, changing anything related to payments can be costly for the retailer and agonizingly time consuming for the consumer, who needs a darn good reason to move off of what is known to something new. Until Apple has cracked the code on how to do that to their satisfaction, it is unlikely that we will see much happening in consumer mobile payments at the retail point of sale. The difficulty, of course, is that a satisfying experience in payments requires a solution that works for both the consumer and the merchant (see any themes here…)
3) Apple also doesn’t have any incentive whatsoever to pave the way for NFC in the marketplace. They have nothing to gain by doing that, as much as everyone who is invested in NFC might wish them to do for their own benefit. If anything, NFC could do things to compromise the Apple consumer experience – drain battery life, make phones larger, heavier or who knows what else. And, see point #2 for why that isn’t happening. NFC also potentially locks Apple into a different business model, and one which they would not entirely control – another Apple no-no.
4) But, as I pointed out in my September piece, Apple today really is in mobile payments and in fact is at the heart of a lot of the disruption in mobile payments today – but on the acceptance side of mobile payments. It is the iPhone that Square used to launch, well, Square, and ignited the dozens of Square-like mPOS schemes in market today worldwide. It is the iPad that has given birth to the disruptive new point of sale environments popping up like crocus in springtime in merchant environments of all sizes. Apple is reaping the benefit (and the juicy margins) associated with being a catalyst for change in mobile payments without deviating one iota from its core mission or lifting one finger. And it is what most consumers and many drivers use for Uber now, too.
Now, I 100 percent percent believe that Apple is observing the user experience and overall adoption of its Passbook application. It’s monitoring the use cases associated with the many merchants that have adopted its Pass API, enabling applications with Passbook and seeing what’s sticking and what’s bombing. I also 100 percent believe that it will continue to add to its base of iTunes digital wallet users so that it has a big honkin’ base of subscribers to dangle in front of merchants when it does finally unveil its physical retail plans.
But what those plans will look like and when we’ll know is anyone’s guess, and likely something we won’t know until it is pretty close to happening. Between now and then, we might find that Apple quietly expands its merchant acceptance of iTunes outside of the Apple walled garden in a strategic fashion in order to pave the path to a broader payments entre later. Maybe that strategy will align with those merchants who are using its hardware to enable their own retail commerce experiences – or those who have Passbook-enabled their apps. Remember, it’s not just the little guys who are gravitating to Apple products these days – Nordstrom and Neiman Marcus gave its sales associates iPads not long ago, and I noticed Saks was installing iPad stands in its NY store a month or so ago too. (Okay, no editorial comments please on the retailers highlighted here). They’re not alone. JC Penney, Burberry, Puma, Kate Spade and many more are embracing the device as a way to enhance the consumer experience in a variety of ways. And, maybe it’s not such a stretch to think that an easy point of entry for Apple into mobile payments is a software push to those merchants to enable iTunes as a payment method. Voila – Apple ignites mobile payments acceptance!
One thing, though, is quite certain. When Apple does make its move, it will be disruptive and significant. And, a likely catalyst for many a new mobile commerce applications.
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Just about everyone by now knows the story of JC Penney, or JCP as the brand is now known. In forty characters, it is how a 110-year-old brand hires Apple exec to turn it from old and dowdy into hip and cool and crashes and burns. When the hiring of Ron Johnson was announced in 2011, JCP’s stock climbed 17% and then again when its new strategy was announced several months’ later. It was easy to understand why. Johnson was hailed as a retail rock star – the guy who grew Apple’s retail business from zero to $18 billion in less than a decade and then before that as the maestro of Tar-jey’s transformation into a purveyor of mass chic merchandise.
Boy, what a difference a little more than a year makes.
JCP’s stock is at an all-time low, having lost 55 percent of its value. Meanwhile, JCP’s sales plummeted to its lowest since 1987. As a result, Johnson has a lot more time on his hands since he no longer has to make the weekly commute to Plano from his home in Silicon Valley.
So, quite naturally, everybody and his mother-in-law has a theory about why Johnson’s strategy was one big dud. I have one too, and I think it is pretty simple. Johnson may have taken the concept of “creative destruction” a little too far.
Now, to be fair, Johnson didn’t exactly walk into a situation that was all wine and roses. JCP was on the wrong end of a bunch of retail and economic trends. Well before he arrived, it was regarded as a pretty dowdy brand with a boatload of undifferentiated merchandise. JCP had a tough time getting good brands into its stores for a variety of reasons and as a result, 55 percent of its merchandise carried its own private label. It seemed stuck in the middle, too. It really wasn’t a discount retailer like Target or Kohl’s or TJX — each of which had its own product and price differentiating brands and strategies — or like a Walmart which was known for rock bottom prices and a broad selection, or like mid-tier retailer Macy’s. JCP was a brand known for price and quality but one increasingly squeezed by competitors who offered more selection and better brands for less.
Then, most of its stores – 80 percent to be exact, were anchor tenants in malls that were no longer packing in the crowds. The changing nature of retail and the growth of online commerce have taken its toll on the physical retailer in spite of the fact that 90 percent-plus of commerce still happen there. But, the physical retail graveyard is filled with names that were pretty well known and thriving as recently as even two or three years ago: take Circuit City, Borders, CompUSA, Tower Records or Blockbuster, as examples, with many more showing signs of great distress. When they leave a mall, it is increasingly more difficult to find replacements for them. In fact, in Boston, when the Tower Records on Newbury Street (the famous shopping street in Boston) closed its 45,000 square foot storefront in 2006, a Best Buy came in right behind it to take over the space. It shut down last year and has remained vacant ever since – the future of the space is a bit uncertain. Yet that story is hauntingly familiar all over the U.S. According to commercial residential listing service CoStar, there are more than 200 malls of more than 250,000 square feet that have more than a 35 percent vacancy rate. Tough financial times have forced consumers to shut their leather and digital wallets and the availability of mobile phones and tablets just make it easier to shop on line and to access marketplaces like Amazon and eBay, where consumers can buy just about everything they might want and at a discount.
And, speaking of discounts, that’s where the wheels really fell off the cart at JCP.
Like it or not, American shoppers are addicted to sales and discounts. In a way, it is sort of retail’s own doing. Consumers know that everything in retail is marked up and usually by a lot. And, so unless the item is incredibly unique (the iPhone), or a luxury item (Cartier watches), or needed urgently (birthday gift for tomorrow), or scarce (Rolling Stones concert tickets) consumers are very happy to wait for a sale. Not only do they save money, it makes them feel smart about buying a product that was once expensive, at a lower price. And, it’s shopping’s Holy Grail when that discounted item is on a rack with a little sign that says, “Today only, take an additional 25 percent off sale prices.” The adrenalin rush that comes with tracking down that sort of added discount is what shoppers love to brag about and organize their shopping excursions around.
Until Johnson took over, JCP was pretty well known for its deep discounts and special promotions. In fact, it ran nearly 600 such promotions a year at an average cost of $2 million a promotion. Shoppers responded by buying, 72% of JCP’s sales came from items that were reduced 50% or more. It was sort of a Pavlovian thing – JCP ran a promotion and shoppers came into the store and brought stuff. It was what they were used to from JCP.
Johnson thought that whole promotions thing was bogus and that shoppers were smarter than JCP gave them credit for. So, rather than JCP spending nearly $1 billion on around 600 promotions that consumers would have to wait for and plan around, he would make it more predictable for customers by pricing everything in the store at 40 percent less than the retail price. Those items could also get cheaper once or twice a month when scheduled monthly reductions were announced. That meant that a $20 shirt would be sold at $12 every day, maybe reduced to $10 on a promotional sale once a month and then maybe even reduced lower than that at some point into the future. As you have read, it was coined “fair and square” pricing. Predictable, consistent, logical.
But JCP consumers didn’t want that. First of all, having a single price on a price tag gave them no frame of reference anymore. Well, except for one. Before “fair and square” pricing, the great majority of JCP’s items were sold at a discount of 50 percent or more. So, existing JCP consumers walking in to the new JCP pricing strategy probably perceived that prices were a little higher than they were used to paying on merchandise that was by and large the same: anything but fair in their eyes. Overnight, the ability to snag a sale item and the anticipation associated with being able to walk into a JCP and stumble upon an item that was on sale and maybe even with an additional percentage off had all disappeared. Fair and square pricing made the shopping experience at JCP seem blah and boring.
So, consumers did what they always do when their expectations are dashed: they went somewhere else. And, these weren’t just any JCP customers that fled, they were their most loyal. It was as if JCP had broken up with them, and they were plenty angry about it too. One of the earliest tip offs that JCP’s strategy was failing wasn’t the dearth of customers in their stores, it was the rising fortunes of Macy’s and Target, whose revenues reported upticks just about the same time that JCP’s new strategy was rolled out.
Johnson’s mandate was to transform JCP into a more hip and happening brand – which was about as far away from JCP as you could get. JCPs core customer was far from your average hipster: it was a 40-year-old Mom with kids and an average family income of $69k. For them, JCP was the “go-to” for quality, price and selection – not fashion forward styles but conservative, well-fitting and comfortable clothes (aka not the skinny jeans and stilettos crowd). Often, this Mom went to that store with kids in tow, kids for whom a Levi’s and a Joe Fresh and a Sephora store-in-store would have been most appealing, and potentially capable of becoming the onramp for the next generation of JCP shopper. There was, in fact, some early evidence of that. Store sales per square foot of those store-in-store brands were well above those outside of those branded experiences in-store. But the change in pricing stopped that loyal JCP Mom from walking through the doors. And when she did, she stopped walking in with her hipster children or hipster friends or hipster siblings who might have been enamored by all of the shop-in-shop branded boutiques that Johnson was building inside of JCP’s four walls, which they never see and experience.
So, there you have it. The handwriting was on the wall in February when Johnson admitted in a CNBC interview that 2012 was harder than he thought but was still bullish on JCP’s future - and no one really leaped to his defense. It was just a month or so later that he was officially out.
Johnson made a pretty bold decision to do things at JCP the “Apple way” – that is without any consumer research or small trials. Apple, as you all know, is famous for not doing consumer research since their view is that consumers can’t articulate what they want so why bother to ask. There is some truth to that; but retail pricing is a discipline all onto itself, one made much more complicated by the difficult economic times, the rise of the discounted daily deal mentality that consumers find hard to shake and the irrationality of the consumer shopping and buying process.
There was another difference at play too. Johnson’s alma maters, Apple and Target, could deliver a different pricing experience because their merchandise is sufficiently differentiated and is targeted to a different consumer segment – the iPad Mini at Apple, the Michael Graves teapot at Tar-jey, for example. JCP’s pricing strategy got in front of its merchandising strategy and killed not only the loyal JCP shopper’s interest in shopping at the store, but offered nothing of value to anyone new. The big lag between when branded merchandise was to arrive resulted in JCP being stuck in the middle again: the existing customer base fled out of confusion and disappointment (and some even out of anger) over the new pricing and the new hipster crowd had no reason to give it a try.
Creative destruction is a conscious decision to cannibalize an existing business in order to reinvent it for the future. Johnson’s mandate was to creatively destroy JCP and turn it into a new hipper brand, more in tune with how people would like to shop and what they would like to buy. His vision of creating a mall within a store was very consistent with how futurists describe the new physical shopping experience – something bigger than just shopping. He painted a picture of moms and families coming to the store, kids getting free haircuts, having their pictures taken, buying clothes, and even grabbing lunch or dinner – was all about delivering value, service and saving time-challenged families time and money.
Unfortunately, that wasn’t the experience that the loyal JCP customer got when the new strategy was launched. The result was a strategy that has the potential to more or less kill the entire business all at once before there is any evidence that the alternative to the “old ways” would be appealing enough to enough new customers to move it in a new direction. Johnson certainly didn’t expect that the result of implementing his vision would be that customers would leave them in droves before new customers latched on or old customers caught on, but that’s the reality of where JCP is now.
Today, JCP is truly between a rock and a hard retail place having alienated many of its existing customers and having introduced a new brand that most consumers new and old don’t really understand now and see no reason to investigate. The old CEO is now back in charge, discounts are back, and about half of the stores have some branded storefronts installed. New merchandise - ordered months ago – will be rolling in soon to stores that today lack a lot of shoppers. Management is seeking $1 billion to keep the lights, on since it is reported that JCP will run out of money come August if it doesn’t get it.
I’ve read in lots of places that JCP was unfixable from the jump and Johnson just accelerated the inevitable demise of the once iconic brand. That may be, since the future of physical retail is changing and there are lots of brands that won’t be able to keep pace with what will be required to serve new types of customers, and to master the new opportunities that come with the convergence of on and off line retail. While it always appeared to be a hugely massive undertaking to turn JCP around, maybe there was a way to creatively destroy the business without as many casualties, including Johnson himself.
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The Incredible Shrinking Google [Retail Payments] Wallet
Seven years into the retail payments game, search giant Google has struggled to find its footing in the retail payments game. The news that broke about ten days ago, as its Commerce reorg sent a huge signal about its plans to address this - at least for now. That announcement split Commerce into a couple of pieces and moved Google Wallet under Advertising, and longtime Google executive, Susan Wojciciki. In my mind sent a very strong message about its plans for the near and maybe not so near future, which is to stop trying to be a retail payments player for bricks-and-mortar stores.
Here’s a replay of the Google Payments movie for all you fans out there who want a bit more context as to why I came to the conclusion that I did. Sit back, relax and grab some popcorn!
Google Payments Scene One - Google Checkout.
Google launched its online payment ambitions in June of 2006 as Google Checkout. Billed then as the “PayPal killer,” Google banked its payments and commerce ambitions on merchants wanting to put a Google Checkout button on their websites in exchange for free transaction processing and better search rankings triggered by product sales. One year and $60 million promotional dollars into that experiment, Google Checkout struggled to break through, racking up a mere one transaction to every 68 processed by PayPal, according to ComScore. By the end of 2011, it managed to secure ~13 percent market share in terms of acceptance by top internet retailers, but that was still less than half of what PayPal and Bill Me Later (a PayPal company) had at the time. On the consumer side, fewer than 10 percent of consumers had ever tried it, compared to PayPal’s 80-plus percent In the case of Google Checkout, 13 percent merchant acceptance didn’t seem to drive much consumer trial since there didn’t seem to be a strong value proposition for consumers to want to care (or many places for them to use it). This is the usual payments ignition failure—a sputtering failure resulting from merchants not being interested because consumers aren’t interested resulting in merchants being even less interested resulting in consumers being really a lot less interested ….
Google Payments Two – Google Wallet.
Google Wallet launched in September of 2011 and was the beginning of the end for Google Checkout. In a go-to-market strategy that took Eric Ries’ Minimum Viable Product to a whole new (lower) level, Google Wallet’s first version was NFC, and available only on the Sprint Nexus S 4G using a Citi-MasterCard and/or the Google Prepaid Card loaded into that wallet. Any consumer who was even remotely interested in using the Google Wallet had to buy a new phone, live in one of the few areas with NFC density (Manhattan, for example) and either get or already have a Citi MasterCard – not just any MasterCard. Not surprisingly, adoption was slow. Just ask any Duane Reade clerk in Manhattan whether they had ever seen anyone use Google Checkout—they were one of the few merchants who took it. You will get a quizzical stare to maybe a “yeah, I saw a one person try to do that once.”
Four months later, in January 2012, Google announced what the media described at the time as one of its biggest reorgs to date. Google Checkout was folded into Google Wallet and Google Wallet would live in something called Commerce and Local. A bunch of top execs were shuffled around (and out). Seldom a sign of success.
Eight months later in August 2012, Google Wallet, still a NFC-based technology and still slogging away to get merchant and consumer acceptance, announced that it was open to all payment brands, leveraging the capabilities of its TxVia acquisition. But what solved one problem – a consumer’s ability to load any card into her Google Wallet – created another– the method by which those transactions were processed. Although consumers’ card accounts were stored on Google’s servers, purchases done in stores were via a virtual MasterCard card number that generated a Google Wallet Master ID linked to a consumer’s credit and debit account, and stored on the secure element in their NFC phones. This meant, for example, that Google Wallet transactions done on Visa cards were behind MasterCard’s front end – I can’t imagine that made for many happy campers up the road in Foster City, California.
And, merchants still didn’t seem to be happy campers either but for different reasons. They got pretty uptight about Google having access to (and monetizing) all of the juicy transaction data generated from transactions happening via the Google Wallet. Practically speaking, they didn’t have all that much to be worried about – with NFC technology still at the core, few handsets with NFC chips in them and few merchant acceptance outposts - there weren’t that many transactions being done. But still, the thought gave them pause and didn’t do much to get them interested in signing on.
Then, the much teased big “cloud” announcement anticipated in October 2012 never materialized, even though rumors of a PayPal-esque solution, a plastic Google card and strategy to gain offline merchant acceptance were swirling. By the end of 2012, it seemed that the only thing at Google Wallet that was getting traction were the rumors that its leader was jumping from the Google Wallet frying pan to the MCX fire to take on its CEO role.
Google Payments Take Three – Reset
So, that brings us to today.
On March 14, 2013 Google announced that it would split its Maps/Geo and Commerce group into two separate units. Jeff Huber, the SVP who was put in charge of Commerce during the last reorg, will move to Google X, the “startup lab” within Google that is doing, among other things, those totally practical experiments like devising self-driving cars and wearable computers (e.g. Google Glasses). Commerce will become part of Advertising, reporting to SVP Susan Wojcicki. Just to refresh your memory, Wojcicki is Google employee No. 16, and the person whose garage literally hatched Google in 1998. Her business unit drives 95 percent of Google’s revenue and she personally masterminded two of Google’s most critical deals – the Double Click and YouTube acquisitions. Further specifics on who will look after Google Wallet were not disclosed but it seems that person Page and Brin seem to trust most is now the person who will help them sort out its retail payments future.
How that future will look is anyone’s guess. My read is that Google has made a deliberate (and very sensible) decision to back away from retail payments in lieu of redirecting its payments use case towards something that more resembles the “iTunes equivalent” for Google Play and Adwords. Hardly an all out full blown payments strategy, this move will enable Google to provide an easy payment mechanism for consumers and businesses who want to buy online (and via the mobile device) with Google – digital goods and ads (for now at least).
After several hundred million consumers have done that, perhaps Google will be in a better position to consider its retail payments options. At that point, a lot of the uncertainty related to retail payments (technology, consumer and merchant value proposition, etc.) will likely be resolved. Of course, so will the competitive playing field, but at the moment, it’ really hard to see a plausible strategy for Google Wallet given what it is today and where it has placed its bets.
Will it be a while before we see Google Wallet as an offline or online consumer payment option at the places you like to shop? Well, let’s just say that I wouldn’t hold my breath. Are retail payments over for Google? I doubt it. As I mentioned during my opening at The Innovation Project 2013, the most exciting and disruptive thing about payments today is the blending of the on and offline worlds. Anyone with a great idea and a vision can give any offline encounter an online component and vice versa. Google has a ton of online experience and eyeballs, and a bunch of interesting assets to leverage, including all of the things that come with its Android platform and Motorola Mobility assets. Google could very well decide to turn its thinking about payments on its ear and approach the problem set and use cases in a very different way. Google’s free cash flow – which for Q4 2012 was about $3.7 billion dollars - could certainly fund a lot of creative thinking about just how to go about doing that.
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The Innovation Project™ 2013 was an amazing experience from beginning to end. We set out to facilitate a series of C-level-to-C-level conversations about payments and commerce that went beyond the usual conference patter to the essence of the struggles and opportunities that executives deal with every day as they are trying to (excuse the terrible cliché) change the tires on a racecar moving 150 miles an hour.
There’s a lot to share but here are a few of my key takeaways. Each will be addressed in more detail over the coming weeks.
The Big Picture
There were many interesting conversations teed up at the start by both Warren Buffettt and Al Gore. Buffettt’s advice was as simple as it was profound – don’t assume you know what the consumer will want. He cited Geico Auto Insurance, one of his portfolio companies, as an example, saying that he and many people like him would rather do anything than fill out forms on line, but it turns out that there are tons of people who would prefer that to calling an 800 number (their first version of the product). He emphasized that making it easy for consumers (like Amazon has done with its massive online marketplace and payment options) is also how you add value. That’s why, in my view, a lot of mobile payments still flounders – it isn’t easy, it doesn’t add value and while en/intrepreneurs think they do, they don’t really know what the consumer wants from a retail payments experience or how to make it better from the great experience consumers have now.
Gore proved to be a knowledgeable student of payments. I was struck by his command of its nuances, like rightfully crediting M-Pesa’s ignition to regulatory exceptions (like not having to deal with bank regs), to take one example. Several provocative things came out of the discussion led by (but not necessarily endorsed by!) Gary Flood from MasterCard.
One is the general sense that “smaller” (aka regional) payments networks might be more plausible than global ones – at least until they get traction and can then leverage their way into larger systems. I found this interesting, not only because of its application to developing economies and the potential need to get smaller M-Pesa-eque schemes launched that can become interoperable but because of what we are seeing in the developed economies too. For instance, Chase Merchant Services (CMS) has the makings of becoming a “regional “ (aka U.S.) three party system with the utility of Visa acceptance worldwide. So could Visa Europe with the news last week of its potential to exercise its sell option to Visa International and then have its banks go start their own system in competition. Certainly, that is the ambition of MCX if that ever sees the light of day, and whatever might come of ClearExchange and some of the other stealthy schemes that are simmering beneath the surface. It’s also the core of Western Union’s Global Share Platform announcements – big global platform powering niche use cases in specific countries that also have the tandem benefit of acceptance globally given the platform assets that power it.
The second point of interest was the discussion around the future of bricks and mortar retail. There was a hearty debate about that, with the consensus that bricks and mortar retail will undergo a huge transition away from what we know today to something very different but won’t disappear entirely. The rationale is that shopping satisfies a lot of other things than just buying stuff – it is also a highly social activity. For that reason, the need and desire to “go shopping” will always remain but just how consumers will adjust that activity given the mobile devices they take with them remains to be seen. Surprisingly though, there were several very smart people who thought, actually, that traditional retail is going to die very quickly. And if you look at the shuttered Borders stores maybe they aren’t entirely smoking something.
There was a hearty discussion about the power of “the global mind” to bring financial inclusion and empowerment to the billions of consumers who need and want it. With that opportunity comes great responsibility – a responsibility that isn’t just up to the innovators to address. Regulation has to play a role in making it easier for innovators to serve those consumers and to build business models that allow them to monetize those investments without disadvantaging the consumers that must be served.
The 411 on Consumers and Commerce
There were many interesting discussions over the two days about how to get inside the hearts and minds of the consumer. A couple of interesting hypotheses surfaced including the fact that the consumer doesn’t really care about innovators and their innovations – they just want stuff to work and they don’t always know what they need until they see it. To the earlier point made by Buffett, it’s why so much “innovation” in payments has fallen flat and why the iPhone is such a screaming success.
That’s why it is essential for innovators to know where to look. For example, who knew that 75 percent of mobile device owners admit to using their tablets while on the toilet? That stat, compliments of PayPal’s Don Kingsborough gave the audience a whole new meaning to the term T-commerce (ba bum bum) and a whole new data point to the notion that the offline world truly does follow us wherever we go today, expanding the more “conventional” time frames associated with accessing the internet. Now, this factoid may not expand how much people actually spend while they are in their virtual worlds (since what they have to spend probably remains fairly constant) but certainly can and will influence how and with whom they spend it.
And speaking of how and with whom, there was considerable discussion over the two days about the role of cash in a world that is trying to kill it off. Data shows that cash in circulation, not necessarily the right way to measure cash usage, is on the rise. In fact, there was, in 2012, $1.2 Trillion of it swirling around the US. And, thanks to a bunch of innovators, it is getting easier and easier or merchants and consumers to access and use. Cash can be used to conveniently pay bills electronically the same day they are due, shop on line and pay in store, store conveniently in secure safes if you’re a small merchant and accept cash and access via ATMs just about everywhere. If anything, innovation is making cash as easy for consumers to use and merchants to accept than just about every other electronic payment method. And, we all know, as long as merchants like it and consumers want to use it, cash will stick around as a method of consumer payments.
The topic of adverse customer selection was also discussed. This is a fancy way of describing the commerce road-kill that retailers are dealing with thanks to deal sites that have bred a whole new generation of deal seeker rather than merchant/brand loyalist. Consumers and their follow the deal mentality has now persisted well beyond what was once thought of as a “temporary” reaction brought upon by the financial crisis. This big takeaway is that retailers must get and use data and the tools to mine that data so that they can identify and target profitable customers - and innovators can help them find and keep them (and keep existing customers in the tent.)
This discussion motivated another important point - the need for offline retailers to leverage the appropriate online methods to do one very basic thing – to know who the customer is who walks in the door – or out, in the case of the many emerging self-payment options that basically enable consumers to move in and out of stores fairly anonymously. Caution is the watchword here since the very tools that enable such transformative experiences for consumers around shopping and buying also has the potential, if we’re not careful, to completely disconnect that consumer from the merchant and the meaningful interactions that can only come when there is engagement.
What Can Startups offer Merchants?
Well, if you are a really small innovator and a really large merchant, probably not much. At least that is what a few large merchants said anyway. Instead, the best course of action for startups is to start with smaller merchants who are eager to get an edge (or to have parity) with the big guys, gain experience and then work your way up into a well-defined pilot with a large merchant that can be measured.
Over lunch and a rapid-fire discussion between merchants and innovators, one cold hard truth surfaced: the big guys probably won’t be all that keen to be your testing ground even if you are cool and innovative unless you are pretty far along. And, if you get up the gumption to call on them, at least visit their web site first so that you can talk intelligently about what they do. It is stunning to hear that the cardinal rule of walking into a meeting knowing more about the prospect than they do is broken routinely by startups!
One final point: Sometimes what startups offer merchants are new business models. Those new business models sometimes tie monetization schemes to incremental customers. That works so long as there are incremental customers OR there is a way to discriminate against those who aren’t loyal customers who drive more incremental spend. We didn’t have time to get into the discussion of what happens when new business models become the new standard, and are then commoditized and incremental spend/customers harder to prove. I have some thoughts, which I will share very soon.
Simmons the [Payments Innovation] Sage
In The Innovation Project’s Shark Tank meets Top Chef, 11 entrepreneurs each had eight minutes to engage with Russell Simmons, Founder of Uni-Rush and Rob Rosenblatt, RushCard CEO. It was a really interesting peek inside the ultimate entrepreneur – Russell Simmons - perspective on startup success. Here’s what I took away from this session based on how the innovators were rated.
- Believe in your idea. This is important because for a very long time, until it is successful, as the innovator, you’ll be the only one. People only think you’re genius when success is evident. It may be lonely at the top but it is also really, really lonely and frustrating on the way there.
- Be clear. If you can’t use plain English to explain what you are doing, then either (a) work thru it until you can or (b) give it up since you will only be prolonging the inevitable train wreck of failure.
- Timing is important. There were several innovations that Simmons thought were promising, but feared would be squashed or rendered irrelevant unless they were far enough along to have traction. The fear was that bigger players with bigger checkbooks and teams could easily see replicate it and do it faster.
- Scale is critical. Technology can enable lots of things but competitive advantage requires that innovators deliver more than what might be regarded as a marginal improvement to what exists today and to do it in a way that can scale. If the problem is too small or solution too complex to scale, you’re DOA.
- Can you make money? I know, seems obvious. But unless the business model is bullet proof, give it up. Now Simmons doesn’t believe that you have to make money on day one, but you do have to have a clear path to revenue that can be seen by everyone, including the innovator on day one.
And the winner? CSI and its globalVCard. Why? It solved a real problem for lots of use cases that were big enough to scale and be profitable.
Igniting Payments Innovation
There were two related and fascinating roundtable discussions about what it takes to get innovation off the ground – whether you’re a startup or a big company that wants to act like one. A couple of themes emerged.
First, perfection is the enemy of the good, at least that is how I interpret Eric Ries and his Minimum Viable Product principles. MVPs are good enough to be credible, not perfect, in the market so that you can learn from the experience. Ries poo-poos multi-year product development cycles and instead challenges teams to look for clever ways to leverage existing things so that they can get into the market quickly. As for the fear of client complaints? Embrace it. The best thing that a startup can get is feedback from customers, even if it is rabid complaints since it means that (a) products are getting into the hands of the right people and (b) they care enough to complain. Alas, this though is relatively rare – most of the time, products are launched and all that can be heard is crickets.
Speaking of enemies, it seems that often the real enemy isn’t the competition – if you are large or small – it is one of two other things. First, it is the company itself. (Ries went so far as to tell “large company” people to look in the mirror and that the person looking back is the problem standing in the way of innovation!). Companies, by and large, understand this, and are doing a number of things to try to make things better including hiving off separate teams and business units that are unencumbered by corporate rules, metrics, reporting, etc. Perhaps the most interesting set of insights came from the President of Korea Telecom who was pretty candid in his assessment of KT’s impact on innovation and innovation - unless it is directly related to its core business, having KT supervise or try to do innovation itself is a death warrant. That’s why KT’s approach to innovation is to seed innovators outside of the KT mother ship and to invest in them until they are large and stable enough to survive when brought inside of KT. Until then, it is strictly corporate hands off! The toughest part, he says, is making sure that they still feel like a startup, since “desperation” is the best motivator even though KT is paying the bills.
The second enemy is regulation. There was a very lively lunchtime discussion about regulation and both the spur to innovation that it is (e.g. lots of new players with new schemes pop up to fill the void) and weight it has become (e.g. forcing old rules on new situations). It also surfaced during several of the roundtables and cited as one of the reasons that innovation in some areas has stalled. Everyone agrees that state-by-state regulation of money transmitters is a big problem and most seem to agree that banking regulation is a sure-fire killer of mobile payments schemes.
Meet the Innovators
The capstone of The Innovation Project 2013 was the PYMNTS Innovator Awards Dinner where 47 awards for innovation were distributed. Sixteen categories, including the NACHA Award for Best Innovation via ACH produced bronze, silver, and gold winners. About 75 percent of the categories were decided by a margin of 100 or fewer votes, in spite of each finalist having received several thousand votes. One category was decided by a single vote with votes for the top two finalists topping 4k each. The biggest takeaway for me that evening was the fact that not a single incumbent placed as a finalist much less won an award, even in the categories where one might expect that to happen – Best Debit, Best Credit, and Best Check. If you wanted more evidence that traditional banks have a problem this was it: not only were they not innovating, but the winners had innovations that were designed to steal customers from the banks.
Maybe perfection has become the enemy of the good in the large incumbents or regulation has kept new ideas in check. But if an alien spaceship landed in Annenberg Hall at Harvard on Thursday, March 21, 2013, they would conclude that the future of payments and commerce is being blazed by innovators who (admittedly) are standing on the shoulders of those incumbent giants and even riding their rails in some cases but who are completely in charge of reinventing what happens when consumers and merchants meet at the point of sale – where ever that happens to be.
The Best Off-Color Remarks of The Innovation Project
Third prize goes to Russell Simmons and the many two-second delay buttons we might have used had we had them at our disposal during the Ultimate Entrepreneur’s Challenge.
Don Kingsborough gets second prize with his toilet stat and the inevitable discussion that kicked off as to what the other 25 percent were doing or whether they were just lying.
The grand prize goes to Vice President Gore who observed that mobile transmitters were being inserted into cows to alert farmers when they were going into heat and how that was the first known example of interspecies sexting. Don’t forget that before the Nobel Peace Prize, the sale of Current TV, the Apple Board….there was the VP’s appearance on Saturday Night Live.
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Platform plays are going to make 2013 a very interesting year for payments.
Payments has always been about platforms, of course, given the sector’s two/multi-sided structure. But the big news that broke across the industry over these last two weeks is, I think the tip of the iceberg. If 2012 was the year of the “mobile wallet,” 2013 will be the year of the platform play.
One might say that Discover started the whole new trend in platform plays the end of last summer when it made its platform available to others (PayPal most famously) to ignite their own payments innovations such as PayPal, Google, and Facebook. Now platform plays are starting to seem as fashionable as neon colors are for the Spring 2013 fashion season. The two biggest newsmakers of the last ten days sort of put a punctuation mark on this payments industry phenomenon.
TSYS/NetSpend is an interesting combination of B2B and B2C platforms. It gives the traditional B2B TSYS business an interesting consumer hedge. That’s important because the processing side of the payments ecosystem could find itself in the middle of its own disruption in the not too distant future. Processors are concerned that MasterCard and Visa will encroach on their space since they, too, face competition from lots of innovative upstarts. But TSYS is also a very big prepaid processor and NetSpend is a big and pretty profitable prepaid program manager. Having NetSpend part of TSYS allows it to “go deep” in the prepaid space and create some supply chain and operating efficiencies that could logically support the development of new products with different economics and a stronger ROI – a new prepaid platform, in essence. Since NetSpend is an issuer of an alternative financial services product and TSYS has a very robust processing platform for financial services products, it seems to suggest that NetSpend customers could begin to benefit from some of those capabilities over time too. And, don’t forget that TSYS is a merchant acquirer and can use its merchant footprint to create more distribution opportunities for NetSpend. TSYS has a very large international presence, including a deal with China Union Pay, that could ultimately extend the reach of NetSpend’s products beyond its current US footprint that could help to expand and monetize the TSYS/NetSpend customer base.
But it’s the Chase/Visa announcement of the formation of Chase Merchant Services (CMS) that got the web buzzing. It answered one question pretty directly – what’s been keeping Charlie Scharf busy these last few months - but certainly raised a bunch more.
The other question that most people felt that the announcement answered was whether Chase would pull out of Visa and start its own system. Most of the reports last week that I read concluded that the new ten-year deal meant that Visa had stayed this off for at least that long. I disagree. Chase, thru the CMS partnership, for all intents and purposes will operate just like a third-party network with a VisaNet element to the “custom processing” solution that will support the transaction processing for Chase/Visa branded cards. CMS will negotiate directly with merchants, strike new pricing deals with them and “offer them an additional option for consumer payments” that extricates itself from the traditional interchange arrangements for those merchants who sign on. I think this is a pretty big development.
Reports suggest that CMS hopes to capture more merchants because the deals will be better and CMS will be able to support the development and deployment of new data-driven offers/inducements and other value adds that will drive incremental consumer spend. Data is a big by-product of the CMS play since at the moment, Chase only gets to see those transactions that run over Paymentech. Now, at least it sounds like they will see all of the data from all Chase/Visa transactions that CMS supports.
So, the big questions now relate to the actual mechanics of how this will all work when it rolls out later in the year. Chase will certainly want to do what all that it can to get merchants to accept its new card option a la a three party arrangement. And, one of the big advantages of a three party system is that it is exempt from network interchange fee regulations. But, as you all know, it is able to charge a merchant discount that, in theory, has no limit (operative words, in theory.) This fee/discount, as all of you also know is the inducement that is offered to issuers. So, if, as reports claim, CMS will mean reduced prices on the merchant side, it will have to sort out how it incents the issuing side of Chase to play along. Now CMS can of course, be very selective about who gets the sweetheart deals, but the system economics won’t really work if CMS reduces or eliminates the merchant discount on a wholesale basis and doesn’t replace it with something else. Certainly, the new CMS gig can identify other sources of revenues, say from the interest on outstandings, (which according to the Fed now is up from 2011to roughly $7k per household with 47% of Americans now revolving their credit card balances) or from new loyalty/payment schemes a la LevelUp that eschews interchange for a piece of the incentive offered to consumers to increase their spend at a merchant, or from creating an entirely new model suited for mobile only transacting. Regardless, the existence of CMS suggests that a new business model must be on the drawing boards in order to both preserve platform equilibrium and leverage the new opportunities that its new operating model and assets can support.
People have implied that this opens Visa’s door to a similar knock on it by Bank of America. That seems less likely. Yes BAC does have BAMS but the majority shareholder isn’t BAC, it’s First Data. Maybe rather than knocking on Visa’s door, BAC could decide to organize its own three party network instead. It’s right behind Chase in terms of credit card volume in 2012 (~$250 billion according to Nilson) and given its First Data stake has the potential for international acceptance too. It could also make some interesting acquisitions (which I’ll keep to myself for now) if it wanted to go that route.
Then there’s the question that CMS raises for the future of ClearExchange, the ACH-based P2P network that Chase, Bank of America and Wells formed in 2011. Many thought that was laying the tracks for a bank-owned payments system. ClearExchange operates by moving payment information (not funds) between people or businesses by only using an email address or a mobile phone number and checking/savings account. Powerful, when one considers that these three FIs account for something like 80% or more of the consumer debit accounts in the US. But doing that would, in many ways, be like going WAY back to the bank-association model future that was wrought with antitrust issues – and one big reason why that model doesn’t exist anymore. But ClearExchange seems intent on doing something with those assets so will be an interesting one to watch. Will CMS change the focus of ClearExchange moving forward, say from a potential retail payments play to a C2B and B2B network perhaps?
And how about the questions related to Visa itself? Cynics say that the CMS deal was the lemonade out of lemons outcome for them since they may not have been in the strongest bargaining position. With CMS, they’ll still get paid on transaction volume, but what they get paid will be a negotiation. And sure, they’ll benefit for the next ten years if Chase brings more volume onto the network, and the partnership has allowed it to avert the direct loss of its biggest customer from its portfolio, but perhaps only for the next decade. There’s nothing to stop CMS from deciding in ten years that it doesn’t need Visa, having used that time to beef up merchant acceptance of the Chase card option and building lots of platform capabilities that are attractive enough to merchants and consumers to hang on.
Outside of CMS directly, there are both questions and potential new platform power plays taking shape too. For instance, FIS/PayNet is a new payments network infrastructure that wants to breathe new real-time life into the ACH system that has been around for decades and make it a more viable network for innovators to leverage. There are other players with similar assets and ambitions. All are contemplating their next moves recognizing that the combination of mobile, new technologies and merchant dissatisfaction with the existing networks makes the potential of new networks more doable yet just as tough as ever to ignite.
Then, perhaps some of the biggest questions remain around a couple of existing payments players and their next moves in the midst of the CMS development and the new opportunities that all of these new platform plays are making possible. Take MCX. What seemed like a slog before seems like a real tough slog now since I’ll bet anything that the CMS merchant short list is the MCX merchant prospect list. I can also imagine that those sitting on the MCX fence right now might just lean in to listen carefully. The MCX business model has always been a big mystery to me for the reasons I stated earlier – the funding for the system has to come from somewhere and if not from the merchant, from where? CMS has deeper pockets and a built in customer base with cards in their non-digital wallets to make that discussion a lot tougher really tough for MCX to counter, I would think. And, ISIS and Google? Yikes. Sure, both are moving (or have) away from NFC to the cloud but they still need merchants who now have even more options to consider and whose latest courter suitor brings consumers along with them. It also seems completely infeasible reasonable to think that CMS isn’t is going to blow out a mobile wallet solution early on that can more easily be deployed at merchants given their acquiring relationship and potentially different business model to get merchants and consumers interested.
It will be interesting to see how MasterCard responds too – it remains the only true worldwide payments network (Visa Europe is a separate entity). For Citi, this just seems like another in a long series of setbacks on the retail payments side. They are MC’s biggest single issuer, and an enormous global financial services entity, but have no acquiring/processing asset to leverage and a more narrow set of options than most other players to consider. Then there’s AmEx. AmEx and Chase are bitter rivalries – many of the Chase senior exec team have AmEx blue in their veins. It’s always had a solid franchise anchored by its corporate travel program, rich cardholder rewards, and outstanding customer service. And, it’s done a lot of innovative stuff on the retail payments side wrapped around social media (Twitter, Facebook and other promotions), and is the most profitable card issuer of the bunch. But, its ability to leverage the Serve network to innovate outside of that has been more of a struggle. AmEx’s recent restructuring efforts are designed to keep costs down and margins intact, but what impact could CMS, PayPal and these other emerging efforts have to on its retail payments business if they all start to get traction and merchants are enticed by better deals and consumer traction?
Now you see why I think this 2013 is the year for platform plays! Here we are, only two months into a new year and so many big things a foot. But, surely nothing is cast in stone yet, but these two announcements are but a few of things that foreshadowing of how the tectonic plates that are the payments industry are likely to shift this year and recast the sector.
So, if payments had a Richter scale, how would you rank CMS in terms of its impact on the future of the industry?
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MasterCard made plenty of news on Monday at Mobile World Congress. It announced the launch of MasterPass — its omni-channel digital wallet that will support QR codes, tags — and the NFC v.2 of PayPass, which was released last year. It will also extend MasterCard’s cloud-based wallet capabilities to the physical point of sale. One more arrow in the worldwide cloud-based wallets quiver! I read this as MasterCard’s nod to the growing realization that NFC is no longer the sure-bet mobile payments method and that enabling mobile payments anyway that technology will deliver it is now digital wallet table stakes. Virtual fist bump to the MasterCard team!
MasterPass is also now supported by MasterCard’s “connected” wallet platform, which I read as further proof of its desire to use its platform to stimulate, distribute and aggregate mobile payments innovation to its various stakeholders – merchants, FIs and third parties. MasterPass is MasterCard’s second toe in the platform as a service offer waters — loyalty and its loyalty offers platform announced last year, was its first.
Both announcements represent big moves forward in MasterCard’s digital wallet strategy. MasterCard, like Visa, has decided that getting a digital wallet out into the ether and populating it is the ticket, since that is the best way to persuade merchants that you have an online consumer base and something of extra value to offer them. Its next two chess moves are to (1) give consumers a reason to download its wallet since acceptance is still relatively thin right now, and (2) incent its third party channels to distribute its wallet and/or wallet technology versus other digital wallet alternatives.
What hasn’t been covered as much is MasterCard’s social media research findings — which were released today, too. MasterCard did something kind of clever: It tracked 85,000 social media comments across 43 markets and over six months across a variety of online resources – Twitter, Facebook, Blogs and other forums – to get a sense of consumer sentiment about mobile payments. Mobile payments is a topic of conversation, for sure, in the industry, but this effort was designed to see just how much the “rank and file” consumer really cares about it outside of our payments industry bubble.
There were a couple of interesting takeaways.
The big mobile skeptics? You might be surprised. It isn’t the US where prior reports have consumers all heebie-jeebie over mobile phones and security. It’s right in the heart of NFC mobile technology land: namely Europe (France, UK) and Canada. The skepticism there seems to be rooted in a general concern over acceptance and the view that worldwide acceptance like the plastic card attained is a bit of a pipedream. I think that is interesting given that their point of reference, at least so far, is NFC technology. (Do you think they have been reading the EMEA edition of PYMNTS.com??!!) In the U.S., which has a far more upbeat view of mobile payments, there is momentum building around mobile apps like Starbucks and Dunkins and LevelUp, familiarity with Square and its category competitors that now power everything from Girl Scout cookie sales to Joe the Plumber house calls, and a shift from using computers to shop online, to their smartphones and tablets – which most consumers describe as “mobile payments.” These apps and use cases have created the feeling that mobile payments are useful, secure and convenient, even if they aren’t ubiquitous. Consumers in the U.S. have been exposed to the power of the mobile phone and payments and commerce across a variety of environments and technologies and are generally enthusiastic about what they see and have used.
The other finding that I thought was interesting is that the most skeptical mobile phone users were the early adopters rather than Joe Six Packs who overall seemed more psyched about the potential for added convenience, speed and innovation. In prepping for The Innovation Project (Are you on the list??), I have been re-reading the books written by our v.cool thought leaders, including The Lean Startup by Eric Ries. Ries’ proposition is that early adopters love innovation and will tradeoff lots of stuff including reliability and compatibility for a new experience. All you early adopters, raise your hand if you remember v.1 of the iPhone? Remember those tradeoffs? According to Ries, the toughest customers are those more mainstream guys and gals who come to new things with high expectations since they seem pretty happy with what they have now, and need the “new thing” to be demonstrably better in order to make the switch.
According to the MasterCard research, it is the exact opposite when it comes to mobile payments. It is the early adopters who are the party poopers and the mainstream guys and gals who seem genuinely excited by the prospect of using their mobile phones to shop and pay in stores. The reasons for the early adopter skepticism is a concern over acceptance — basically not being able to use their phones all the places they want to. In fact, the problem is the early adopters get all psyched at first and download and populate wallets only to get turned off by the lack of acceptance. Maybe the mainstream customers haven’t thought the acceptance part all the way through or maybe they don’t care so long as they can use their phones at the places they want to, which may not necessarily be all of the places they shop today. Then again, maybe the early adopters are too hung up on making a total switch from plastic card to mobile phone as a condition of being wildly enthusiastic, which can only mean that they will be grumpy for a long time to come.
The study is an interesting data point since it only underscores that there is a worldwide consumer conversation about the power and the potential of mobile payments. From Dallas to Dubai, the chatter is consistent — consumers are fascinated with the possibility of using these powerful devices to discover new and efficient ways to buy and pay. Absent these conversations? Anything at all about what technology was going to power the experience – that’s the stuff that they will leave to all of us to duke out and tell them about later.
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The “Facebook goes offline” development of last week got me to thinking about a couple of things.
First, it only reinforced the notion that Discover is dead serious about its ambition to be the innovation catalyst in this space. Licensing its network and the set of assets that its network offers has the potential to help innovators with scale on one side of the platform – whether it be hundreds of millions of digital wallets in the case of PayPal or the billion human beings with Facebook accounts in the case of Facebook – and achieve scale in the other – merchant acceptance. Discover has the potential to help solve the critical chicken and egg problems that have kept the industry from reaching its innovation potential, at least to this point. It is proving to be a most interesting industry development.
But, Discover is simply an enabling infrastructure that will help Facebook (in this case) crack the merchant acceptance aspect of commerce at the physical point of sale. But, the strategy that appears to underpin its commerce ambitions has me a scratching my head.
As I was reading the many news stories on this, I couldn’t help but be reminded of the Charles Duhigg book, The Power of Habit, that I read a while back and wrote about when it first came out. Duhigg’s thesis is that people are by and large hard-wired to do what they do, and changing those behaviors requires that the cue-routine-reward feedback loop that forms our habits be altered, and altered in a way that basically, forms a new habit.
One of the more interesting vignettes in the book is the case study about P&G’s Febreze – a product that today drives more than $1 billion in sales but that was on life support only a few years ago. Febreze, as some of you probably know, is an odor neutralizer. But it turns out that the “smells bad” cue — which everyone thought was the buying trigger and thus the focus of the advertising campaigns — wasn’t the right place to focus. After watching thousands of hours of recorded tapes of women cleaning their houses, it turned out that the right trigger was actually the reward of a fresh scent once a room had been cleaned. No one either wanted to admit that their house smelled bad or in many cases, had lived with bad smells so long that they couldn’t smell them anymore. Those were ineffective triggers and thus couldn’t create the “habit” of using Febreze. But, more to the point, the “cue” that represented a clean house was the “reward” of a fresh scent — and not the absence of bad smells. In this case, getting consumers to develop their Febreze habit was to play into the reward of a fresh smelling home, not reminding them of a cue that they either didn’t think they had or didn’t want to recognize.
Okay, interesting story, you’re saying, but what does this have to with Facebook and offline commerce?
Well, I would posit that the habit that Facebook is looking to create isn’t gifting; it’s using a Facebook payment method at the physical point of sale. Gifting is merely the means to that end, since Facebook has a bunch of built-in tools on its platform to easily trigger that behavior. So, if that is the habit it is hoping to develop, let’s examine the cue/routine/reward feedback loop that this latest product launch is hoping becomes a Facebook at the physical point of sale habit.
The routine part is sending a gift to a friend. The reward is a gift card that can be used at multiple merchants and the cue is the familiar form factor of a plastic card with a mag stripe plastic with a Facebook logo on it. That familiar cue – plastic mag stripe card – that powers the pay at the point of sale habit today — is something they seem to be banking on as a way to get consumers comfortable with the product.
But is that really the right cue for Facebook to focus on?
What about the cue that consumers may interpret when they see the Facebook logo on the plastic card – which is the only logo on the card? Instead of reminding consumers of the familiarity of a plastic mag stripe card, could it instead remind the recipient of the online social network that doesn’t necessarily keep their activities private? Is that cue a trigger, instead, of the possibility that what they buy might be broadcast on their status feed? (We’ve seen that story play out before on the commerce side with both Blippy and Beacon, and end with disastrous results, and with Social Reader and Spotify where people really do object to having what they thought were private selections become public.)
Then, there’s the routine. People generally like to have gifts arrive at or before the day of the celebrated occasion. For a plastic gift card to get to a person on her birthday, the giver has to take an action well enough in advance of the actual day. Facebook does send email notifications the week of a friend’s birthday, but most would-be givers are in the habit of wishing a “happy birthday” to someone on their birthday by posting on their wall. If on that day they then take the action of giving a gift of a Facebook physical card, that card will arrive well after the fact. That’s certainly not the end of the world, but probably not the desired outcome if the friend is really a good friend. It also assumes that the giver knows the recipient’s mailing address. (Maybe I’m unusual, but I probably know the mailing addresses of only about 2 percent of my Facebook friends. Who uses physical mail anymore?) And, if someone wants to give a physical gift to a friend and is doing their planning in advance, how likely are they to break their own gift buying/giving routine — which is probably buying a gift and giving it to that person, in person — and turn to Facebook as their option?
Now, what about the reward? As described, the Facebook gift card is sort of an all-in-one gift card that can be used at multiple retailers, and friends can add to it once a person has one. The Facebook app provides a dashboard for the recipient to monitor balances. But, is getting that kind of physical card really a reward – or does it create a hassle and stress for the recipient to remember how much is available where in order for the reward to be consummated? Let’s not forget that the raison d’etre that the Starbucks mobile app exists is that it discovered that most consumers didn’t know how much was on their card and didn’t want to be embarrassed in line by not having enough on the card to pay for their mocha double whipped Frappuccino so didn’t use it (and these were consumers who had a love affair with the Starbucks gift card). Only when they combined mobile app plus stored value did they see their sales of stored value cards explode. It seems sort of clunky for consumers to log onto Facebook in the store (and more likely in lane) to find out how much they have on their card – or maybe to even to remember to bring it to the store.
Wouldn’t this whole Facebook gift card thing be a whole lot easier as a mobile app?
If Facebook is asking consumers to develop a whole new habit that is using Facebook at the physical point of sale, it isn’t leveraging any of the existing “habit loop” that consumers have today when either shopping in a physical store, using a gift card or giving a gift card for someone else to use. If anything, it may even be reinforcing existing cues (regardless of how irrational) that could blunt trial and use.
Facebook is making a huge leap of faith that by simply leveraging the powerful technology capabilities available to them packaged around a familiar plastic card that consumers will adopt. Except that it has the unfamiliar payment brand of Facebook on it and not the more familiar merchant or network logos on it that consumers associate with gift cards and payment. Not to mention that the biggest cue that is being overlooked is that consumers don’t equate Facebook with commerce – yet. Facebook Gifting drove all of $5 million in sales last year, according to Facebook – not exactly breaking online land speed commerce records. And, Pavyment, the pioneer in Facebook commerce that closed down last week, and its investors, could certainly testify to the challenges of getting consumers to shop there.
Clearly, these are the early days. The program was launched several days ago — so it will be an interesting experiment to watch. It certainly does suggest, if anything, that Facebook’s interest in commerce – and offline commerce – is a whole lot more than a passing fancy. But, I don’t think this is the way to nail (or redefine) Facebook commerce. Could Facebook drive commerce and monetize it? I actually think that it could. Could it as its own network? I don’t see it. To prosper in the commerce arena, Facebook might want to think about leveraging the cues and rewards from those who know how to drive consumers’ habits around commerce and develop a business model to create the incentives for them to play along.
By the way, this whole topic of cues and routines and rewards is a thread that we will explore at The Innovation Project 2013 at Harvard on March 20-21. Steve Levitt, author of Freakonomics, has a whole session devoted to it — with PayPal, NetSpend, TrialPay, Kohl’s and MasterCard — who are searching for the hidden clues for why consumers buy and pay. The understatement of the century is that technology makes just about anything we want to do around commerce possible. It’s getting inside of why consumers or merchants want to innovate — and how innovators need to respond — that will bring innovation to life for all of us. To join in this and the other rich discussions like this over those two days, click here to request an invite.
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I had the pleasure of moderating a very fun panel right before Christmas (Doesn’t that seem like an eternity ago?!) on my all time favorite topic, mobile wallets. It was sponsored by the MIT NFC Cluster, which has done an excellent job of assembling the NFC community in Boston. And, yes, I was invited to moderate in spite of my views on NFC was escorted by a bodyguard into the auditorium .
Since our panel followed a presentation of the winners of the NFC Hackathon on the Monday of the last work week of the year, I knew we better be great. Oh, and in case you are wondering, the winner of the competition was an NFC-enabled fishing rod which seems right to me since there are about as many NFC enabled fish as there are merchant terminals.
And, our panel was great! The panelists were all players at the top of their game, representing a variety of different digital wallet enabling technologies, which made the conversation interesting. Here was the lineup:
Jed Rice | VP of Paydient, who represented the white label/cloud-based QR code solution
Sarab Sokhey | Strategic Advisor for Verizon Wireless, who represented both ISIS/NFC but spoke about cloud-based solutions as well
David Chang |COO of PayPal Media Networks, who represented cloud-based solutions delivered in a variety of ways at the physical point of sale
Wilson Kerr | VP Biz Dev for Unbound Commerce who represented digital wallets with a single sign-on across merchant sites
Prat Vemana | Director, Velocity Labs at Staples, who hasn’t decided on a wallet technology at the physical point of sale but who represented the merchant viewpoint
Mung Ki Woo | Head of Mobile for MasterCard who represented NFC
So, for an hour, we cut through the noise and the prepared talking points and had a free-wheeling discussion of how the mobile wallet landscape will evolve over the next several years and, more importantly, the role of the mobile wallet in igniting mobile payments. We riffed on what solution, technology, value proposition and consumer experience will ultimately “win” the day. (There was a lot of NFC negativity and not just from me!) And, we tackled the two big strategic questions that are at the core of mobile commerce ignition: how many (and whose) wallets will consumers want to have — there was no agreement here — and why and how many and (whose) wallets will merchants want to accept and why — there was agreement: any and all wallets that consumers want to use and have traction.
This video clips below is the whole fascinating discussion — since it is long, just play it and minimize the video and listen to it as you multi-task. I think you will find the banter among the panelists really fascinating. But, if you listen to only one thing, do listen to everyone answer my first question — which was a doozy! It went something like this…
“I don’t really watch TV in real time for all of the reasons you probably don’t either. But I do catch up with TV series on my iPad when I travel since TV episodes are just long enough (or short enough) to keep my attention. One of the series that I just finished watching was The Event. For those of you who aren’t familiar, The Event is about a group of aliens — who look just like human beings — who have come to earth, as it turns out, to do bad stuff. It sounds wacky but it’s pretty good – more of a drama/intrigue show than science fiction, which is not really my cup of tea. So, let’s pretend that our audience tonight is a group of aliens — who look just like all of us and who have of course, come peacefully to Planet Earth — but need to be assimilated into our culture. They don’t know much about our primitive form of payments (They are advanced, you see…) but do have mobile phones. Describe your mobile wallet concept to them.”
So, with that, enjoy! Oh, and I’d love to hear your rendition of how what you are doing, whatever that is, would be described to a group of aliens!
Part 1 http://video.mitef.org/3jyG
Part 2 http://video.mitef.org/LnnK2
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There’s a new topic of conversation now in and around payments and that is about how to get and keep customers loyal. It’s become front and center for retailers, for sure, these days who are being attacked on all fronts by consumers who enter their stores with mobile phones that help them buy stuff cheaper at other places (all while standing right in front of their merchandise) and by belt-tightening consumers whose loyalty is to the best deal regardless of who offers it. And there are schemes galore popping up just about everywhere by any number of players who promise to deliver those “loyal customers” by integrating payment with loyalty schemes, offers and coupons tied to purchases and more.
But those schemes don’t amount to much if there’s uncertainty or confusion about just what a loyal customer is anyway. There’s no shortage of definitions though, often tied to metrics that measure frequency of visits to a retailer. But I think I heard the best ever definition of a loyal customer the other night at a dinner that I hosted with a small number of players in the payments space. That definition (and I quote) was “a customer who spends 40 percent of her disposable income with us – and ours do.”
Holy guacamole, that would certainly meet my criteria for a loyal customer if I were a retailer — wouldn’t it for you?
Now, any idea what retailer made that claim? It was Neiman Marcus. And, not only do they have loyal customers, they have managed to attract and keep their customers loyal and profitable, in spite of the current economic malaise.
Now, before you roll your eyes and say, “Oh, sure, but that’s Neiman Marcus and their customer is really different.” True enough. Their typical customer is different, but there’s a lot about how they create profitable customer loyalty that others can learn from.
First, a little history lesson. Neiman Marcus was the brainchild of Herbert Marcus, Carrie Marcus and Abraham Lincoln Neiman after they ix-nayed the idea of investing $25,000 into a Coca Cola franchise right around the turn of the 20th century. Their first store opened in 1907 in Dallas and it was quite a scene. It is reported that the merchandise in that store was different than anything ever seen in Texas. It was merchandise acquired by Carrie after a buying trip to New York. Within a few weeks, the inventory was completely gone. Neiman’s mark as an exclusive — and profitable — fashion purveyor was born.
Neiman’s has perpetuated its brand in that way over the years. Its legendary Christmas Catalogue was Stanley Marcus’ idea of taking the notion of extravagance to another entirely new level, sparked by a request from Edward R. Murrow who wanted something unique to offer his radio audience one year. That gift — a live Black Angus bull and sterling silver barqueue cart — was offered for $1,925 to his radio listeners. In 2012, a Limited Edition McLaren 12C Spider for $354,000, a personal jetpack for $99,000 and his-and-her matching watches and trip priced at $1.09 million were among the gifts to be exchanged among the rich and famous. At one point in the 1960s, Neiman Marcus Christmas catalogues were the item most stolen from recipient mailboxes.
But Neiman’s also recognized that its brand, and its customer base required an attention to personal service that went “above and beyond” for its well-heeled patrons. And it did that by embracing the concept of big data before it was, well, big. In 1961, it introduced what we know now to be “recommendations” by matching purchase history with store inventory to generate a top ten list of things to buy for Neiman’s customers (or to have others buy for them). And, when Astronaut Jim Lovell was circling the moon during the Apollo 8 mission during the Christmas of 1968, it was a Neiman’s driver in a Rolls Royce that delivered his wife her Neiman Marcus mink coat, all gift wrapped in paper the color of the blue earth! Moon commerce actually pre-dated eCommerce!
But, it’s Neiman’s loyalty program, InCircle, introduced in 1964 that is perhaps the real key to its customer loyalty — and the 40 percent disposable income reality.
InCircle has three components — points, tiers and redemptions. The more a Neiman’s customer spends on her Neiman Marcus or Bergdorf Goodman credit card, the more points she racks up — pretty much like every other credit card rewards program. But, it is the tiers that is the difference and creates the stickiness. The higher the annual spend at Neiman’s, the more points earned per dollar spent – which start at two per dollar and max out at five for those really big spenders. Certain days of the year, those points are worth double or triple their value — and those aren’t days when merchandise is on sale, but just when the value of the points racked up buying full price stuff is higher (which, of course, is just another form of discounting but one that is higher based on prior “volume” of spend). Customers plan mega shopping trips around these days, and sales associates, who are all commission based, scurry around to help customers hoard their favorite styles in their sizes so that the stash is well-edited and points are maximized. (She says with great authority based on personal experience.) To make the InCircle points flow even faster, sales associates across all Neiman Marcus stores now have iPhones and iPads. That helps them keep in touch with their customers via email and to even facilitate “online to offline” sales by emailing photos of items and charging them to their accounts on file for in store pick up later that just makes it easy to buy and to buy often! Then there’s redemption. Redemption is both encouraged and easy. InCircle members are sent prepaid cards with the value of their reward on them at the end of each year – cash back to the max – who view the money as “free” or applied to subsequent purchases throughout the year. Members can also redeem their points for merchandise too. In 2011, someone is said to have redeemed her five million points for a new car. (Even at 15 points for every dollar, that is still a lot of Louboutins — like $330k worth!!!).
But here’s the payoff: Neiman’s CEO said that in 2011, more than 100,000 customers who are enrolled in InCircle spent $1.3 billion and accounted for about 50 percent of its business — with both membership and average spending per participant growing. And, in that year, its profits increased nearly 30 percent (better than its competitors). Profits in FY 2012 increased more than 35 percent from 2011 levels.
I think there are a few important takeaways from this.
First, Neiman’s has created a brand that stands for exclusive merchandise because it knows that’s what its customers want. Ever since the doors opened in 1907, they sought to give its customers a selection that was not only different but also not widely available, limiting the greatest of all fashion faux pas — that fashionista A turns up at a party seeing fashionista B wearing the same thing. Neiman’s, to this day, doesn’t carry a lot of product (even less now post financial crisis), so once an item is gone, it’s gone for good. Its customers, generally speaking, don’t want to run that risk so they buy when they first see something. Scarcity equals sales at full price for them.
Second, it has sales. In fact, right now it is running its famous Last Call sale, which discounts what’s left from the Fall/Winter season at 75 percent. But there’s a difference. Neiman’s doesn’t use ongoing discounts or weekly or monthly sales to drive people into the store. Neiman’s famously, and even proudly, doesn’t do what’s known as “breaking sale” with the designers that it carries — so it never puts Donna Karen stuff on sale before Donna Karen’s retail stores do (its competitors are often criticized for that) which means that Neiman’s often gets better selections from designers who want to protect their brand too. That means that most of the time when consumers walk into Neiman’s, stuff isn’t on sale.
Now, Neiman’s isn’t immune to the purse string tightening of its clients. During the financial crisis of 2008 and even the last part of 2012 with concerns over he fiscal cliff and rising taxes, its customers, like everyone, stopped buying. It saw sales drop. In response, Neiman’s accelerated its sales dates (in 2008), tried new things (Target + Neiman’s in 2012) and shifted the InCircle double and triple points cycle to stimulate buying, but managed to keep its customers buying whatever merchandise it was buying, from them. So, its customers may not have bought as much then, but Neiman’s was still their first choice, even if the 40 percent of disposable income spent wasn’t as much as it was before.
Third, Neiman’s takes customer service seriously, and if their sales associates want to make a decent living, they better as well. So, sales associates are adept at letting customers know when new merchandise is arriving, putting things aside for those famous double and triple point days, and encouraging sales. The following emails and phone messages are not uncommon: “You know the navy jacket you bought a few weeks ago? Well, we just got in two really cute skirts that would look great with it — and one in your size. I’ll hold them both for you — when do you think you will be in?” Then, when the willpower fails and customers break down and go into the store, the savvy sales associates has the shoes, blouse and matching scarf ready in the dressing room, increasing the odds they walk out with all of it. Which, of course, they probably will, since they are racking up those InCircle points right and left! The combination of sales associates who build customer relationships with a loyalty program that actually delivers a meaningful reward is powerful.
Of course, not every business has a luxury client base, but the framework that Neiman’s uses to attract and retain profitable customers is both practical and replicable, I think.
- Scarcity. The less that there is of something, the more that people want and value it. Neiman’s has used scarcity as a substitute for discounting. Everyone can use the same tool to give consumers an incentive to buy and buy before what they want is gone for good.
- ROS. Neiman’s has introduced consumers to something I call the “return on spend” concept – the more cardholders spend, the more their points are worth. InCircle sets up the concept of a volume discount that gets steeper the more cardholders spend. And, the higher the ROS for consumers, the higher the profits for Neiman’s! It certainly has worked out much better than discounting as an inducement to bring customers into the store, which as we have seen sets up that retail Pavlovian experiment that when the discount is removed – customers stop coming.
- Service. Neiman’s makes a point of building a relationship with a customer. Not all (or even many) retailers have a long tenured sales associate team, but the combination of valuable information (The designer you love has a trunk show next week.) and service (I know you are busy so I will send you pictures of what I think you might like based on what you have purchased before so you can tell me what to put aside.) increases the odds that a customer will (a) buy, (b) buy at full price and (c) stay loyal. As long as sales associates anticipate customer needs and make it easy to buy, they will! Mobile technology can level the playing field for lots of retailers by putting the relevant information about customers in the hands, literally, of the sales associates who can use it to help increase sales and basket size – and build relationships (and data on customer preferences).
- Utility. Neiman’s going in proposition is that it wants 100 percent of its customers to redeem their rewards. And, they even up the ante by increasing the number of points per dollar spent based on total spend and offering double and triple points on full price merchandise several days a year. Of course, those dollars are redeemable only at Neiman’s, but what a nice way for consumers to get a good head start on building up their points for the next year – by spending those dollars on double and triple points day! Now who, other than the baby on the Capital One cash back commercial, doesn’t like cash back! And pegging discounts to past spending means that Neiman’s is in full control of calibrating just how much of a discount customers get.
There’s surely a lot more to talk about on this topic, but I think I’ll stop now. There’s an InCircle cash balance in my account burning a hole in my pocket and a triple points sale in process!
I’d love to hear how you think these concepts apply to stores other than Neiman’s.
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