Eye on B-to-B: Best Programs for Best Buyers

Drawing the line when assessing who should receive discounts

The point of offering frequent-buyer discounts and other incentives to your best customers, of course, is to increase buyer retention and revenue. But if you fail to crunch the numbers before implementing the plan, the boost in sales could end up costing you money.

Gary Hennerberg, a principal with Grapevine, TX-based consultancy Hennerberg Group, says many catalogers fail to calculate beforehand how much of a discount they can offer buyers and to whom they should offer it. “Catalogers often don’t know where to draw the line in the sand,” Hennerberg says, “and they make emotional vs. quantitative choices.”

While there isn’t a one-size-fits-all formula for setting up frequent-buyer plans, there are some guidelines. The first step, Hennerberg says, is to sort your customers according to how much they have spent with you and how many purchases they’ve made during the past year. For most catalogers, the analysis will show a clear break between your top customers and the rest of the pack. For instance, you may find that 10% of your customers spend more than $10,000 with you each year, while most of the rest spend $1,000-$8,000 annually.

Beyond the numbers

Strictly speaking, you would then want to offer incentives to the top 10% of your house file. But that doesn’t mean you should offer frequent buyer programs based solely on quantitative factors. For instance, Seton Identification Products, a cataloger of safety and identification products with U.S. headquarters in Branford, CT, takes qualitative factors into consideration as well.

Seton offers its top customers volume discounts and flexible shipping dates, says Rob Besley, database marketing manager for the $50 million-plus marketer. In addition, Seton may send one of its OSHA consultants to a top customer’s operation to recommend safety signage. To determine to whom to offer these services, Seton first identifies its top 5% of customers based on sales. From that pool, Besley looks at other data that suggest a company will be a good customer during the coming year. For example, a company with several employees that belong to a workplace safety organization is likely to be interested in Seton’s products.

By providing its best buyers with additional services, during the past year Seton has increased sales from some of its largest customers by several hundred percent, Besley says. But the company offers the incentives to only 50 or so of its top customers. Opening up the program to lower-volume customers would be unlikely to recoup costs. “These services are time- and labor-intensive,” Besley says. “They affect not just pricing, but also billing, fulfillment, and more.”

Costs and margins

After choosing whom to offer an incentive, you need to calculate how the incentive program would impact gross margin. “Ask, ‘What happens to my breakeven if I give away 5% or 10% of the margin?’” advises Jack Schmid, president of J. Schmid & Associates, a catalog consulting firm in Shawnee Mission, KS. That is, how much do sales need to increase to cover the cost of the promotion? For instance, if the previous breakeven per catalog was $1.25, does the incentive program boost that to $1.35 per catalog?

During the past year, Engineering Services, a $50 million-plus catalog of supplies for the construction, retail, and agriculture industries, has seen its managed accounts — high-volume customers with whom Engineering Services’ salespeople work personally — grow at twice the rate of its nonmanaged accounts. To make that happen, the South Windsor, CT-based marketer, which produces the FarmTek, TekSupply, ClearSpan, and TekFoil catalogs, offers managed accounts such incentives as extended payment terms, price breaks, and just-in-time delivery, says Tim Bidwell, executive vice president of sales and marketing.

In deciding what incentives to offer to whom, Bidwell considers its likely effect on the bottom line. “For instance, a customer who wants to have 500,000 feet of aircraft cable delivered in one shot will receive a larger price discount than a customer who wants to receive the same order in more costly multiple shipments.” Flexibility, then, is key.

Before launching a full-scale incentive program, test the proposed program on a small number of customers. How small a number depends on your total customer base. As a general rule, though, Hennerberg says that if your pool of eligible customers is less than 5,000, you may want to test half of them.

And since clients can get upset when an incentive program is stopped without warning, you should establish an exit strategy for your test from the get-go. For example, when you launch the test, be sure to tell customers that it is a year-long program; at the end of the year, you can then extend and expand the program or drop it, depending on its success.

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