November 05, 2006

Hallmark Doorbuster, CRM and Loyalty Programs

Loyal readers ... by now, you know that I am not a huge fan of CRM. To be fair, I am a fan of well-executed CRM programs. Unfortunately, it is very hard to execute a CRM program well. Very hard.

Take Hallmark, as an example. My wife is part of Hallmark's Gold Crown Preferred Member Program (a loyalty program for 'best' customers). When receiving her rewards certificate, she received an invitation to shop a Holiday Open House on November 4 and November 5 (she also received an e-mail notifying her of the event). The best part of the invitation, according to my wife, was the Holiday Instant Scrapbook, a $36.00 value, on sale for $14.95*. The asterisk next to the price stated "Offer valid 11/4/06 - 11/5/06 while supplies last at participating retailers. Not valid on past purchases. Tax not included".

On Saturday afternoon, my wife navigated Interstate 90 on a twenty minute drive to the closest Hallmark store. Not surprisingly, supplies did not last. Staff in the store told my wife that they were given eight scrapbooks, and that the eight scrapbooks sold immediately. In fact, anybody could have purchased the scrapbooks, not just the loyal customers that were notified of the promotion. A first-time buyer, walking in off the street, could have purchased all eight available scrapbooks at the discounted price, if she wanted to.

This afternoon, my wife drove twenty-five miles to the next-closest Hallmark store. And guess what? All eight of their scrapbooks were sold to three customers (one purchased four, one purchased two, another purchased two) within the first few minutes of business on Saturday. A sales associate told my wife that customers from sixty miles away (Olympia) called to see if any of the scrapbooks were available.

I have no idea how Hallmark measures the success of programs like this. I imagine increased sales and gross margin are key contributors to a successful program. With $4.2 billion in annual sales and 40,000 stores (according to their website), it is possible that the average Hallmark store sells about $300 of merchandise a day.

This means that Hallmark sells the eight scrapbooks quickly, driving about $119 of increased sales, at cost. In addition, all the customers who are lured into the store by this promotion have the opportunity to purchase other merchandise that is regularly available. This might increase sales by an additional ten or twenty percent. Here is where the profit is generated.

If each store generates an additional $30 of sales on Saturday, and an additional $30 of sales on Sunday, then Hallmark generates $2.4 million in additional net sales for the weekend, across 40,000 stores. Because Hallmark is a privately held company, we can't easily identify their gross profit percentage. It is likely it is in the neighborhood of fifty percent. If that is the case, Hallmark generates over $1,000,000 of increased gross profit for the event.

From a company standpoint, this "CRM / Loyalty" event is a huge success. 320,000 scrapbooks were sold at sixty percent off to a group of delighted customers. It is entirely possible that an incremental $1,000,000 of gross profit were generated, profit that would not have happened without the promotion.

For the customers who were lucky enough to get the scrapbooks, they are selling them on eBay for more than $40 each. Maybe Hallmark could have put a limit on the number of scrapbooks per customer, like one per customer?

But for maybe a half-million customers (an estimated 6 customers per day times 2 days times 40,000 stores), the hour they invested out of their lives to attend this "Holiday Open House" was a waste. What was the increase in loyalty that Hallmark generated among these customers? How much did Hallmark improve "customer relationships" with this promotion?

Undoubtedly, the marketing folks at Hallmark did not devise this promotion with the intent of disappointing a half-million customers. The marketing folks tried to do something that helped their company. By executing this promotion, they likely increased sales by between $2 million and $3 million dollars, and likely increased profit by $1 million dollars (all numbers are based on assumptions I made, actual results could be greater or less than what I estimate). Was it worth it to disappoint 500,000 customers to obtain $1 million in profit?

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