Peter Guidi's Blog

Archive for July, 2012|Monthly archive page

Surcharging for credit versus discounts for cash; why it makes a difference and how the consumer will react.

In alternative payment, Bank Fees, Bank Tax, Convenience Store, credit card, debit card, interchange, loyalty, merchants, payment, Payment card, Petroleum retailing, Platforms, retailers, swipe fees on July 16, 2012 at 8:02 pm

In the struggle between the Credit Card Associations and Retailers this week’s court decision reminds me of the old western film when two guys are fighting and the guy with the rifle runs out of ammo as the other guy’s gun is a few yards away. There is that brief moment when they both realize that the game has changed and now the race to the finale is upon them.  This week MasterCard Inc. and Visa Inc. along with some large banks settled what had become known as the Brooklyn case, setting the stage for retailers to pick up the gun and shoot first.

 The weapon that the Brooklyn decision has given the retailer is the ability to surcharge the consumer for the use of a credit card.  Surcharging is a tremendously powerful tool that has the ability to dramatically shift consumer behavior. Surcharging is fundamentally different than Discounts; understanding why, is the key for retailers wishing to leverage this decision. How powerful is surcharging?  Alphawise (Morgan Stanley Research) reports that “43% of consumers would be “very-likely” to switch from credit/charge cards to debit, cash or check if asked to pay a 1-2% surcharge by a merchant”. Further, “on average, those who said they would be “very likely” to stop using a credit card would shift about 67% of their credit purchases to other forms of payments”.

Retailers have some experience with offering discounts for cash or alternative payment discounts.  In the Convenience Store Industry, the per gallon discount for cash or merchant issued debit has been moderately successful. Some merchants like Savannah’s Parker Stores, are offering up to 10 cents off per gallon for consumers using their PumpPal card. These programs are reported to have captured between 5% and 25% of their consumer’s transactions.  But if Alphawise is correct, and Parker posts a price of $3.50 with PumpPal, and then ROLLS-UP the price of gas by 10 cents per gallon for the use of credit, then according to Alphawise’s survey results,  upwards of 50% of consumers appear ready to walk away from credit cards

The reason Surcharging is more powerful than Discounts is because of “Network Effects”. Network Effects are an economic term that describes the attraction of two groups of end-users across a “platform”. The reason the card associations have never allowed surcharging is because the economic principles driving a platform (two-sided market) state that only one side of the platform can be weighted with fees to the end-user.  An example of network effects is the Adobe PDF Reader. Almost all of us have the PDF reader on our computers, and it is free. The PDF writer on the other hand is expensive. The reason the writer is expensive is because so many people have the reader. If Adobe had charged for the reader it’s likely no one would have purchased it and as a result, the writer would be valueless. The same is true for credit cards, show the consumer the real cost of using their credit card and they are likely to find another way to pay.

The question is; will the Retailers react? Like our gun fighters, there is risk going for your gun.  Mike Schumann, owner of Traditions Classic Home Furnishing in Minneapolis was quoted in the WSJ saying that he is “hoping that surcharging will become commonplace, but that small firms will not lead the charge” adding that he might charge 2.5% to 3% if his competitors adopt the practice. During a call with a national home furnishings chain, the CIO wondered aloud how consumers would react to seeing an $80.00 upcharge for a major purchase. It’s a good question. But what does seem clear, is that in areas of every day spend, like gasoline and groceries, retailers have a new tool. We’ll have to see if they choose to use it.


What is the Omni-Channel?

In Uncategorized on July 2, 2012 at 2:21 pm

At some point the way the world works changed; we went from seeking information, to information seeking us. Today’s consumers are always connected. The maturation of infrastructure like wireless networks combined with the capability of mobile devices and the adoption of social media tools has given the consumer more control to make educated purchasing decisions. Today’s connected consumer expects highly relevant and dynamic information at their fingertips within a moment’s notice. How Retailers communicate with their “always connected” customers is the key succeeding in the new competitive retail environment.

The most significant opportunity in this connected world is the ability to communicate to the consumer through the “Omni-channel” or “Multi-Channel”.  Lately there has been a lot written about this concept, yet I’ve noticed that many retailers are still trying to grasp what it means; what is the Omni Channel?

The simplest explanation is that the Omni-channel represents the convergence of multiple business silos into one interdependent activity. For retailers, this means that multiple business silos; catalogs, online or retail, are now one sales channel that is converging with marketing and advertising in a real time one-to-one relationship with the consumer. The way the Omni-Channel plays out is easy to see. A consumer sees a TV advertisement during their favorite show.  He thinks; “perhaps will I buy this new TV”. The first step is to research prices and service reports about the TV’s online. Armed with this research the consumer posts a question about the TV on Facebook and 25 “friends” provide comments offering their experiences with TV’s. Having made the decision to purchase he visits the store for a “hands-on” look and while at the store the consumer scans the UPC or QR to compare prices. Finally choosing to purchase, our consumer finds a better deal from Amazon having just received a push discount based on his price check, along with an offer for free shipping. For today’s retailer the question is; where was the consumer shopping? at home, in the store? The answer is; in the Omni Channel. Winning that TV sale requires a new more robust capability to compete within the Omni-Channel. MediaPost news reports that “According to a new study from Deloitte, the “mobile influence factor” (or effect of smartphones on in-store sales) on retail purchases will increase to $689 billion (or 19% of total store sales) by 2016, up from the current influence factor of $159 billion (or 5.1% of sales). (Mobile sales, meanwhile, are only expected to be $30 billion at that time.) Further evidence suggests smartphone shoppers are 14% more likely to make a purchase in the store than non-smartphone users.” Understanding and leveraging this maturing consumer behavior is the primary challenge retailer’s face when leveraging the Omni-Channel.

A few weeks back, I was delivering a presentation where we were discussing the evolution of the communication and what it means to the retailer/customer paradigm when I made this observation. There were six of us at the conference table, each with their tablets, PCs and Smart phones in front of us. I said; “I’ll bet right now each of us has some actionable event occurring in real time on our phones”. I pointed out that while we engaged in this conversation, “each of us is actually engaged in multiple real-time conversations”. The group around the table seemed to have an epiphany, because they realized this was true. Like their customers, all of us are now connected and information is constantly seeking us. And so there it is; the Omni-Channel is not just about our customers it’s about our lives. What is your plan?