Last week, Dunkin Donuts announced that the next release of their mobile app will incorporate gifting between consumers, allowing one consumer to buy doughnuts and coffee for another, and have the details of that purchase sent to their friend's phone for quick scanning and payment.
For those of us out on the town this Friday night, the idea of getting a round in is hardly something new and certainly not something that would normally have us reaching for our smartphones, so what's the big deal?
I'm lucky enough to work with some exceptionally clever people when it comes to the planning and execution of sales promotion who have been devising techniques for so long now that they are completely beyond redemption (sorry for the pun), and the idea of using digital as a distribution method and gifting as an incentive is getting them excited again.
Moving away from cheesy dotcom bubble expressions, gifting as a sales promotional vehicle will be one of the fastest moving improvements to bottom lines in 2013 as more and more retailers integrate digital commerce into their sales strategies.
The math
To understand some of this excitement, we have to first look at the numbers. I'm not going to include all factors in the calculations - set-up, maintenance etc. are all out of scope, so please don't burn me for what is purely an overview.
For the purposes of these two examples, the cost of sale is 80% of the sales price with a 20% profit.
If we consider a typical sales promotional vehicle - the 'money off' voucher- the numbers stack up a little like this:
Voucher promotion return = sales price – cost of sale – discount amount
I've not factored in supplementary sales, subsequent sales or any increases in customer equity, but as a simplistic sales promotion tool it's quite straightforward.
For it to be worthwhile to the business (without factoring in loss leaders), the driven sales need to create enough profit after cost of sale and discount amount are factored in to pay for the creation and maintenance of the campaign within the given number of vouchers released, each voucher discounting a little to induce the sale to bring the final return.
Putting this into an example, if I have a 10% off voucher for a cup of coffee and, as above, I'm making 20% profit per sale, the voucher will need to drive 10 additional sales to hit the same amount of profit as five sales without the voucher.
Gifting as a sales promotion tool works a little differently. Looking at pure gifting and not a hybrid, vouchers are replaced by the gifting chain; Janet gives to John, who gives to Peter, who gives to Mary, who gives to… and so it continues (hopefully).
The retailer is not an agent within the chain but a catalyst allowing the chain to occur, apart from the initial incentive to Janet which gives her a reason to gift something to John. Using only gifting, someone has to kick the process off and it will have to be the retailer, so seeding is required which makes the numbers stack up a little like:
Gifting promotion return = ((sales price – cost of sale)* length of gift chain) - seed
Before reaching for the coffee and calculator, for our coffee house example it looks a little like this:
If the coffee house gifts Janet her coffee, that is 100% loss on that potential sale, so at our 20% margin we require a gift chain of five people to recoup the value of the initial gift / seed and retain the profit which would have been achieved without gifting.
Any extension beyond five people in the gifting chain and our return is undiminished by ongoing discounting, but the promotion holds valid.
Breaking the chain
It doesn't take a PhD in consumer behaviour to spot the potential weakness in a sales promotion based across gifting - if the chain is broken but the gift is collected before the return threshold is reached, the retailer is out of pocket (alternatively, if it is broken and the gift not collected they are up in the game).
The use of hybrid promotions incorporating discounting and gifting is certainly one way to reduce seed risk and increase the desirability of ongoing gifting, but the integration of digital - specifically social platforms - moves gifting towards being a banker for sales promotion and subsequent improvement to the bottom line.
The psychology
Moving away for a minute from the sales promotion side of things, what are we doing when we gift?
While most hardened cynics will assume the nature of gift giving is far from altruistic and little more than a thin, socially conditioned veneer above a Machiavellian substrate, scientific research has suggested that while not 100% removed from this kind of cynicism, humans are hardwired to give.
In a study at the UC Santa Barbara, a group of psychologists undertook studies using one shot games where the participants were given some money and were asked to give a portion of it to an anonymous partner or charity, with the instructions:
- they will never interact with this partner again
- only they would know how much, if any, they gave away
All participants chose to give, with the average allotment being 40% of the amount they were given. The act of giving triggered the mesolimbic reward system within the brain and with charity, the subgenual area of implied social attachment. We are wired to give.
If we consider the cynical approach over and above what's hardwired into our nature, reasons to give include:
- Influence / attachment
- Reciprocity
- Guilt reduction
- Self perception improvement
And many more non-altruistic reasons that push towards human need and back to Maslow's hierarchy, all the way up to self actualisation.
The digital
Although cumbersome, it is perfectly possible to run a gifting promotion without any reference to digital technologies and approaches.
But, as I have said earlier, the role of digital strategy is: "Digital makes it better", and through digital commerce gifting can finally become a powerful sales promotion tool. Consider the following requirements for effective use of gifting in sales promotion.
Network
There are plenty of articles concerning the impact of social platforms on relationships and the number of connections they open up.
While some examples of gifting are random acts of kindness, e.g. the reinvention of 'I'd like to buy the world a Coke' where the gifting is anonymous, social platforms immediately provide a connected group for the consumer to gift to and receive from. Throw geo-location and action into the mix and there is a ready-made audience.
Delivery
Mobile technologies allow consumers to hold their digital social world in the palm of their hands, as well as their receipts, vouchers and purchase confirmations.
As Dunkin' Donuts has done, it's relatively simple to hook these to barcode readers to confirm collection and sale, and as the technology becomes increasingly mobile (including NFC, in time) and part of our transaction process, gifting then becomes a natural and convenient fit.
Demand
Whether altruistic or out for all we can get, the amplification of any gifting campaign through digital media is going to be critical. The role of self perception through Cooling's looking glass is not immaterial, either. Automatically posted status updates such as:
"Janet has gifted John a coffee"
are probably far too blunt, but in 2013 I fully expect to see a fad of 'gifting' as the new 'badging', before some smart creative folks push towards amplification that is far more subtle and more deeply ingrained; after all, we all want to be seen as the good guy.
So what is the big deal?
The big deal is that, created and activated correctly, there is no 'big deal' that retailers have to make in gifting sales promotions, and the amalgam of digital, sales promotion and retail mixed correctly into good digital commerce will, for those retailers that adopt it, lead to some exciting and profitable times ahead.
Richard Conyard is CIO at Red Ant and a guest blogger on Econsultancy.
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