Target Decides Payment Method Incentives Work

Written by Evan Schuman
February 24th, 2010

Changing consumer shopping behavior is about as easy as motivating a salesperson: Just speak with money. This is how you can tell the difference between what retail executives really care about and what they need to say they care about.

Contactless payment, biometric payment and self-checkout are just some of the more obvious examples of payment processes that retailers have said they want to push, and yet they have never done the only thing that’s almost guaranteed to work: sharp discounts. If a grocery chain decided it wanted to push more consumers through its self-checkout lanes, all the chain needs to do is announce that product prices in self-checkout are sharply less than those rung up through staffed lanes. It can even dictate the percent of change by deciding the percent of discount.

Target, for example, has decided that its in-house payment cards are a priority, so it’s trialing a program in Kansas City that—in part—offers customers who use the card “5 percent off on every item, every transaction, everyday,” Target CFO Doug Scovanner told analysts in a Tuesday (Feb. 23) conference call discussing the chain’s earnings.

The card incentive is one of two payment trials Target is running, Scovanner said, adding that the tests “could shape the future of this business segment. In one test, we’re exploring the idea of returning to issuing cards solely for use in our stores. In another, we’re testing a totally different reward structure in two markets, offering guests who use our card in Kansas City, for example, 5 percent off on every item, every transaction, everyday.”

The results thus far? “Sharply higher penetration” and “sharply higher credit quality of the guests asking for cards, sharply higher pace of guests asking for the cards. The whole question in Kansas City is whether all of those benefits are sufficient to (justify) the incremental markdowns.”

There’s nothing surprising in those results. We’re talking about an installed base, so these are already customers you’ve won. They’re already in the store, and they have chosen products based on the prices marked on the shelf. At this point, why not use the store card? Incentives like a one-time $50 store credit deliver a very short-term boost and then the numbers on those cards plummet.

The Target plan is for a program that keeps on giving. It’s aggressive, and it assumes that Target’s margin figures won’t be diluted by something else. But it’s also the best way to change consumer behavior. Why don’t more chains opt for it? It’s because the programs are generally not that important to the senior management who need to sign off on a global discount.

That, plus a lot of confidence in spreadsheets. If you’re offering a 5 percent off-the-top discount, you had better be darn certain that you’re getting at least a 9 percent margin. That’s hard to do. But Target officials have decided that they’re confident about the chain’s numbers and that shifting payment methods is a priority. Well, at least for Kansas City.


4 Comments | Read Target Decides Payment Method Incentives Work

  1. James Van Dyke Says:

    Target’s provision of a 5% discount for consumers that use their payment card is a significant development that must be watched closely by banking card issuers, payments executives and merchants alike. The success or failure of new payment mechanisms can more accurately be determined by assessing the balance of value propositions between the three constituents (rather than the traditional approach of offering lopsided value to just one or two constituents, which results in failure). Keep your eyes on this one!

  2. Dan Stiel Says:

    Rewarding behavior to choose lower cost payment enablers is smart business for Target.

    The math is pretty compelling and simple for Target.

    First, encouraging customers to use the house card means Target avoids bankcard interchant/merchant discounts – even with costs of running a private-label portfolio, it is less than 3rd-party bank card costs.

    Our research also shows private label cardholders spend far more on each visit, spend far more on higher margin merchandise, and stay customers far longer than all other customer groups.

    Plus, those who revolve balances help offset cost of rewards.

  3. ben benack Says:

    Now if TARGET figures out how to convince customers to grant access to their bank checking accounts and offers the in-store card as decoupled debit…look-out.

  4. Peter Guidi Says:

    Compete for your customers Method of Payment! Do it today!

    Retailers are rightly concerned about interchange fees. Merchant’s are given a choice either accept cards, or not. Retailers can negotiate the Merchant Discount Rate, but not the interchange fee which is the largest part of the cost. Alternative Payment providers who create disintermediation offer payment programs that bring significant savings. While disintermediation creates saving, these payment systems rely on the retailer for marketing and card issuing.


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