Sunday, July 20, 2014

The Easiest Way to Improve Club Profitability

 
While away on vacation the past few weeks, I've had some time to catch up on Dilbert which is a muse for all business revelation. The above comic got me thinking about Tasting Room compensation and specifically how staff are rewarded for new club member signups.

Of course paying for new club members makes sense because you need new members. Asking the next obvious question then .... why do you need new club members? You might think the answer is to increase your direct sales but for many the real answer is, you need new club members just to keep your wine club from shrinking.

Are You Paying Incentive Compensation for Treading Water?

As you can see in the chart below, wine clubs grew by about 30% last year which is impressive until you see the other chart below which shows clubs also lost members at a 20% rate. That means on average if you grow new members by 20%, you are really just paying staff to keep your club the same size. How does it feel to pay higher overhead for new sales, when total sales haven't moved higher?

When you look at the average length of club memberships, it hovers between 24 and 28 months. Some stay longer but in some cases, the new club member was incented to join the club to get their initial discount at the tasting bar, but had no intention of joining anything. They just wanted a discount and you paid your employee a commission for giving that discount.
 
The way to discover the magnitude of the issue in your club is by reviewing every closed membership from their signup date. It may be that 80% of the signups have a fast decay rate and you aren't even covering overhead with that first sale. That is a costly issue and you never get to the most important sale, which is the second sale. That analysis will also value the other 20% of members at a real premium and ought to make you think about finding 1 of those members instead of 5 of the others. It also might change your thinking about outreach to that cohort given that value.

Paying for Retention and Higher Profitability

As most know, the key statistic in measuring the wine club success is Lifetime Member Returns, not new club signups and not total membership size. Lifetime Return is calculated as the product of total average annual sales from a club member, times the number of months they remain in your club. There are only two ways to increase that measure. You either get club members to spend more per year on average, or you keep them longer.

It seems most wineries pay a commission for selling memberships, but few really compensate to keep their club members longer and that's the simplest solution I see to improve wine club profitability. Instead of paying just for new club members, why not compensate staff under a commission structure that incents production of higher total Lifetime Member Returns?

Align tasting your room staff with club members. Turn quazi-anonymous customers into clients then friends and maybe even evangelists. Make staff the point of contact. Make the employee the face of your winery. After members join, have the person who signed them up follow with them to communicate club opportunities. That direct contact creates an added benefit of an emotional connection which will lengthen customer tenure.

Pay Incentive Compensation on What You Want to Incent

There are a lot of ways a winery could craft a program to increase membership tenure. One thought would be to set up incentive compensation a little like a stock broker. Give staff duties that include communicating with your existing club members and keeping them informed on club activities. After setting a minimum revenue stream from their assigned pool of members, pay them something for revenue in excess of that minimum, but pay handsomely for growth in their revenue stream. I see an added value in that as a retention tool for good employees because as they build up their client list, they leave a lot on the table to go elsewhere.

Another idea that might be simpler could be to add the behaviors aimed at retention in staff job descriptions, but pay for net memberships at year end by netting out the members lost to their membership signups. I can see some issues with that approach but its better than paying only for new signups.

I have some other thoughts about finding more effective incentive comp structures, but I'd rather hear your thoughts. 

 
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19 comments:

  1. In any business you get the results you reward with money and or attention. If a winery pays an hourly wage, no medical benefits, no tips via credit card with no commission on sales but reward money for each wine club signup you are sending the message that above all else the winery wants wine club sign ups because that is what your paying for.
    If you only pay for wine club enrollments after they take their first order you are still only paying for wine club signups, because it makes no difference to the tasting room staff at the time of enrollment.
    If you studied optimal hospitality service and applied it to tasting room staff, you would pay a higher hourly wage than currently most common $12-14/hr. You would provide regular training on service/sales/etc. You would incentivize staff for the sale of wine both individually and as a group, you would pay for both wine club enrollments and longevity, and last but not least you would enable tips via credit card because cash is a disappearing commodity, and research clearly demonstrates that service staff do a far better job of providing better service if they believe they can earn a tip.

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    1. Anon 8:46 - thanks for the enlightening comments.

      I would pile on that an owner ought to invest in that which is most important and the area that will deliver the best returns. We too often in the business get in ruts and are slow to evolve. In this case, for most wineries below 5k cases, direct sales are the largest opportunity and thats where investment is being made and needs to be made...not just in facilities but in people and training.

      Professionalizing the roll of a DtC employee is an important step for the future. Training is an important part and better defining the skills, activities, and profile for the position is equally important. I like what Wise Academy is doing in that vein ( http://wineindustrysaleseducation.com/ ).

      An old saying is you can never underpay a sales person. Of course that is a commission based sales person. But in this case, its a little more because both engagement and retention have to be part of the role and what is being compensated.

      If wineries can get to a second and third sale ... not just the first one, they will see profitability skyrocket.

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  2. Fascinating info, and I'll throw in some data points we measure. We started our Wine Club Division at VinoPRO in 2013 to combat exactly the problems you outline, AND we created a compensation system that targets long-term retention of wine club members. In 2013 alone we sold over 3,500 wine club memberships over the phone. And we didn't pour a single drop of wine (for the customers, that is!). In one large, multi-branded customer, we reduced the attrition rate of membership cancellations from 35% to just over 11%, and we did that in just under 12 months. We pay our sales reps to KEEP the member in the club which means they get paid for every club shipment they secure - what a novel concept. My feeling is that it is infinitely more profitable and smart to keep your existing customers and keep them happy than it is to constantly have to generate new ones to replace those who become disinterested or un-engaged with your brand.

    Jeff Stevenson
    CEO/VinoPRO
    A 2013 and 2014 Inc500 Company

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    1. Jeff - Thanks for logging in and the comments

      Care to give some details of the kind of compensation initiatives that drive those results? No need to use real numbers - just the program highlights. For instance, are you paying a percentage for new signups, a separate one for retention sales, a separate commission when a customer hits an annual anniversary .... etc

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  3. Sure - we use the KISS principle. Keep It Simple Stupid! Pay the rep something nominal on the initial signup, and then pay them something on every shipment. When the shipments stop, so do the sales rep's commissions. Money talks, and it gives them an incentive to keep the club member engaged, happy, updated, credit card current, etc. - Jeff

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  4. I've worked in sales management and marketing in several other industries before entering the wine business. My prior experience strongly underscores your points: initial and ongoing compensation for sales and/or gross profits were key to customer retention and reduced staff turnover. If a small winery needs new members, then add a bonus (possibly for the team) or some kind of competition (with a decent "prize") to spur further sales efforts and results. I am amazed at how wineries treat the true front-line employees and I agree with the earlier Anonymous poster about gratuities. I've heard it said that not having an entry point on a credit card allows the employee to avoid claiming the tip on taxes. So, I guess that means they'd rather have 100% of nothing than 70% of something?!

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  5. The other interesting impact of tipping in the second poorest county in California, is by allowing tipping on the credit card the tasting room staff can actually earn a living, and the cost to the winery is the bank charge for the credit card. If you ask tasting room visitors if they would like the option of providing a tip via credit card for good service you would be hard pressed to find a visitor that would object. So why do the wineries continue to suppress wages when it will cost them little to increase compensation and motivate their staff to work harder at providing great service?

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  6. Anonymous - The reason so many wineries continue to miss this boat and therefore miss out on sales and long-term customer relationships is quite simple - blissful ignorance. They honestly don't know what they should be doing. Nobody has told them that this methodology works and provided the proof that it works. In some cases, they're just plain stubborn and refuse to change, even though the world is changing right under their noses. They can sense it, they see it all around them and they say they want the increased sales, but they can't seem to pull the trigger and let the experts get to work and change their outdated methods.

    The only thing we can all do is continue to create and share our amazing success stories, continue to implement best practices and programs that sell millions of dollars of incremental revenue for those that understand and embrace those methods, and continue to educate those who need it most.

    And last but not least... I’ve come up with a quote that sums up the situation in the wine business pretty well. “You can lead a wine-country horse to water. When it gets there, sometimes you have to shove the hose down its throat and turn on the valve at full blast. Only then does the horse realize its insatiable thirst is finally being quenched by someone who knows how to quench it.”

    Jeff Stevenson
    CEO/VinoPRO
    A 2013 and 2014 Inc. 500 Company

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  7. I have been a Wine Club Manager for many years and have run two very successful wine clubs to date. I was the "face" for a small 6,000 case winery and now have more of a "back seat" role at an 160k case winery. What's interesting to me is that both wineries have the same-sized wine club. One of the reasons is just what you say in that management doesn't put an emphasis on growing the club (though they think they do) and the other reason is the customer contact.

    I wholeheartedly agree in that you need an employee to be the face, however, I believe that person should be the Club Manager and not a tasting room employee. Tasting room employees tend to not be as well versed in club operations and many are part-time or even on-call. I also believe that they should focus on new customers who come through the door to taste. A good club manager knows how to engage club members and make them feel special.

    Also, while I do agree with some of your compensation ideas, in reality, managing these sorts of commissions becomes a nightmare.

    My two cents....

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    1. Thanks for the thoughts Anon 11:21. Human connection is a key and relationships are built one on one. A Club Manager can be the face of a small club but that's not scalable.

      Compensation is always a nightmare to manage. We might as well get the right incentives then?

      Thanks again for the thoughtful comments.

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  8. I'm sorry, but fighting attrition is a myth. Wineries already offer TR incentives on sales, regardless if the sale goes to a Wine Club member or not. There are entire departments dedicated to generating "second sales" through Club, eCommerce, print mailings, telesales, etc. It all doesn't matter. The absolute best of us have a 5 year average Club tenure out of a 20+ year customer life cycle. The model is broken. Clubs and allocations require too large a commitment, ostensibly for eternity. What else do we ever buy this way? We need to find ways to make our product more accessible through direct channels and incentivize purchases through quantity discounts and openly available loyalty programs. If you have 3 Tier distribution AT ALL, Clubs made sense 30 years ago, they don't now.

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    1. Anon 12:05 I've heard the comment before that clubs have outlived their usefulness, but I believe the old style clubs have outlived their usefulness and clubs are critical for most wineries. Most are under 5,000 cases and since there is very limited access to distribution for those wineries - DtC and clubs are critical for survival.

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    2. Just to be clear Rob, DTC and Clubs aren't mutually exclusive. DTC is definitely the future, but Clubs actually hamper the scope of DTC by reserving benefits only for those willing to make a commitment that most consumers find distasteful. The data continuously supports this, otherwise we'd all have much longer-lived Club members. Customers want what they want, when they want it. The Club model is far too limiting in this regard, which is why attrition will always be a major issue.

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    3. I don't see clubs hampering DtC. There are numerous examples of clubs, and loyalty programs in retail. There are reserved benefits for those members versus people walking in off the street. Kohl's is an interesting example. They give big discounts for a second sale but the first purchase can be rich, unless you join their club.

      I believe the reason we aren't keeping members longer in clubs has more to do with a lack of understanding of why members are in the club, what their preferences are, not keeping a club fresh with variety, lack of choice in shipments, and limited engagement once people join a club.

      Like other retailers, I see "new style clubs" and DtC as part of an integrated marketing strategy. The old club of automated shipments of whatever the winery wants are dead/dying.

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    4. I think we're actually very close on this Rob :) The Kohls program you mention is a perfect example of what we need to change into, as it's a loyalty program with no commitment or automatic/required shipments of product. The "old clubs" as you call them, are what the overwhelming majority of wineries are still using.

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    5. Thanks for the comments Anon 11:44

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  9. Managing the commissions is where the technology comes in... :)

    And fighting attrition is certainly not a myth. If it was a myth, why does the concrete, measurable data backing up our efforts and showing these types of programs work exist? That data tells us something, and it proves we can learn from it.

    You can disagree with the data, but I doubt you would turn away the revenue when the data is put into practical use and it generates actual sales.

    And the customers who have 3 Tier distribution are finding all kinds of ways to have really cool clubs that generate millions of dollars of revenue per year. The really successful ones are realize that pulling back some of the 3 Tier wines and using them for DTC sales is the way to go. Again, we have measurable data that tells us this. Those who wish to disregard the data certainly can do that.

    Jeff

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    1. Not that you have a vested interest in this Jeff, but the attrition numbers you mention above are far more affected by Club growth than they are of preventing cancellations. This is reflected in industry data as well. Take a look at any data set out there and average tenure (28mths) is not supported by attrition rates (20%?). Meaning, the past few years we are all doing a great job of getting new customers that will leave us very soon. There hasn't been good industry data to support this yet, but the percentage of Club members that continue to purchase after they cancel is ridiculously small. This is not because the y had a bad experience, it';s because they left you for another Club that required a similar commitment from them and there is only so much room. As you must know from your data Jeff, we are swimming in a ridiculously small pool on the DTC side of things. The fastest way to increase our profitability is to increase our customer base. What if benefits were available to every customer, without commitments, just based on volume and sales history? How much longer would a customer continue to buy from us then? Do you want a hot and heavy 5 year committed relationship, or a lifetime of service that responds to your desires? Customers hate commitment. I'm not saying Clubs aren't profitable, they just leave huge sums of money on the table.

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  10. >>As you must know from your data Jeff, we are swimming in a ridiculously small pool on the DTC side of things.

    Amen. Hence the reason we developed our kiosk solution. It's too early to tell if the trend will continue, but in some cases we've seen 15-20% list growth inside of 90 days. We now have a live counter on our website that shows NEW customer list signups. I expect that number to grow exponentially as time goes on.

    >>There hasn't been good industry data to support this yet, but the percentage of Club members that continue to purchase after they cancel is ridiculously small.

    Obviously I can't speak for the industry at large, but we actually have data that contradicts this across every brand we work for. In fact, as I've published in our 2012 whitepaper, we sell about 50% to WC members and 50% to non-club. Of the non-club sales, upwards of 10-20%% are former WC members. To your point, most cancelled because they found another club that served their needs better, however when contacted by a live person who took the time to learn what they like, they were much more likely to make a purchase even though they don't want to rejoin the club.

    >>Do you want a hot and heavy 5 year committed relationship, or a lifetime of service that responds to your desires?

    And there in lies the holy grail! I contend you can have both if properly executed (and hence we have a thriving business that proves it), but you have to be willing to invest in making that happen because it will *never* happen by itself. - Jeff

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