Pay By Touch SmartShop MRD

8/14/2019 Pay By Touch SmartShop MRD

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FILE: PBT MRD SMARTSHOP V1.0 VERSION: 1.0 PAGE 1 OF 43

NOTICE OF PROPRIETARY PROPERTY

THE INFORMATION CONTAINED HEREIN IS PROPRIETARY AND CONFIDENTIAL TO . THE POSSESSOR AGREES TO MAINTAIN THIS DOCUMENT IN CONFIDENCE ANDNOT TO REPRODUCE, COPY, REVEAL OR PUBLISH IT IN WHOLE OR IN PART.

MARKETING REQUIREMENTS DOCUMENT

Project Name: Personalized Marketing - SmartShop

MRD Version: 1.0

Date: 1/23/06

MRD Due Date: 1/23/06

Beta Release Date: 9/30/06

v1.0 Release Date: 12/31/06

Product Team:

Name Role Email address

Hutch Carpenter Senior Product Manager [email protected]

Authorizations

Product Marketing: Stephen Reade Title: SVP Product Marketing

Signature: Date:

Product Engineering and Support: Robert Van Tuyl Title: VP Engineering

Signature: Date:

Program Management: Joe Lampertius Title VP Loyalty Solutions

Signature: Date:

Platform Management: Erich Wilson Title VP Platform

Signature: Date:

Finance: Doug Griscom Title VP Finance

Signature: Date:

Operations and Risk Management: Don McNelley Title VP Operations & Risk

Signature: Date:

Security: Larry Hollowood Title: VP Systems Security

Signature: Date:

Professional Services: Mike Orman Title VP ImplementationSignature: Date






DOCUMENT H ISTORY AND CHANGE CONTROL

Version Date Description of Changes Initiat or Initials

1.0 12/18/05 MRD initiated HC

1.0 1/23/06 Initial draft of MRD published HC






EXECUTIVE SUMMARY

Many retailers, especially grocery stores, are improving the way they track customers' purchases -- and how they reward those customers. Forget the old club card you must present with each purchase. "You're going to see retailers, particularly the grocery companies, do more with the data they gather from customers," says Mr. Fox,[professor of marketing at Southern Methodist University]. "They're going to give you a special discount or give you more information about what you bought or what's on sale."

“Trends (A Special Report): Retail --- Upscale Experience, Downscale Prices”Wall Street Journal, November 21, 2005

“Google is basically out to make every ad a targeted ad," said Safa Rashtchy, an analyst for Piper Jaffray & Co."That started in search and that will go beyond search in display advertising and then offline.”

“Google explores radio ad sales; Search engine plans to buy dMarc of Newport Beach”San Francisco Chronicle, January 18, 2006

Deloitte believes there are four umbrella challenges in Trade & Consumer Management that are of highest priority to CPG manufacturers [including] Direct to Consumer Marketing: ‘How should we leverage information from retailer loyalty programs to jointly market to the consumer?’

“What is Trade Promotion?”Deloitte Consulting, August 5, 2004

The three quotes above exemplify anoverall trend in consumer marketing.Companies have worked to get closer tothe consumer in their marketing. Key tothis effort has been cycles of improvementin data gathering and technologies for

delivering content to individuals. For example, a major innovation for magazine publishers was the abilityto vary ads by subscribers’ locations, opening up channels for local advertisers. In recent years, Googlehas taken marketing to another level with its AdWords. These catch consumers’ self-identified interestsright at a moment in which they are highly receptive to a message. Google’s recent announcement of itsacquisition of dMarc highlights the Web giant’s view about other areas ripe for more targeted marketing.

SmartShop is a product designed to take marketing even further along this spectrum, toward truepersonalized marketing . Grocers and other retailers have established loyalty programs with an eyetoward improving their information capture and fostering a relationship with customers. The reality is fewMerchants have captured even a quarter of the potential of these programs. Consumer packaged goodsmanufacturers (CPGs) are also keenly interested in developing better ways to market directly toindividuals. Currently, they havelittle ability to identify and reachindividuals most interested in theproducts.

SmartShop will deliver a set ofoffers (i.e. discounts) based onconsumers’ actual purchases. BothMerchants and CPGs will input theoffers they want to distribute.SmartShop will handle the targetingand distribution of these offers.Consumers will receive their offersin an easy to access and useprocess, completing the loop for truepersonalized marketing.

MassMarketing

TargetedMarketingTargetedMarketing

PersonalizedMarketing

A d F l y e r s

N e t w o r k T V

L o c a l R

a d i o

M a g a z i n

e s

G o o g l e A d W o r d s

W e b s i t e

s

S m a r t S h

o p

D i r e c t M

a i l

G o o g l e A d S e n s e

A m a z o n . c o m






Pay By Touch will generate revenue on SmartShop primarily through fees received from the CPGs, withsome revenues from Merchants as well.

The revenue model forSmartShop can becharacterized as:

• Merchants providethe customer data

and distributioninfrastructure

• CPGs provide therevenue dollars

The revenue modelacknowledges the criticalrole Merchants’ customerdatabases serve indelivering personalizedmarketing for CPGs.

The table to the right

provides a sense of thePay By Touch revenue opportunity in the U.S. grocery market. The $1.8 billion is based on a fully matureimplementation of SmartShop in the top 25 grocers, in which it becomes a primary loyalty program forMerchants. The revenue model is defined more fully in §1.2.

The primary revenue generation for SmartShop is via CPGs. CPGs spend $75 billion annually inpromotion-related funds, either paid through Merchants to run ads and discounts or directly to consumers,such as coupon distribution. Much of this money is wasted on expensive physical production anddistribution of free standing inserts (CPG coupons) and Merchant ad flyers. Not only are these currentmass marketing vehicles expensive, they have a very low readership. This combination leads toinefficient use of dollars and represents the opening for SmartShop to successfully penetrate the market.

SmartShop will leverage Pay By Touch’s differentiating strategic assets in realizing this revenueopportunity:

Pay By Touch Wallet: The Wallet is the centralized home for a consumer to manage and access herdifferent financially-related accounts, including SmartShop offers. Members can also be linked tohouseholds for purposes of tracking spending.

Implementation at the POS: To track consumers’ purchasing, a company must have access to theirtransaction history. With in-store implementations across a variety of merchants, Pay By Touch has anincredibly valuable asset for the design and implementation of SmartShop. In addition to informationaccess, PBT is positioned to deliver offers to consumers at transaction time.

Biometric credential: Biometrically identifying Members solves two issues that can bedevil loyaltyprograms. First, it takes the burden off the consumer to keep multiple cards in her wallet. Use of PBT foridentification automatically captures her loyalty account. Second, it eliminates the practice of providing afalse loyalty card ID, providing an immediate increase in the quality of data captured.

Multiple communication channels: Pay By Touch will have multiple touch points with Members. In-store

kiosks provide a vehicle for communicating offers to Members. MyPBT will offer Members acomprehensive view of their loyalty programs and provide a venue for Merchants and CPGs tocommunicate offers to Members. Email communications will alert Members to new offers. Mobile devicescan alert Members to relevant offers through a unique combination of identity, purchase history andlocation.

SmartShop Revenue OpportunityTop 25 U.S. Pure Play General Grocers

Source: Supermarket News Top 75; SEC filings; company websites

General Food # General Estimated Merchant Merchant CPG CPGRevenues Food Revenue Activation Redemption Activation Ad Offer Loyalty

No. Grocer (billions) Stores Opportunity Fees Fees Fees Activation Program

1 Kroger 51.1$ 2,532 345,618,000$ 19,749,600$ 9,874,800$ 197,496,000$ 118,497,600$

2 Safeway 35.8$ 1,802 245,973,000$ 14,055,600$ 7,027,800$ 140,556,000$ 84,333,600$

3 Albertsons (excl. drug stores) 34.7$ 1,797 245,290,500$ 14,016,600$ 7,008,300$ 140,166,000$ 84,099,600$

4 Ahold USA (excl. Bi-Lo) 18.6$ 1,033 127,026,827$ 7,258,676$ 3,629,338$ 72,586,758$ 43,552,055$

5 Publix 18.6$ 850 126,637,875$ 7,236,450$ 3,618,225$ 72,364,500$ 43,418,700$6 Delhaize America 15.8$ 1,523 108,148,950$ 6,179,940$ 3,089,970$ 61,799,400$ 37,079,640$

7 Meijer 11.1$ 158 75,757,500$ 4,329,000$ 2,164,500$ 43,290,000$ 25,974,000$

8 H.E. Butt 10.6$ 298 72,345,000$ 4,134,000$ 2,067,000$ 41,340,000$ 24,804,000$

9 Winn-Dixie 9.9$ 587 67,710,825$ 3,869,190$ 1,934,595$ 38,691,900$ 23,215,140$

10 A&P 7.8$ 638 53,235,000$ 3,042,000$ 1,521,000$ 30,420,000$ 18,252,000$

11 Giant Eagle 5.1$ 222 34,807,500$ 1,989,000$ 994,500$ 19,890,000$ 11,934,000$

12 SuperValu (excl. Save-A-Lot, Deals) 4.8$ 262 32,691,068$ 1,868,061$ 934,031$ 18,680,610$ 11,208,366$

13 Pathmark 4.0$ 143 27,149,850$ 1,551,420$ 775,710$ 15,514,200$ 9,308,520$

14 Hy-Vee 3.9$ 192 26,208,000$ 1,497,600$ 748,800$ 14,976,000$ 8,985,600$15 Stater Bros. 3.8$ 159 25,935,000$ 1,482,000$ 741,000$ 14,820,000$ 8,892,000$

16 Aldi USA 3.5$ 630 23,887,500$ 1,365,000$ 682,500$ 13,650,000$ 8,190,000$17 Wegmans 3.3$ 65 22,522,500$ 1,287,000$ 643,500$ 12,870,000$ 7,722,000$

18 Raley's 3.2$ 134 21,840,000$ 1,248,000$ 624,000$ 12,480,000$ 7,488,000$

19 Roundys 3.0$ 125 20,550,075$ 1,174,290$ 587,145$ 11,742,900$ 7,045,740$20 Price Chopper 2.5$ 106 17,062,500$ 975,000$ 487,500$ 9,750,000$ 5,850,000$

21 Harris Teeter 2.4$ 140 16,380,000$ 936,000$ 468,000$ 9,360,000$ 5,616,000$

22 Save Mart 2.2$ 123 15,015,000$ 858,000$ 429,000$ 8,580,000$ 5,148,000$

23 Schnuck Markets 2.2$ 101 15,015,000$ 858,000$ 429,000$ 8,580,000$ 5,148,000$

24 Ingles Markets 2.2$ 197 14,774,760$ 844,272$ 422,136$ 8,442,720$ 5,065,632$25 Weis Markets 2.0$ 157 13,854,750$ 791,700$ 395,850$ 7,917,000$ 4,750,200$

T O T A L S 262.0$ 13,974 1,795,436,980$ 102,596,399$ 51,298,199$ 1,025,963,988$ 615,578,393$






T ABLE OF CONTENTS

1 INTRODUCTION...................................................................................................................................8 1.1 PURPOSE OF THIS DOCUMENT .........................................................................................................8 1.2 OPPORTUNITY DESCRIPTION ...........................................................................................................8 1.3 OVERVIEW OF PROPOSED PRODUCT..............................................................................................12 1.4 CUSTOMER VALUE PROPOSITION...................................................................................................13

2 PRODUCT STRATEGY AND OVERVIEW.........................................................................................13 2.1 GOALS AND OBJECTIVES ...............................................................................................................13 2.2 STRATEGIC ROADMAP ...................................................................................................................14 2.3 COMPETITIVE ANALYSIS ................................................................................................................15

2.3.1 Direct and Indirect Competitors..............................................................................................15 2.3.2

Strengths, Weaknesses, Opportunities and Threats..............................................................20

2.3.3 Differentiators.........................................................................................................................20

3 BUSINESS MODEL ............................................................................................................................21 3.1 MARKET SEGMENTATION AND VALUE PROPOSITION........................................................................21

3.1.1 Merchants...............................................................................................................................21 3.1.2 CPGs ......................................................................................................................................24 3.1.3 Members.................................................................................................................................25

3.2 VALUE CHAIN STRUCTURE.............................................................................................................26 3.2.1 Members.................................................................................................................................26 3.2.2 Merchants...............................................................................................................................26 3.2.3 CPGs ......................................................................................................................................26

3.3 COST STRUCTURE ........................................................................................................................27 4 USE CASES AND IMPLEMENTATION SCENARIOS.......................................................................28

4.1 INTRODUCTION..............................................................................................................................28 4.1.1 Use Case 1: Establish Member Household ID .......................................................................28

4.1.1.1 Description.....................................................................................................................28 4.1.1.2 Justification for Use Case..............................................................................................28

4.1.2 Use Case 2: In-store SmartShop enrollment .........................................................................28 4.1.2.1 Description.....................................................................................................................28 4.1.2.2 Justification for Use Case..............................................................................................28

4.1.3 Use Case 3: Web-based SmartShop enrollment ...................................................................29 4.1.3.1 Description.....................................................................................................................29 4.1.3.2 Justification for Use Case..............................................................................................29








4.1.16 Use Case 16: Offer Pool is distributed to customers.........................................................37 4.1.16.1 Description.................................................................................................................37 4.1.16.2 Justification for Use Case..........................................................................................37

4.1.17 Use Case 17: Targeted Offer Pool is published ................................................................38 4.1.17.1 Description.................................................................................................................38 4.1.17.2

Justification for Use Case..........................................................................................38

4.1.18 Use Case 18: Merchant is paid for CPG fees and discounts ............................................38

4.1.18.1 Description.................................................................................................................38 4.1.18.2 Justification for Use Case..........................................................................................39

4.1.19 Use Case 19: Merchants and CPGs use results of prior offers to set new offers for the future ...........................................................................................................................................39

4.1.19.1 Description.................................................................................................................39 4.1.19.2 Justification for Use Case..........................................................................................39

5 REQUIREMENTS DEFINITION ..........................................................................................................40 5.1

INTRODUCTION..............................................................................................................................40

5.2 MARKETING REQUIREMENTS..........................................................................................................40

5.2.1 PBT Wallet..............................................................................................................................41 5.2.2 In-Store...................................................................................................................................41 5.2.3 Merchant MIS .........................................................................................................................42 5.2.4 SmartShop Application...........................................................................................................42 5.2.5 Professional Services.............................................................................................................43 5.2.6 PBT Financial .........................................................................................................................43






1 INTRODUCTION

1.1 PURPOSE OF THIS DOCUMENT

This Marketing Requirements Document (MRD) is intended for internal distribution only. The MRDdescribes how SmartShop aligns with the corporate goals of Pay By Touch and will meet the demands ofexisting and future customers. It explains the value that SmartShop would bring to our various customercategories and how it would help differentiate Pay By Touch from our competition. MarketingRequirements are specified; these describe the functionality that is required in order to realize the goals.

1.2 OPPORTUNITY DESCRIPTION

Consumer Packaged Goods Manufacturers (CPGs) spend$100 billion annually in advertising, marketing and promotionefforts with grocers. $25 billion is spent on advertising.Another $17 billion goes toward direct consumer promotions,which include free standing inserts (FSI). FSIs are thecoupons provided by manufacturers in consumers’ Sundaynewspapers. $10 billion is budgeted as “account specific”promotional dollars. These are dollars that the CPG uses torun consumer promotions through specific Merchants. Theremaining $48 billion represent trade promotion allowancesprovided by CPGs to grocers. Because grocers are thecritical distribution channels to consumers, they holdconsiderable sway over CPGs. CPGs provide grocerssignificant dollars to ensure their products are placed in weekly ad flyers, displayed in-store and promotedvia discounts, or temporary price reductions (TPRs).

Two problems plague the current industrypromotional structure, one a more recentphenomenon, the other a longtime issue.

Over the past decade, the efficacy of CPG FSIs andMerchant ad flyers has steadily diminished. FSIredemption rates are now below 1% (see chart) andad flyer readership is typically under 10%. Whetherthe cause is increasingly harried households,promotion saturation or shopping at alternativeoutlets, the result is less bang-per-buck for thesevehicles, raising the effective cost of advertising thatdoes “make it through” to consumers.

The other problem for Merchants and CPGs is that promotional programs follow an indiscriminate one-to-many distribution model. All shoppers are treated the same when it comes to in-store discounts.According to Accenture research, consumers are unaware of 51% of items bought on sale. Thistranslates to a loss of margin with zero marketing value to the Merchant and CPG. A second issue is that“cherry picker” customers only purchase items on sale from different Merchants, meaning the grossmargins on their average basket are significantly lower than those of loyal customers.

Both CPGs and Merchants are unhappy with current promotional models. To address shortcomings, theapproach has been to throw money at the problem. In 1999, manufacturers spent 14.0% of their sales ontrade promotion; by 2003 that figure had risen to 17.4%. Unsurprisingly, Cannondale Associates reportsthat 84% of CPGs are dissatisfied with the return on their trade promotion dollars.

CPG Coupons

Total Distributed and Redeemed: 2002-2004

300

305

310

315

320

325

330

335

340

345

2002 2003 2004

C o u p o n s D i s t r i b u t e d

2.9

3.0

3.1

3.2

3.3

3.4

3.5

3.6

3.7

3.8

C o u p o n s R e d e e m e d

CPG Coupon Distribution Coupon Redemption

1.1%

1.1%

0.9%

Source: CMS, Inc.

billions

CPG $100 Billion Annual Spend

Grocer Advertising and Promotions

Advertising, 25%

Account Specific,

10%

Consumer

Promotion,

17%

Trade

Promotion,48%

Source: Cannondale Associates






Pay By Touch Market Opportunity

By leveraging its strategic assets, Pay By Touchhas an opportunity to provide a solution that solvesseveral issues. SmartShop reverses the trend ofincreasing costs in FSI and ad flyer production anddistribution by providing relevant offers thatconsumers want and can easily access. TPRs can

be targeted to loyal, higher margin customers whileCPG coupons can find the most interestedconsumers. The end state is more CPG tradepromotion and consumer dollars appliedtoward driving profitable customer visits.

The basics of SmartShop that address the opportunity are:

• Targeting engine that distributes offers to Members based on their shopping history

• Weekly offer sheet that presents up to 20 offers to the customer

• Multiple low-cost communication modes that deliver offers right before Members initiate shoppingas well as earlier in the week

Members will receive weekly offer sheets with up to 20 different individual discounts. The first ten offerswill be those funded by the Merchant (trade promotion dollars). The second ten offers will be thosefunded by individual CPGs (consumer promotion dollars). In the example above, there are two offers(Coca-Cola, Haagen Dazs) that are set up as offer ads. These offers receive more real estate on the offersheet and allow larger, more dynamic graphics.

Coupon

Production & Distribution TPR Dis-

playsUnaware of TPRAware of TPR

Coupon

Prod. & Distr.

Dis-

playsUnawareAware of TPR

Current

End State

Trade/Consumer Allowance

Distribution of Spending

Coupon

Production & Distribution TPR Dis-

Unaware of TPRAware of TPR Offer

Production & Distribution TPR/Coupon Dis-

playsUnawareAware

Offer

Prod. & Distr.

TPR/Coupon Dis-

playsUnawareAware

MerchantFundedOffers

CPGFundedOffers

SmartShop Offer Sheet

Example Structure

Offer Ads Regular Offers










1.3 OVERVIEW OF PROPOSED PRODUCT

SmartShop will deliver highly relevant,personalized discounts to Merchants’customers. For example, if a Memberregularly purchases baby items, the offersmay include a coupon for Pampers.

Regular purchasers of coffee may seeFolgers offers.

The product requires four inputs to providethese personalized offers:

1. Member identification

2. Household purchase history

3. Merchant product hierarchy

4. Merchant & CPG offers

Members must activate their offers prior totheir being available for discounts at thePOS. This ensures that the Member is

aware of the offer being made. After the offers are tendered at the POS, SmartShop maintains a tally ofdiscounts taken, providing settlement services for Merchants and CPGs.

The major functional components of SmartShop are described below:

A. Data Center: Member household purchase histories, or transaction logs, are imported fromMerchants’ databases. Information includes UPCs, price per UPC, and the total amount paid.

B. Offer/Rule Library: Merchants and CPGs input their offers on different products. Offers indicate adollar or percentage off, limit on total customers per offer, a list of eligible UPCs, offer effectiveperiod, Member assignment rules and digital assets (logos) associated with the offers.

C. Targeting Engine: LoyaltySuite provides the analytical engine for distributing the offers. Itstatistically evaluates the transaction logs to identify customers likely to be interested in a givenoffer, incorporating the Merchants’ and CPGs’ designated distribution strategies.

D. Communication Staging: After the various offers are distributed to Members, they are uploaded tothe Staging Server. The server is the source for offers presented to the various communicationchannels. A flag is maintained for each Member indicating whether they have viewed the offers.

E. Communication Channels: Members view their offers in four different ways. Email notices aresent weekly. Offers can be viewed on MyPBT portal. In-store kiosks catch Members right as theyinitiate shopping trips. Members can view their offers on-the-go via mobile devices.

F. POS: The POS component consists of two elements. First, SmartShop will monitor the UPCsscanned at checkout. Once the eligible UPCs are identified, SmartShop will transmit thediscounts to the ECR for application to the Member’s checkout total.

G. Settlement: SmartShop will track all offers redeemed through the system. This information will beaggregated on a regular basis (e.g. weekly) for use in electronic settlement of funds betweenCPGs and Merchants.

H. Web Reporting: Merchants and CPGs will be provided with metrics outlining the performance oftheir offers. Customer segmentation will be integrated in the reporting of these metrics.

web

email

kiosk

communicationstaging

shopperidentified

datacenter

manufacturer retailer

electronic offer delivery at POS

next-generationtargetingengine

Offer/Rule library-----------

collaborationplatform

mobile web reporting

-----------settlement

SmartShop Product Architecture

A

B

C D

F

G

H

E






1.4 CUSTOMER VALUE PROPOSITION

SmartShop will deliver value to four different constituencies:

Merchants • Innovative loyalty program that fosters an ongoing relationship with customers

• Deliver customers offers on the products they care about

• Reduced cost for production and delivery of coupons

• Ability to target best customers to improve overall gross margin

CPGs • Ability to get messaging much closer to their end customers than ever before

• Reduced cost for production and delivery of coupons

• Target customers of rival CPGs for offers

Members • Receive much more relevant coupons than what arrives in the Sunday paper

• Ability to redeem coupons is greatly simplified versus current search-clip-n-carrymodel

• Through increased use of coupons, purchasing power is extended

PBT • Revenue from CPGs and Merchants• Increased utility for the Wallet

• Increased Member enrollment and usage through a stronger Merchant “push”strategy

2 PRODUCT STRATEGY AND O VERVIEW

2.1 GOALS AND OBJECTIVES

The goal for SmartShop is to become Merchants’ primary loyalty program. A single, highly effectiveloyalty program simplifies administration, reduces costs and keeps customers’ focus on their relationshipto the Merchant. Achieving this goal does not require a radical departure from current industry practices.Rather, it requires re-channeling existing discounts into a customer-specific model. The initial marketentry will be selling SmartShop as an augmentation to an existing loyalty program or as a trial program forgrocers without existing programs. Over time, as the value of SmartShop is realized, grocers will increasetheir reliance on it as their primary loyalty program.

Essentially, SmartShop will be Merchants’ CRM application for managing their customers. As such,SmartShop must be built with a whole product approach. Models for product development and servicedelivery include Siebel and Salesforce; Amazon.com and Netflix; and Visa and PayPal. BecauseSmartShop will touch multiple points of Pay By Touch and Merchants, the objective is to keep the levelof customization as minimal as possible. Otherwise, the solution risks being expensive, long to

implement and not scaleable.






2.2 STRATEGIC ROADMAP

SmartShop represents the first step on the road toward Pay By Touch’s Personalized Marketing productsuite. Personalized Marketing leverages the PBT biometric credential to provide Members with relevantoffers and information related to their purchases and interests. The graphic below provides a high-levelstrategic roadmap for Personalized Marketing.

SmartShop: Provide consumers with highly relevant discounts, on the products they like to regularly buy.Initial release is targeted toward the grocery industry. Subsequent verticals for expansion include massmerchandisers, drug stores, pet discounters and convenience stores.

Online: Create eCoupons which the consumer can load into their Pay By Touch wallet by clicking oninternet ads. The eCoupons are then redeemed upon purchase via the Pay By Touch wallet at both brick& mortar merchants and online merchants.

Media Network: Extend the distribution points already in place for in-store, online and mobilecommunication of SmartShop and Online. Establish infrastructure for scheduling and distributing

messaging to Members based on their individual preferences.

SmartShop

- Mass Merch- Drug- Pet- C-Stores

SmartShop- Grocers

Online- eCoupons

MediaNetwork- Advertising

PersonalizedMarketing






2.3 COMPETITIVE ANALYSIS

2.3.1 Direct and Indirect Competitors

U.S.-based competition in the loyalty field centers primarily on grocers, secondarily on other massmerchandisers. Analysis of SmartShopcompetitors is based on three attributes:

1. Degree of relevance: level ofpersonalization in the loyaltyprogram

2. Offer Communication: how closelydoes the communication of offers/ rewards fall relative to the criticalmoment when the customer initiatesshopping

3. Program Management: amount ofeffort for Merchants and CPGs toimplement and manage the loyaltyprogram

Each of the competitors is described below.Two firms are called out in greater detailbecause their models are most competitiveto that offered by SmartShop: ConceptShopping and POSnet.

Concept Shopping

Concept Shopping provides a robust solution that provides personalized offers to shoppers based on theirpurchase histories. The offers are funded by CPGs and are delivered to shoppers via in-store kiosk, theweb and email. For a Merchant, the solution is nearly all upside, as the CPGs fund the offers from theirown promotional budgets, not trade allowances. CPGs gain a direct line to customers most interested intheir products. Concept generates most of its revenue from the CPGs.

CPGs commit a certain dollar amount for a defined period,$10,000 for six months for example. They set parametersfor offer distribution, and then let the system go on “autopilot”. Based on pre-defined rules, it distributes the offers tothe Merchant’s customers until hitting the total dollaramount or the end of the active period.

Concept Shopping’s innovation is a targeting model thatincorporates a customer’s prior product purchases as wellas their responses to different discount offers. If acustomer previously redeemed a given discount onPampers, for instance, the discount will be the same or lessthe next time. If the customer didn’t redeem, the next

discount is higher to induce the sale.Concept Shopping has been in business for several years (approximately 7). It was tested at Safeway,which never committed to the solution. Concept is currently running pilots and expanding withinAlbertsons, deployed under the Avenu name in Jewel Osco stores. Concept currently partners with kiosk-provider Tactical Retailing Solutions (TRS) for the Jewel-Osco pilot. However, it is likely a new providerfor kiosks will be selected in the first half of 2006 as Albertsons expands the program.

5©2005,ConceptShopping, Inc.

Data Feeds

Tlog

Product

Data

Images

CSI Engine

Concept Shopping Retailer HQ In-StoreUsers

ConceptShoppingDataCenter

ShopperPersonal

Web PagePermission

Email

Retailer provides

POS

StoreControllers

sdb/EME

Server

Modified

HH Map

•Ad Products•Targeting/Tactics•Offer UPCs

Reporting

State Machine

Personal

OfferDispenser

Gateway

CampaignManager

CampaignManager

Shopper Targeting

Tlog Essence

Shop

NScan

Web-based

Messaging

In-store Messaging

Offer Arbiter

WebMessaging

Ad Server

Redemptions;Ad channel

engagementEngaged,Targeted offers

Targeted

offersWeb channelengagement

Engaged,

Targeted offers

Web channel

engagement

I n - s t o r e e n g a g e m e n t

E n g a g e d , T a r g e t e d o f f e r s

Engaged, Targeted offers

Discountsrequested

Engagement

Engagement

DataFeeds/Engagem ent

Engaged Discountssent

Program Architecture Overview

O f f e r C o m m u n i c a t i o n

Degree of Relevance

Difficult

Moderate

Easy

ProgramManagement

One size fits all

Reflects my specific interests

Days until my next

shopping

trip

Right before I

shop ConceptShopping

POSnet

V a l a

s s i s

V R M

S S A P

T r i v

e r s i t y

Retalix/ Sagarmatha

S&HGreenpoints Catalina

SafewayClub Card

G r o c e

r y

S h o p

p i n g

N e t w

o r k

LoyaltyLab

NCRCopient

dunnhumby(Tesco, Kroger)

DorothyLane

SmartShop

SmartShop Competitive Landscape






POSnet

Concept Shopping can be classified as an innovative offer targetingengine with supporting infrastructure around it. POSnet, on the otherhand, provides the supporting infrastructure needed to deliverpersonalized offers, but without a proprietary targeting engine.POSnet is a member-owned Limited Liability Corporation dedicated tothe commercialization and operation of its electronic offer

management and point-of-sale clearing system. Pathmark is itslargest customer.

The company’s Retail Media Management™ is an open platform andelectronic offer management infrastructure that enables retailers toflexibly share their customer relationships with trading partnersproviding the widest possible array of creative household-specificpromotional offers through multiple communication channels includingdirect mail, email, internet couponing sites, kiosks, service-counterlabel systems, POS printers, mobile shopping devices and aninnovative solution to in-store coupon clearing

In addition to robust, open platform offer management, POSnetprovides settlement functionality. Its aggregation of transactional datafacilitates measurement and analysis of marketing results on a real-time basis. POSnet’s settlement provides four critical requirements:

• Validation: POSnet central systems extract redemption details from retailer point of sale systemsand perform validation routines to verify that the rewards issued at checkout are in agreement withrequirements contained in the central database.

• Automated invoicing: A weekly process aggregates daily point of sale redemption activity into asingle invoice transmission document for each funding CPG-sponsor.

• Weekly payment: The issuance of weekly CPG-sponsor invoices, retailer receivables reports and joint settlement documents occurs each Monday following weekly close. Through a concentrationaccount managed by Bank of America, CPG payments are collected by ACH transfers executedon Monday, allowing for funds transfer to retailers on Wednesday.

• End-to-end audit trail accountability: Retailers (and third parties the retailer authorizes) can readilyfollow the disposition of any redemption forward through the settlement process, and/or trace anysettlement document or invoice back to the precise original point of sale redemption transactions.

The following table summarizes other companies in the loyalty solutions space.

# Company Description Degree of Relevance Offer Communication Program Management

1 dunnhumby(Tesco, Kroger)

dunnhumby is theanalytics engine andconsultancy behindTesco’s renownedcustomer-specific loyaltyand marketing program.Kroger has established aJV with dunnhumby totarget the U.S. market.

Combining existingcustomer data with abreadth of consumerlifestyle and attitudinal dataworldwide, dunnhumbyprovides its clients withunprecedentedunderstanding of thebehavior and motivation ofcustomers. This

information underpins thecreation of bothcommunication programs,such as direct marketing,and targeted products,services and promotionthat enable clients tocreate value for theircustomers and improve thelifetime value of each

Tesco mails out offers to itscustomer base. Unclear howKroger is leveraging itsdunnhumby-generatedprograms. With ties to two ofthe largest grocers in theworld, in-store communicationof offers seems to be withinreason.

In the U.S., dunnhumby isworking directly with Krogerand offers its services toother retailers through theJV. The lack of informationand track record forimplementations earnsdunnhumby a difficult ratingfor Program Management.







customer.2 Valassis VRMS Provides a leading CRM

database solution tomerchants; primarycustomers aresupermarket.

MarketEXPERT is effectiveat developing lists ofcustomers based uponattributes or shoppingbehavior.

To date, MarketEXPERTusers primarily make use ofdirect mail for communicatingdifferentiated information oroffers to customers.

User must create buildoffers in MarketEXPERTfor targeting, then buildsame offers in Target-EXPERT for POS delivery.TargetEXPERT has beenintegrated to NCR, IBM,and Retalix POS systems.

3 Retalix/ Sagarmatha

Retalix is a leadingprovider of POS softwareto supermarkets.Sagarmatha offers asophisticated targetingengine. In December2003, Sagarmatha signedan MOU agreement withRetalix to market and sellSagarmatha’s PersonalPromotion Builder system.Retalix is currentlybuilding the combinedloyalty system for aEuropean client and willthen make the solution

available to other clients.

Sagarmatha provides anautomated offer generationsystem which supportsone-to-one marketing. ItsPersonal PromotionBuilder (PPB) givesretailers a sophisticatedand automated data miningtechnology andpersonalization solution.

Offers developed bySagarmatha can becommunicated via kiosk;however, Retalix does notprovide for this functionalitycurrently. Thus, the Retalixsolution can put offers in frontof the customer right beforesale but does not provide awhole product solution fordoing so.

Retalix can output offerinformation to be utilized ata kiosk or web page, but itdoes not provide foractually communicating theoffers; that work is theresponsibility of the retailer.This solution also requiresthat the retailer utilizeRetalix systems throughoutits IT infrastructure, fromthe POS to the back officeto the CRM component – an expensive solution formany retailers.

4 Catalina Catalina Marketing is theglobal leader in providingbehavior-basedcommunications on amass scale, targeted toindividuals as individuals.The company has beenchallenged financially overthe past several years andhas refocused on its corebusiness; sellingcouponing to CPGcompanies at the POS forthe purposes ofencouraging brandswitching by consumers.

Catalina can offer retailerslimited ability to targetshoppers, utilizing theretailer’s customer data,based upon categorybehavior or shoppingactivity in departments.Relevance is driven by theCPGs that participate – if acustomer does notpurchase a particularbrand, the degree ofrelevance is diminished.

All offers are delivered at thePOS, after the customer haspaid, in the form of papercoupons which must bebrought back into the store ona future visit to redeem.

With a highly successfultrack record andimplementations in over170 grocery and drugretailers nationwide,Catalina has deepexperience in aiding retailerProgram Management.

5 NCR Copient A hardware, software andcommunications"promotion execution"system, the CopientSolution offers retailers aconsolidated platform thatenables contentmanagement, targetedmarketing, offerautomation, customeraccount management andenterprise/storecommunications. MarshSupermarkets is the onlyknown retail company tohave implemented theCopient solution.

Copient is a promotionbased tool; that is, retailclients build promotionsbased upon purchasingdependencies; a shoppermay receive an offertriggered by the shopperpurchasing a specific item.For example, Copient mayissue an offer to a shopperfor buying salsa if theshopper purchased chips.Its offer targeting system isdriven from a productperspective, not driven byproviding relevant,important offers to eachcustomer. It is notdesigned to executetargeting of a specificnumber of relevant offersper shopper.

Marsh Supermarketsimplementation of Copient isa screen that presents offersto the customer at checkout.These offers becomeactivated and available thenext time the customershops. The customer isprovided with the offers onthe receipt as a reminder forher next shopping trip.

The solution interfaces withexisting POS systems toenable discountingfunctionality, while workingin concert with retailers’existing CRM and back-office accountingapplications. Copient isable to display promotionalmessages in-aisle and atthe checkout via theirdisplay devices. AsCopient is owned by NCR,it will likely be challenged toprovide its solution toretailers utilizing an IBM,Retalix, or other competingPOS system.







6 GroceryShoppingNetwork

Grocery ShoppingNetwork of Minneapolishas developed softwarethat connects consumerswith retailers andmanufacturers via theInternet. Beginning nextmonth, consumers whovisit the websites of

participating supermarketswill be able to makepersonalized shoppinglists, research productinformation and receivecoupons and otherpromotions based on theirprevious purchases.

Offerings include“personalized” e-flyers, inwhich GSN simply parsesthe current weeks’ ad flyerfor products the shopperhas purchased before.

Customers’ personalized e-flyers are emailed out everyWednesday.

GSN provides thefunctionality to parse theMerchant’s existing ad flyerinto items that would be ofinterest to customers basedon their purchase histories.Program Managementprimarily consists ofexporting of the t-log data

and producing the weeklyad flyer.

7 SAP Triversity Triversity is a retailsoftware company basedin Toronto providing POSsystems, back officesystems, and a CRMdatabase solution that cansupport targeting anddelivery of offers to

customer segments.Triversity focuses onspecialty retailers as itscustomer base.

In Sept. 2005, SAPannounced the acquisitionof Triversity.

Triversity’s CRM product,Allegiance, is a customer-centric solution designedfor retail. It gives retailersthe ability to capture andanalyze customer andtransaction data, and thenuse that data to build

stronger, more profitableand longer-lastingcustomer relationships.

The functionality of Allegiancecan be further enhancedthrough the addition ofvarious Triversity services,including Promotion Delivery.Note, however, that Triversitydoes not provide a completeinfrastructure for promotion

communication. Based onknown information, it isassumed offers arecommunicated by retailers viaexternal methods (mail,email).

The targeting of offers inthe CRM solution is amanual process. Datatransfer is through FileTransfer – Batch andTrickle. A multi-platformfile and message transfersolution that automates the

daily consolidation processfor multi-site and multi-channel retailers throughtwo information transfermodes: file transfer for off-line batch file transfers, andcontinuous data trickle.

8 Loyalty Lab San Francisco-basedLoyalty Lab is a providerof on-demand retail loyaltyand customermanagement solutions. Itsflagship CustomerRelationship ManagerSuite allows retailers tocreate and manage loyalty

programs, emailcampaigns andpromotional offers from asingle desktop.

Primarily offers points-based loyalty solutions.

Loyalty Lab’s “StandardPackage” includesDynamic Segmentation.This includes segmentationbased on demographic,geographic, RFM, priorpurchases, and surveyresponse. Thissegmentation would allow

some limited degree ofrelevancy.

The primary delivery mode forLoyalty Lab’s offerings is viaemail. In addition, rewardscan be tracked by theconsumer via a web interface.

Loyalty Lab has beenarchitected as a highlymodular software-as-a-service. This approachsimplifies implementationswith retailers’ existingsystems. However, LoyaltyLab is challenged toprovide tight integration into

a retailer’s POS systemproviding for the electronicdelivery of offers at thePOS; while moving in thisdirection with mallmerchants, large chainsare beyond the company’spresent capability.

9 S&HGreenpoints

S&H Greenpoints is anupdated version of the oldgreenstamps program.Shoppers enroll atparticipating stores, usetheir loyalty card eachtime they shop, collectpoints based onpurchasing, and canredeem points for gifts.

Classic Greenpoints hasno customer-specificrelevancy. However, thecompany has introducedSHPROMO™. Thepromotion system is asophisticated engine thatallows each promotion totrack consumer behavioracross multiple shoppingtrips and makessophisticated decisionsreal-time. Eachcommunication has theability to be unique andpersonalized for eachcustomer.

Customers can receive amessage related to theirGreenpoints as they gothrough check out. Thismessage sustains theirloyalty until the next shoppingtrip.

Merchants must pay theprogram fee and implementthe Greenpoints technologyin store. Thereafter, theprogram essentially runsitself. Greenpoints offers arange of additionalconsulting services tailoredfor Merchants’ uniquemarketing programs.







10 Dorothy LaneMarket

Dorothy Lane (DLM) isincluded as an example ofa Merchant building itsown solution that directlycompetes withSmartShop.

Club DLM is a loyaltycard, which DLM uses to

capture t-logs and todeliver relevant offers. InOctober 1995, DLM ran itslast newspaper ad andbegan focusing itsmarketing efforts onkeeping and pleasing the30 percent of itscustomers who supply 80percent of its profits, andespecially pleasing the 1percent who account for11 percent of the take.

Coupons are targeted, withdifferent customer groupsreceiving different batchesof coupons and differentlevels of discounts -depending on what thedata tells DLM executivesabout which customers likewhat. And the more the

customer spends, thebetter the deal.

8-10 offers are delivered viathe mail to customers.

As a homegrown solution,DLM developed thisapproach over time. Thesystem does requireregularly updating of offers,but Program Managementat this point is probably nomore a burden than wouldbe putting together weekly

ad flyers.

11 Safeway Safeway is included as anexample of a Merchantbuilding its own solution

that indirectly competeswith SmartShop.

Safeway’s Club Card isused to run a two-tierpricing approach.Customers are presenteddiscount offers on theshelf, and receive theirdiscounts once theypresent their Club Card atthe POS. The Club Cardacts as an inducement forcustomers to present theircards at checkout, butthere is little in the way ofspecial offers to

individuals.

None Offers are presented on theshelf as the customer shops.

Club Card is relativelystraightforward to manage.There are no requirements

to develop customer-segment strategies, so theprogram runs relativelyefficiently as a storewidepromotion.






2.3.2 Strengths, Weaknesses, Opportunities and Threats

Strengths WeaknessesPay By Touch

• Biometric access to loyalty program increases itsusage by removing the need to present a card

• Biometric ID increases data quality

• In-store presence (in-lane, kiosk) for PBT servicefacilitates introduction of SmartShop

SmartShop

• Highly relevant offers to Members increaseconsumer interest in retailers and brands

• Multiple communication channels to ensurecontact with customers

• Requires an evolution in Merchant businessmodels (channel existing offers more directly toindividuals) rather than a revolution

• PBT in-house expertise in developing customer-specific marketing programs

Pay By Touch

• Currently lacks most elements needed to provideSmartShop

• Not PBT’s sole business model, putting product

development in competition with other productinitiatives

SmartShop

• Acquired product built for a single storeimplementation, significant work required tomake scalable for the market

• Merchants may have concern turning over theirloyalty programs to a relatively new,inexperienced loyalty provider

• Merchants may have concern in makingbiometric auth the only way to access theirprimary loyalty program

Opportunities ThreatsPay By Touch

• Through biometric enablement and a suite ofsolutions, PBT can serve as the primary providerto Merchants of revenue-generating products

• Increase Wallet utility with a unique value-addedfinancial instrument for Members

SmartShop

•

Customer-specific discounts are an emergingtrend (Top 10 retail trend in 11/21/05 WSJ article)

• CPGs are looking for ways to form directrelationships with customers

• Hosted software is increasingly being used bycompanies

Pay By Touch

• RFID cards can include loyalty card informationas well as payment mechanisms

• Smart cards can include loyalty and paymentmechanisms

SmartShop

• Inertia – Merchants retain existing loyalty

programs• Large market player – e.g. Catalina – decides to

aggressively pursue this business model

• Start-up develops a competitive offering – e.g.Concept Shopping

2.3.3 Differentiators

SmartShop will offer a whole product, such that Merchants will be able to target their offers based on t-logs, communicate through multiple channels, deliver discounts to customers at the POS and reconcileoffers between CPGs and Merchants. Few competitors offer a complete solution to the market. Inaddition, Pay By Touch offers its intrinsic strengths in the offering.

Relative to its most direct competitor, Concept Shopping, SmartShop is more consistent with currentindustry practices regarding the distribution of discounts: Merchant and CPG control over the offers,weekly cycles for distributing offers. Concept Shopping’s approach does require more faith in its targetingmodel due to the opaqueness of its model.






3 BUSINESS MODEL

3.1 MARKET SEGMENTATION AND VALUE PROPOSITION

3.1.1 Merchants

Merchants will benefit in three ways from SmartShop:

• Increased revenues and profits by re-orienting their promotions into customer-specific models• Reduced costs for advertising

• Generate revenue from CPGs for coupon placement

Increased Revenues and Gross Margins

The top value to Merchants implementing SmartShop’s customer-specific promotional model will be anincrease in sales and profits, achieved through changes in three components of Merchants’ economicmodels: higher average customer baskets, increased transaction volumes and higher gross margins.

The table to the right describes a typical customersegmentation for Merchants. The best customersprovide the largest share of revenue, at the highest

gross margins. The worst customers generate thelowest spending while taking a disproportionate shareof the markdown dollars. The goal of customer-specific marketing is to move more customers into aprofile consistent with the top deciles. These would bethe most loyal customers. Those customers that donot respond with an improvement in their averagebasket will not receive a disproportionate share of themarkdowns.

In his book Customer Specific Marketing , Brian Woolf relates the experience of Gregerson’s Foods. InApril 1994, Gregerson’s initiated its Club Greg card, offering its best customers special discounts whilesharply decreasing the in-store temporary price reductions. 18 months later, CEO “Greg” Gregersondescribed the program results to Woolf: “Our same-store sales are up 5%, and our gross profit is up over

one full percentage point! Differentiated marketing works!” Woolf reports similar results for a variety ofretailers implementing customer-specific marketing.

The table to the left models the increases for the top 25SmartShop grocers if they achieved one fifth the benefits thatGregerson describes. The lift in gross profit is based on a 1%increase in same store sales and a 0.2% point increase ingross margins.

Higher sales result from customers’ increased loyalty, driven byconsistent delivery of relevant offers that are easily accessible.In addition to increased household share of wallet, theMerchant experiences an increase in the number of customertransactions.

The increased gross margins are based on a more targeteduse of trade and consumer promotion dollars. By fostering anincreased loyalty with the customer, the Merchant will gain asthe customer not only buys the on-sale items, but she buys themajority of her household needs when they are not on sale. Atthe same time, by reducing the wide distribution of TPRs, manycustomers will buy items at full price.

General Food SmartShop

Revenues Lift in

No. Grocer (billions) Gross Profit

1 Kroger 51.1$ 103,222,000$2 Safeway 35.8$ 72,316,000$3 Albertsons (excl. drug stores) 34.7$ 70,025,890$

4 Ahold USA (excl. Bi-Lo) 18.6$ 37,596,218$5 Publix 18.6$ 37,481,100$

6 Delhaize America 15.8$ 32,008,920$7 Meijer 11.1$ 22,422,000$

8 H.E. Butt 10.6$ 21,412,000$9 Winn-Dixie 9.9$ 20,040,420$

10 A&P 7.8$ 15,756,000$11 Giant Eagle 5.1$ 10,302,000$12 SuperValu (excl. Save-A-Lot, Deals) 4.8$ 9,675,598$

13 Pathmark 4.0$ 8,035,560$

14 Hy-Vee 3.9$ 7,781,503$15 Stater Bros. 3.8$ 7,676,000$

16 Aldi USA 3.5$ 7,070,000$17 Wegmans 3.3$ 6,666,000$

18 Raley's 3.2$ 6,464,000$19 Roundys 3.0$ 6,082,220$

20 Price Chopper 2.5$ 5,050,000$21 Harris Teeter 2.4$ 4,848,000$22 Save Mart 2.2$ 4,444,000$

23 Schnuck Markets 2.2$ 4,444,000$24 Ingles Markets 2.2$ 4,372,896$25 Weis Markets 2.0$ 4,100,600$

Merchant Value PropositionModeled Lift in Gross Profit

Actual Supermarket Customer DataDecile Spending and Markdowns

Source: Customer Intelligence , Gary Hawkins

Decile#

CustomersDecile

Spending% of Total

DecileMarkdown $

% of TotalMarkdown

Markdownas % of

Spending10 2,671 10,161,647$ 59.5% 813,439$ 49.1% 8.0%9 2,671 3,113,702$ 18.2% 326,487$ 19.7% 10.5%8 2,671 1,564,890$ 9.2% 188,791$ 11.4% 12.1%7 2,671 891,308$ 5.2% 116,982$ 7.1% 13.1%6 2,671 544,806$ 3.2% 77,408$ 4.7% 14.2%5 2,671 345,851$ 2.0% 52,698$ 3.2% 15.2%4 2,671 218,307$ 1.3% 35,685$ 2.2% 16.3%3 2,671 132,857$ 0.8% 23,580$ 1.4% 17.7%2 2,671 73,003$ 0.4% 15,051$ 0.9% 20.6%1 2,671 27,984$ 0.2% 7,984$ 0.5% 28.5%

Total 26,710 17,074,355$ 100.0% 1,658,105$ 100.0% 9.7%






Reduced Advertising Costs

The second benefit is a reduction in the cost to produce and distribute promotions to customers. At a highlevel, the weekly ad circulars and newspaper advertising can be thought of as reminding the bestcustomers about the offers from their favorite store, and attracting new customers who shop elsewhere.Once a Merchant switches to a customer-specific approach, mass media advertising is no longer theprimary communication vehicle. Direct-to-consumer modes become more important: email, web, kiosk,direct mail, mobile device. These modes are less expensive than traditional media; combined with a

reduction in print media advertising, Merchants are able to increase profits.The table to the right outlines an example of thesavings a Merchant could expect with SmartShop:

Households: The number of households (HH’s) perstore is set as 10,000.

• 70% of HH’s in a given locale are deemed toshop with a Merchant, meaning 14,286 HHsare in a Merchant’s geographic coverage

• 80% of a Merchant’s actual customers areassumed to belong to SmartShop

Weekly Ad Flyers: Typical distribution of ad flyers

follows a 3-to-1 model.• Ad flyers cost $125 per thousand (12.5¢ ea)

• Ad flyers are distributed via subscribernewspapers, newsstand papers and in-store

• With SmartShop, Merchants cut theirdistribution in half as customers receive discounts information via other modes

Kiosks: SmartShop customers will often walk into a store, biometrically identify themselves at a kiosk andprint out their offer sheets.

• Kiosks deliver the weekly offers to about 50% of SmartShop customers. 50% of HH’s don’t getkiosk printouts because they miss a shopping week or print them out at home from the web.

• Costs per offer sheet are estimated at 3¢: roughly one cent for the paper plus two cents formaintenance and depreciation

Activation and Redemption: Activation occurs when the customer views her offers via the web or kiosk. Itsignals that the customer has actually taken in the information presented, a key goal for Merchants.

• PBT will earn 2.5¢ per activated offer sheet ($25 CPM), and another 2.5¢ per offer sheet forredemption of any offer at the checkout ($25 CPM)

• 75% of HH’s are assumed to view their weekly offer sheets, with email generating the strongestprompt to Members’ activation

• Half of activations are assumed to result in redemption at the POS

Communications: Digital communication of offers (web, email, mobile) is an expense incurred by PBT.

Several pioneers in customer-specific promotions have reduced their conventional advertising without aloss in revenues. Brian Woolf notes the following in Customer Specific Marketing :

“One fascinating discovery with differentiated marketing is that traditional print advertising can be cut with no noticeable adverse impact on sales! Both Gregerson’s Foods…and Ukrop’s…have cut their newspaper and other print advertising at least in half. Meanwhile, others, such as Morgan’s Tuckerbag…Dorothy Lane Market…and Green Hills Farms…have eliminated print advertising completely! This works because different customers are targeted with different offers, and newspapers and circulars are poorly suited to communicate these new variable, targeted offers.”

SmartShop vs. Mass Distro of Ad FlyersHypothetical Savings – Single Store

Current

Mass Distro. Mass Distro.Loyalty

CustomersHouseholds 14,286 14,286 8,000

Ad Flyers/HH/week 3.00 1.50 Total Weekly Flyers 42,857 21,429 Ad Flyer Cost-per-Thousand (CPM) 125$ 125$Weekly Ad Flyer Cost 5,357$ 2,679$

Kiosk Printouts/HH/week 0.50 Total Weekly Kiosk Printouts 4,000 Printout CPM 30$Weekly Kiosk Printout Cost 120$

Offer Activation/HH/week 0.75 Total Weekly Offer Activations 6,000 Activation Payment to PBT CPM 25$Weekly Activation Cost 150$

Offer Redemption/HH/week 0.38 Total Weekly Offer Redemptions 3,000 Redemption Payment to PBT CPM 25$Weekly Redemption Cost 75$

Subtotals 2,679$ 345$Total Weekly Costs 5,357$ 3,024$Total Annual Costs 278,571$ 157,226$

SmartShop






CPG Payments for Offer Placement

Merchants currently receive trade allowances from CPGs tooffset the cost to produce and distribute ad flyers , as well as toaddress other elements of Merchant promotions. The table tothe right outlines the average Merchant allocations for everydollar of trade allowance they receive from a CPG. On average,44% of a CPG’s trade allowance to a Merchant goes toward

offsetting expense (e.g. ad flyer production) or straight to theMerchant’s bottom line. Based on an average discount amountof 86 cents, that translates into 68 cents going directly to theMerchant per redeemed discount.

FSIs , on the other hand, are costs borne by CPGs without Merchant involvement. However, withSmartShop, CPGs are now leveraging the customer data of Merchants and the distribution infrastructure(i.e. kiosks) of Merchants. This change affords an opportunity for Merchants to charge CPGs an offerplacement fee. As demonstrated in the next section, CPGs cost for distributing offers via SmartShop willbe significantly less than the equivalent distribution via FSIs. So the CPGs arguably have money to spendon offer placement fees.

The structure for determining these placement fees can vary depending on the source of the offer: tradepromotion dollars or consumer promotion dollars:

Trade promotion offers: Trade promotion allowances are a negotiated amount between the Merchant andthe CPG. The working assumption is that Merchants will negotiate new fees with CPGs for their inclusionin the SmartShop offer set.

Consumer promotion dollars: Because consumer promotion dollars are currently spent outside of thenegotiated agreements between Merchants and CPGs, there are different models that could potentiallygovern the placement of CPG-input offers in customers’ offer sheets. The following are possible models:

i. Negotiated : Similar to the trade promotion-based offers, the Merchant enters into an agreementwith each CPG that spells out the fees for offers distributed to the Merchant’s customers.

ii. Bid System : In this model, CPGs would bid for inclusion of each offer in the distribution tocustomers. For example, General Mills bids 7.5¢ for inclusion of a Cheerios offer in the OfferPool, payable per customer offer activation or redemption. CPGs adjust their bids based on anumber of factors (e.g. importance of Merchant, prior offer results, special marketing initiatives,

etc.). The Merchant uses each CPG’s bid rate as a factor in determining which offers to include inthe weekly Offer Pool.

iii. No Fee : Merchants hold off on charging under this scenario. Rather, they view deep discountoffers from CPGs as the better play in driving increased traffic, higher average baskets andincreased gross margins.

Merchant ROI

The table to the right presents an example of theMerchant’s ROI (i.e. Albertsons). The cash flowprojections model out the cash in and cash out. Cashin numbers reflect the three value propositionsdiscussed herein. For CPG Placement Fees, theassumptions are 2.5¢ for ten Merchant-input offer slots(ignoring the possibility of billing for the ten CPG-inputslots). Even so, the model shows a very quickpayback to the Merchant for SmartShop of less thanone year.

CPG Trade Promotion DollarsMerchant Allocation

Source: Deloitte Consulting; TNS Marx FSI Trend Report

Est. DollarDistribution Pct of Total Amounts

Consumer Discount 56% 0.86$

Merchant Profit 24% 0.37$

Merchant Expense 20% 0.31$Total 100% 1.54$

# stores 1,797 Cost per kiosk 5,000$

# HHs per store 10,000 3-yr kiosk maintenance 20%# kiosks per store 2 POS changes per store 25,000$

Year 1 Year 2 Year 3

Household Adoption Rate 20% 50% 80%

Cash In

Gross margin pickup 17,506,472$ 43,766,181$ 70,025,890$Reduced ad flyer costs 54,514,562$ 136,286,405$ 218,058,249$

CPG Placement Fees 35,041,500$ 87,603,750$ 140,166,000$

Total 107,062,535$ 267,656,336$ 428,250,138$

Cash Out

PBT SmartShop fees 5,256,225$ 13,140,563$ 21,024,900$

Kiosks (2 per store) 17,970,000$ 898,500$ 943,425$

Kiosk maintenance 1,198,000$ 1,257,900$ 1,320,795$

POS changes to accept offers 44,925,000$ 2,246,250$ 2,358,563$

Total 69,349,225$ 17,543,213$ 25,647,683$

Net cash flow to Merchant 37,713,310$ 250,113,124$ 402,602,456$

Example Merchant ROI






3.1.2 CPGs

CPGs will benefit in three ways from SmartShop:

• Reduced cost for offer distribution

• Improved customer targeting

• Reporting and analysis

Reduced Cost for Offer Distribution As described previously, CPGs have increased their issuance of FSIs even as consumers are redeemingfewer coupons. The increased production and distribution costs combined with diminished consumerusage of coupons represent a poor ROI for promotional spend. SmartShop offers a way to reduce thecosts associated with the distribution of coupons.

The table to the right outlines an example of howSmartShop costs less than FSIs. The premise ofthe example is to analyze the costs of getting405,000 household redemptions.

Distribution: The count of households receiving theoffers.

• For FSIs, a blanket distribution of 45 million

is required. All of these FSIs must be produced and distributed.

• SmartShop starts out with a distribution to 2.7 million households. There is no cost for this initialdistribution.

Activation: The number of households that actually “take in” the offer, recognizing what is being promoted.

• “Activating” an FSI is defined as reading it. The 10% rate is an estimate based on grocer ad flyerreadership.

• Activation of a SmartShop offer is set at 75%, the rate utilized in other calculations herein.

Redemption: The number of households redeeming the coupon at the checkout.

• For FSIs, the rate is under 1% of distribution, as noted previously.

• SmartShop redemption is estimated at 15% of distribution, or 20% of activations (15% / 75%).

This assumption translates into an average of two CPG offers redeemed out of every ten.Cost: The cost required to get the 405,000 redemptions.

• A typical cost for distribution of 45 million FSIs is $250,000.

• The baseline cost for the SmartShop redemptions is tied to the number of activations. Thepreviously described cost of 2.5¢ is used here.

Measure Quantit ies Pct of Distro Quanti ties Pct of Distro

Distribut ion 45,000,000 100.0% 2,700,000 100.0%

Activation 4,500,000 10.0% 2,025,000 75.0%

Redemption 405,000 0.9% 405,000 15.0%

Cost 250,000$ 50,625$ (@2.5¢ per activation)

FSI SmartShop

CPG Offer DistributionSavings Example






Improved Customer Targeting

Through the analysis of a customer’spurchasing history, CPGs will be able todistribute promotional efforts to the mostrelevant customer segments. SmartShopessentially serves as an agent for theCPG, allowing direct communication to

Merchants’ customers.

Obviously, discount offers are not theprincipal driver of customer purchasingdecisions. CPGs invest significantly inproduct attributes, production, distributionand marketing. However, the SmartShopoffer serves as a way to drive behavior, afinancial incentive that complements theother product efforts. Through SmartShop,CPGs have a new, more powerful tool to:

• Reach and retain their highestvalue customers

• Identify top potential customers for their products

• Target customers of competitors

Reporting and Analysis

A consistent limitation in trade and consumer promotion management forCPGs is the lack of visibility. CPGs distribute coupons and provide TPRfunds, but have little information on the effectiveness of these promotions.85% of CPGs rate trade promotion inefficiency as a very high issue.

SmartShop will provide insight to CPGs on the effectiveness of theiroffers. Offers will be analyzed on both demographic and behavioralbases. CPGs will know the impact of different targeting strategies. Overtime, the CPG can see the impact of changing the dollar amount of thediscounts offered.

The goal of the reports is to give CPGs the data necessary to experiment and refine their customermarketing strategies and to understand the ROI of their trade and consumer promotion efforts. Longerterm, these reports will be cross-merchant as Pay By Touch signs up new clients.

3.1.3 Members

Members’ SmartShop value proposition is driven by two benefits:

• Savings: Members receive discounts on items they regularly purchase.

• Convenience: Offers are delivered in an easy to access and utilize manner; no more huntingthrough multiple FSIs and ad flyers, clipping relevant coupons and remembering to take them tothe store

These benefits are delivered to Members free of charge.

Trade &

Consumer

Solutions

Direct toDirect to

ConsumerConsumer

MarketingMarketing

AccountAccount

ManagementManagement

CollaborationCollaboration

& Exchanges& Exchanges

AccountAccount

PlanningPlanning

• How can we focus marketinginvestments on our highestvalue consumers?

• How should we leverageinformation from retailer loyalty

programs to jointly market to theconsumer?

• What types of promotional eventsand tactics are most effective?

• How can we get visibility to thequality of in-store execution?

• How should we collaboratewith the retailer to improvedemand forecasts?

• What supply chain productivitygains can be achieved bylinking supply forecasting withCRM information?

• Which type and level of accountare the most profitable and howshould we prioritize customerinvestments?

• How do we incorporate lessons

learned from past activities intofuture planning?

Four CPG Challenges in Trade & Consumer ManagementDeloitte Consulting

Source: Deloitte Consulting, “What is Trade Promotion?”, August 2004

Demographic• Age• Location

Behavioral

• Product purchase levels• Purchase categories• Consumer redemption rates

CPG OffersReporting Segments








their product; users of competitive products; and users with certain demographic and purchasingattributes.

Targeting: The key to improving existing loyalty programs and reducing effective costs for distribution willbe highly effective targeting.

Messaging: Because SmartShop works through several customer touch points – email, web, kiosk,mobile, POS, receipt – CPGs will want to ensure a consistent message to consumers. Limited CPGmessaging will be included, formatted for the different communication modes.

Monitoring and Administration: CPGs will be able to track the distribution, activation and redemption ofoffers on a daily basis. SmartShop will honor limits on Member purchases of items at discount. CPGchanges to offers will be updated quickly.

Offer Tender: As a Member transacts via Pay By Touch, her CPG discounts will be automatically appliedto the checkout total within the overall payment transaction.

Settlement: Managing the settlement process, with audit functionality, is a critical component to the valueof SmartShop.

Reporting: CPGs are keenly interested in understanding what drives different consumers to purchase theirproducts. SmartShop reports will provide customer-segmented data to CPGs for analysis of offers.

3.3 COST STRUCTURE

SmartShop is a product with a significant service component. As with any technology product, there willbe development costs – engineering staff time and possible new software/hardware investments. Thetotal scope of these costs will need to be determined. In addition, delivery of the product is well beyond a“plug-n-play” implementation. Each Merchant’s in-store POS and overall system architecture will requirevarying levels of customization. While many of the customization costs will be borne by Merchants, PayBy Touch will have a responsibility to provide professional services to see the implementation through. Inaddition, Merchants and CPGs who are new to the customer-specific marketing model may requirestrategic and analytical consulting. Kiosks are a critical communication channel; Merchants are expectedto bear the cost of these including paper restock.

Once built and implemented in a Merchant’s environment, the following are currently identified costs forSmartShop:

•

Email: PBT will bear the expense for sending out emails to Members with their SmartShop offers• Settlement: PBT may engage a settlement agent for clearing and payment services

• Customer Service: PBT personnel to handle issues and inquiries from Merchants, CPGs andMembers

• Sales & Marketing: SmartShop will be marketed to Merchants and CPGs (collateral, trade shows,industry publications, sales trips)








4.1.3 Use Case 3: Web-based SmartShop enrollment

4.1.3.1 Description

During a web-based PBT enrollment or afterwards, a Member can sign up for all SmartShop programs forwhich she is eligible.

1. After enrollment or during Member updating to her account, a page of SmartShop programs ispresented. The list of SmartShop programs may be governed by certain rules, such as proximity

to Member’s home address.2. Member will check the boxes for the programs she wants to join. She will also indicate whether

she wants the loyalty programs to be tracked at the household or individual level.

3. Member’s new SmartShop account(s) are communicated both to PBT Server and to theMerchants’ customer management database(s).

4. Member is presented New Member offer sheet(s) on the web, which she can print out.

5. Her discounts are immediately available at the POS when she goes through checkout.

4.1.3.2 Justification for Use Case

Basis for this use case is similar to UC.2, except that the online enrollment environment increases thenumber of programs that can be presented to the Member.

4.1.4 Use Case 4: Offer Activation

4.1.4.1 Description

Before a set of offers can be used at the POS, they must be activated. Activation occurs once theMember views her offers online or at the kiosk, or clicks a URL in the offer email. Activation makes thediscounts available to the Member at the POS.

1. (a) Member activates offers by viewing them on the web or clicking URL in offer email(b) Member activates offers by viewing them at an in-store kiosk(c) Member activates offers by affirmatively replying to a SMS text message displaying the offers

2. PBT SmartShop server records the activation, making the offers “live” and eligible for redemptionat the POS.

3. When Member purchases offer-eligible products, her discounts are recognized by the MerchantPOS during checkout.


Without activation, the value of discounts is entirely lost. Consumer will not see the discounts, and maynot buy the advertised product. Or if she does, she is buying a product she wanted anyway and theMerchant/CPG just gave away money. The discounts are seen only after the transaction is concluded.

4.1.5 Use Case 5: Offer redemption

4.1.5.1 Description

At checkout, the Member will receive her discounts without any additional effort on her part.

1. Member purchases products listed on her SmartShop offer sheet.

2. Cashier scans the UPCs of products in the Member’s basket.

3. UPCs eligible for discounts will be identified and matched to their discounts.

4. Discounts will be processed through the ECR and the transaction total will be reducedaccordingly.






5. Member pays for her purchase.

6. The tendered discounts are communicated back to the PBT SmartShop server in real-time or nearreal-time.


Application of discounts at transaction time is a critical success factor. Members should receive discountsat checkout to reduce extend their purchasing power and without real-time application of offers, Members

could re-use discounts multiple times.

4.1.6 Use Case 6: Offer limit management

4.1.6.1 Description

Offers will be established with limits, so as to manage the total amount of discount provided. After aMember redeems an offer, the quantity of product eligible for the discount will be reduced by the numberof items purchased.

1. Member receives offer for $1.00 off cereal, limit 2.

2. She purchases three boxes of cereal.

3. She receives $1.00 off on two of the three boxes at the POS.

4. After completing the transaction, the PBT SmartShop server is updated with the purchasequantity. The limit on the cereal is reduced, in this case to 0.

5. No more cereal can be bought at the discount for the duration of the offer period.


If limits are not followed, the Merchant and CPG would pay out too much for the promotion and Pay ByTouch would risk liability for the error.

4.1.7 Use Case 7: Biometric auth fails - kiosk

4.1.7.1 Description

Member goes to kiosk to retrieve her offers. Biometric auth fails, leaving her unable to activate her offers

and use the offer list as a basis for shopping.

1. Member walks up to kiosk, places her finger on the reader.

2. The biometric fails after several attempts.

3. Member enters her 10-digit phone number.

4. The offers associated with the phone number (which is linked to the PBT Wallet) are returned tothe kiosk.

5. Her offers are now available for redemption at the POS.


Biometric auth failures will continue to be an issue for a while. These failures can turn a Member off if shemust pay more for her purchases than she should.






4.1.8 Use Case 8: Biometric auth fails – In Lane

4.1.8.1 Description

Member attempts in lane biometric auth to complete a transaction. The auth fails, making the SmartShopoffers inaccessible at the POS. While the Member can use other payment options, she is unable to tapher offers. To prevent a potential blow-up situation that affects both the Merchant and PBT, the cashierneeds a reliable backup plan that quickly resolves the issue.

1. Member attempts biometric auth to complete transaction and receive her SmartShop discounts.

2. Auth fails, making the SmartShop offers inaccessible.

3. Member agrees to pay via the cards in her physical wallet, but still wants her discounts.

4. Member enters her 10-digit phone number.

5. The offers associated with the phone number (which is linked to the PBT Wallet) are returned tothe POS. Note that only the offers, no other elements of her Wallet are returned (i.e. checkingaccount info, credit cards, debit, etc).

6. Her offers are recognized for eligible purchases and the discounts are applied accordingly.


The scenario above describes one possible way to address the issue of an in-lane failure of biometricauth. The driver for this use case is that loss of the ability to get her discounts is a real loss of money to aMember, caused by Pay By Touch. This cannot happen. In the noisy, fast paced environment of a store,a cashier needs a quick, consistent way to handle this issue.

4.1.9 Use Case 9: Offer reminder alerts

4.1.9.1 Description

Members will be able to set their preferences for reminders regarding their offers. The alertscommunicate remaining offers to Members and the date of expiration for the discounts.

1. Member logs in to MyPBT.

2. She clicks on the Loyalty Programs tab.

3. She clicks a specific Merchant’s SmartShop program.

4. She clicks ‘Preferences’.

5. She checks that she wishes to receive reminders regarding her unexpired, unused offers.

6. She sets ‘Thursday’ as her day of the week to receive these alerts.

7. She checks ‘Email’ as one mode for receiving these alerts. The email address associated withher Member Profile is used for these alerts.

8. She checks ‘Mobile’ as a second mode for receiving the reminders. She enters her mobile devicephone number.


Offer reminders demonstrate the power of SmartShop’s digital communication modes relative to existingundifferentiated mass distribution of ad flyers and FSIs. The reminders are a helpful way of letting theMember know that she has discounts available to her for items she regularly buys, but that she may be atrisk of losing the offers if not used by the weekend. Merchants and CPGs are expected to view reminderfunctionality as a powerful component of the SmartShop offering.






4.1.10 Use Case 10: View SmartShop offer history

4.1.10.1 Description

Member will be able to see her history ofoffer redemptions via the MyPBT portal.

1. Member logs in to MyPBT.

2. She clicks on the LoyaltyPrograms tab.

3. She clicks her AlbertsonsSmartShop offers link.

4. She clicks View History.

5. She is presented with a list ofher transactions for the year-to-date.

6. Her savings per offer are shown.In addition, her SmartShopsavings for the year are summed.


The transaction history is a form of audit for the Member. In addition, by showing the discounts received,the value of shopping with the Merchant is reinforced, as well as the value of using Pay By Touch toaccess SmartShop. This is a good example of how Pay By Touch extends a Member’s purchasing power.

OFFER ENTRY AND DISTRIBUTION

4.1.11 Use Case 11: Export t-log, customer data and product hierarchy


Merchant establishes the t-log and customer data export files per PBT’s specs and transfers them weekly

to PBT’s SmartShop server.1. Merchant is provided with export file requirements: data contents, formats (XML, delimited), etc.

2. Merchant utilizes existing export functionality of its database applications or hires a third party(e.g. database vendor) to customize the export functionality.

3. After establishing the file contents and format, and the export functionality, Merchant sets up aweekly export of files to PBT.

4. Merchant will receive confirmation information and any error reporting after each weekly export oft-logs, customer data and product hierarchy.


T-logs, customer data and product hierarchies are the fuel that makes SmartShop run. PBT will need to

be prepared for a variety of software applications that will contain the necessary data. The goal is astandard methodology for the export of data that requires no import customization on the part of PBT.

Albertsons SmartShop Savings

Date Ref ID Location Description Quantity Savings

1/27/2007 5478957 San Francisco, CATide Ultra, Liquid Laundry Detergent, 100 oz.,Save $2.00 off lowest shelf price

1 $ 2.00

1/27/2007 5478957 San Francisco, CAPalmolive Auto Dish Liquid, 45 oz., Save 80

cents off lowest shelf price

1 $ 0.80

1/27/2007 5478957 San Francisco, CAStove Top, Stuffing, 6 oz., Final price after

discounts, 89 cents2 $ 0.70

1/27/2007 5478957 San Francisco, CAHeinz Gravy, 12 oz., Final price after discounts, 89 cents

2 $ 0.60

1/27/2007 5478957 San Francisco, CALipton, Iced Tea Single Serve, 16 oz., Save 30

cents off lowest shelf price6 $ 1.80

1/20/2007 5476911 San Francisco, CAHillshire Farm, Deli Selects, 6 oz., Final price

after discounts, $1.792 $ 1.00

1/20/2007 5476911 San Francisco, CASimply Potatoes, Mashed Potatoes, 24 oz.,Final price after discounts, $1.99

1 $ 0.50

1/13/2007 5472078 San Francisco, CAChicken of the Sea Solid White Tuna, 6 oz.,Final price after discounts, 89 cents

3 $ 0.75

1/13/2007 5472078 San Francisco, CAHefty One Zip Bags 35 ct., Save 90 cents offlowest shelf price

2 $ 1.80

1/13/2007 5472078 San Francisco, CAGeneral Mills Lucky Charms Cereal 14 oz.,Save $1.00 off lowest shelf price

2 $ 2.00

1/13/2007 5472078 San Francisco, CAPeter Pan, Peanut Butter, 18 oz., Save 50cents off lowest shelf price

1 $ 0.50

SmartShop Savings (year-to-date) 12.45$






4.1.12 Use Case 12: Merchant selects and implements customer database marketing application


Merchants without an existing loyalty program will need to implement a customer database marketingapplication. The application tracks customers’ spending, and applies analytics to segment the customerpopulation. These segmentations are a basis for distributing offers to Members.

1. Pay By Touch identifies best partner(s) to provide this application.2. Pay By Touch and Vendor exchange technical information.

3. Pay By Touch works with Merchant to advise in selection customer database marketing app.

4. Merchant installs customer database marketing app.

5. Merchant implements SmartShop.


If a Merchant does not track customer purchases – i.e. via loyalty card – the fundamental valueproposition of SmartShop is invalid. Merchants without existing loyalty cards are the “low hanging fruit” forsales efforts, but they will need technology to segment their customers and to track their purchases.

4.1.13 Use Case 13: Merchant creates offer


Merchant enters an individual offer into theSmartShop application.

1. Authorized Merchant employee logs in toSmartShop Offer Builder, selects ‘CreateOffer’.

2. Employee names the offer – this name is forinternal tracking purposes only. Forexample, Merchant may want to create aDiamond Customer Coke $1.00 Offer and

an Opal Customer Coke $0.50 Offer.3. Employee selects the applicable UPC

code(s) for the promoted product(s).Selection may be done via a hierarchical listof pre-loaded UPCs, search or directlyentered UPCs.

4. During the UPC selection process,associated product images will be displayed.For each communication mode (kiosk, web,email, mobile), the Employee will choose thesingle image which will be used incommunicating the offer. Kiosk, for

example, may have a gray-scale imagewhile the web will have a full-color version.

5. Employee enters the Offer Description. This is the text which provides the product(s) promoted,along with any size information. The Offer Description can vary based on the communicationmode (web, kiosk, email, mobile).

6. Employee enters the applicable dollar discount per item, as well as the item limits for the durationof the promotion.

Merchant ‘Create Offer’ ScreenCurrent Green Hills Implementation

Merchant ‘Create Offer’ ScreenCurrent Green Hills Implementation






7. The offer distribution strategy is selected. Strategies essentially look for a reference group ofpreviously purchased UPCs to determine customer interest in a given offer. The reference groupof UPCs for an offer may be narrow or wide. For example, a narrow reference group for a BudLight 6-pack offer would be the Bud Light 6-pack UPC. A broad reference group for theBudweiser 6-pack offer would be all beer UPCs. The basis for determining these referencegroups is the Merchant’s product hierarchy . A product hierarchy example is presented below.From this hierarchy, strategies are executed. The available strategies are:

•

Reward: Narrowest strategy. Offer is targeted to customersbuying exactly the UPC(s) listed in the offer.

• Category: A bit broader than Reward. The offer is distributedbased on customer purchases one-level up from the UPC level.For example, the Bud Light 6-pack offer would be distributed tofrequent purchasers of any ‘Beer-Domestic’ UPCs.

• Introduction: Broader than Category. The offer is distributedbased on customer purchases two-levels up from the UPClevel. For example, the Bud Light 6-pack offer would bedistributed to frequent purchasers of any ‘Beer’ UPCs.

• Up-sell: Similar to Category, except that only purchasers ofUPCs at a lower price than the offer UPC(s) are targeted for

distribution. Alternatively, an Employee can create his own setof reference UPCs for use in the Up-sell strategy.

• Custom: Freedom to create, name and save custom UPCreference groups. Examples of custom strategies include: (i) distributing a baby food offer tobuyers of diaper UPCs; (ii) distributing a Wisk detergent offer to buyers of Tide; (iii) distributinga Hamburger Helper offer to buyers of ground beef; and (iv) distributing an offer for a neworganic soup to buyers of other organic products.

8. The total number of offers to be distributed is entered. In addition, the customer segments andlifestyle groups (from the Merchant’s customer database marketing application) are selected.Offers will only be distributed to those customer segments/lifestyle groups, up to the distributionlimit.

9. Employee saves offer; SmartShop creates a tracking ID for the offer.


This is a basic requirement for the application – creating offers. The distribution strategies are a keycomponent of making the offers relevant to customers.

Sample Product HierarchyBeer Categories






4.1.14 Use Case 14: CPG creates offer


CPG enters an individual offer into theSmartShop application.

1. Authorized CPG employee logs in

to SmartShop Offer Builder, selects‘Create Offer’.

2. Employee names the offer – thisname is for internal trackingpurposes only.

3. Employee selects the UPC(s)eligible for the offer. UPCs can beselected by:

• Direct entry

• Search

• Viewing the product hierarchiesvia a series of drill down menus

4. Employee enters offer description,amount and limits.

5. The distribution of the offer isentered. The CPG is presented alist of eligible Merchants. The CPGcan select the eligible Merchantbanners and set the overalldistribution limit per banner.

6. Employee selects the offerstrategy, customer segments andlifestyle groups for distribution.

7. The offer will have an availabilityperiod. These are the dates duringwhich an eligible Merchant may usethe offer for distribution to itscustomers.

8. The offer descriptions to be used inthe various communication modesare entered.

9. The employee selects the imagesto run in the various communication modes. The system will serve up all images available for theUPCs entered, allowing for an easy selection process.

10. Employee indicates whether the offer is available for a Offer Ad slot in the Offer Sheet. Merchantsmay select any CPG offer checked as being ‘Available for Ad’ to fill one of the two premium OfferAd slots.

11. Employee enters the text to be used in the Offer Ad for different communication modes.

12. Employee selects or uploads the image to be used with the Offer Ad.

13. Employee saves offer; SmartShop creates a tracking ID for the offer.

CPG Offer CreationScreen Mockup

Field Name Value

Offer Name

UPC Code(s)

Offer Description

Offer Amount [$]

Offer Text

Limit per Customer

Limit per Customer Text

Distribution Distribution Ad Offer Placement Bid Ad Bid

Albertsons

Jewel-Osco

Piggly Wiggly

Farm Fresh

Green Hills

Strategy

Lifestyle Group

Availability Period Effective Date

Expiration Date

Offer Description for Web

Offer Description for Email

Offer Description for Kiosk

Offer Description for Mobile

Offer Image for Web

Offer Image for Email

Offer Image for Kiosk

Ad Description for Web

Ad Description for Email

Ad Description for Kiosk

Ad Description for Mobile

Ad Image for Web

Ad Image for Email

Ad Image for Kiosk

Select Image

Select Image

Select Image

Search UPCs UPC Hierarchy

Select Image

Select Image

Select Image









Offer pools are the vehicle for distributing the selected offers to the customer database such that eachMember receives up to 20 apiece. The Merchant has no control over the CPG-entered offers. These arehandled by SmartShop’s targeting engine rules.

4.1.16 Use Case 16: Offer Pool is distributed to customers

4.1.16.1 Description After finalizing the Offer Pool, the Merchant Employee sends it to the SmartShop targeting engine for atwo-step distribution process.

1. Targeting engine receives the Offer Pool.

2. Offers, subject to their parameters (strategy, customer segments, distribution limits, discountamounts), are preliminarily distributed to the Merchant customer base. Each customer’s purchasehistory is statistically analyzed for likelihood of interest in a given offer.

3. Merchant Employee ispresented with a screenshowing the preliminary offerdistribution. In 7th Street’sLoyaltySuite this is called the“ReVision” screen. The screentells the Employee:

• Assigned limits per offer

• Number of eligiblehouseholds, based oncustomer segmentsassigned (e.g. Diamond,Ruby, etc.)

• Modeled distribution ofoffers, which tells thenumber of households that

would receive a given offer.

• Markdown cost is based onthe modeled number ofhouseholds receiving theoffer multiplied by the discount amount.

• Merchant Employee can use an on-screen slider (“ReVision” column in graphic above) to alterthe number of offers made available to change the modeled number of households receivingthe offer. He can only do this for Merchant-entered offers.

• CPGs will not be able to access the ReVision screen.

4. After he is satisfied with the preliminary distribution of offers, the Merchant Employee commandsthe SmartShop targeting engine to execute the final distribution of offers. After this execution, the

Offer Pool is considered targeted .5. The targeted offers per household are then forwarded to the SmartShop Server.


The core engine of SmartShop is the targeting function. This targeting process is what makes the offerrelevant to customers.

7th

Street SoftwareReVision Screen






4.1.17 Use Case 17: Targeted Offer Pool is published


The offers are made available for viewing by customers via three communication modes prior to the OfferPool Effective Date: email, web, mobile. Communication via the fourth mode, kiosk, occurs starting on theEffective Date.

1. The kiosk, email and web display of the offers

will be based on one of three templates foreach customer:

• 20 regular-sized offers

• 19 regular-sized offers, 1 ad-offer

• 18 regular-sized offer, 2 ad-offers

2. Email and mobile distribution preferences are used as parameters for distribution of the OfferSheet:

• Email address

• Mobile device number

• Preferred receipt date


The communication of the offers is a critical component for Member activation and redemption of offers.

4.1.18 Use Case 18: Merchant is paid for CPG fees and discounts


Merchants will accept the CPG-funded discounts at the POS for each Member. There will be a weeklysettlement of these discounts and the fees the CPG owes to the Merchant.

1. At the end of each week, SmartShop will tally the offers redeemed by Members:

• Tracked by offer ID

• Quantity of offers redeemed

• Total dollars provided by the Merchant in the form of discounts

• Total CPG Placement Fees and Offer Ad Fees owed to the Merchant

• Report displaying each Member activation by Member SmartShop ID, date, time andcommunication mode; and each redemption by date, Member SmartShop ID, time, locationand transaction ID.

2. The Offer Activation and Redemption Report will be provided to the Merchant for their records andfor them to audit against their own records as appropriate.

3. The individual Reports will be provided to each CPG for their review and to prepare ACH batchpayment.

4. Money will flow from the CPGs to the Merchant in one of two ways:

a. CPGs will transfer the funds to Pay By Touch. Pay By Touch will then transfer the funds tothe Merchant one day later.

b. CPGs and the Merchant will work with a third party Settlement Agent. Pay By Touch willprovide the documentation to the Settlement Agent, who will validate the payments from theCPGs to the Merchant.

No Offer Ads 1 Offer Ad 2 Offer Ads

Proposed Offer Sheet Templates







Merchants must be made whole for the discounts they accept and the revenue they’ve earned.

4.1.19 Use Case 19: Merchants and CPGs use results of prior offers to set new offers for thefuture


Over time, both Merchants and CPGs will learn what works and what doesn’t in setting targeted discountsfor products. From this information, they can improve the efficacy of their future promotions.

1. SmartShop’s reporting engine performs analytics on Members’ redemption of offers and their pre-offer and post-offer purchasing behavior.

2. The analytics also provide insight based on customer demographics and purchasingcharacteristics.


Information gained from running these promotions through SmartShop is a key value proposition for bothMerchants and CPGs.






5 R EQUIREMENTS DEFINITION

5.1 INTRODUCTION

SmartShop requirements are driven by:• Existing SmartShop functionality as developed for implementation at Green Hills Market in

Syracuse, NY

• Loyalty Solutions business unit direction – Gary Hawkins, Joe Lampertius, Sterling Hawkins

• Market and product analysis performed by product management

5.2 MARKETING REQUIREMENTS

The graphic below outlines a high-level process flow for SmartShop.

Member

Pay By

Touch

Merchant

CPG

Set-up Offer Distribution Redemption

SmartShop

High Level Process Flow

Existing Memberlinks Wallet to

Household ID forSmartShop

account

Memberenrolls in

SmartShopduring PBTenrollment

Existingcustomer

DB?

Merchantimplementscustomerdatabase

Merchant exportst-logs and customersegmentation info

UpdateWallet

MerchantSmartShop-

enablescustomerdatabase

Y

N Merchant uploadsproduct hierarchy

Merchant preparesPOS for offer delivery

Merchant acquireskiosks for offer comm.

Merchant negotiateswith CPGs for fees

CPGs negotiate withMerchant for fees

Memberindicates

communicationpreferences

Merchant uploadsproduct graphics

CPGs upload product

hierarchies and graphics

CPGsprepareoffers fortargeting

Merchantpreparesoffers fortargeting

Offers arestatisticallymatched toMembers’

t-logs

Offers aredistributedto Memberaccounts

Memberviewsoffers

Offers areready for

viewing byMembers

email web

kiosk mob ile

Membershops inMerchant

store

Member accessesPBT for offers and

to pay

ProcessPBTauthand

WalletGet

offers

Offersare

insertedinto the

POS

EligibleUPCs

ID’d, disc.applied

Paymentacceptedon total

Reduceavail.offers

Tally weeklyredemptions

ProvideMerch.reports

ProvideCPG

reports

CalculateCPG

remit. toMerch.

Processpmt betw.

Merch.and

CPGs

CPGsmake

payment

UpdateMember’sMyPBT

transactionreport






5.2.1 PBT Wallet

MR Description UseCase

Priority

MR 1.1 Household ID. Member ID is associated with a Household ID forpurposes of tracking purchases and distribution of SmartShop offers.

UC 1 High

MR 1.2 Auto-Enrollment. Members can be automatically enrolled in different

Merchants’ SmartShop programs during PBT enrollment or later withthe click of a button. These IDs are added to their Wallet.

UC 2

UC 3

High

MR 1.3 View Offers Online. Member can view and activate her offers throughthe MyPBT portal. She will see how many offers she has left afterredeeming any with limits.

UC 4 High

MR 1.4 View Transactions Online. Member views her SmartShop offerredemption history.

UC 10 Medium

MR 1.5 Offer Reminder Alerts. Send alerts to Members after the initialcommunication of offers, letting them know they are available up tothe Expiration Date.

UC 9 Low

5.2.2 In-Store


Priority

MR 2.1 Offer Transmission. Offers available to a Member shopping with aparticular Merchant are delivered to the store after the biometric auth.

UC 5 High

MR 2.2 UPC Sniffer. Ability to track all UPCs in a Member’s basket duringcheck-out and identify those that are eligible for SmartShop discounts.

UC 5 High

MR 2.3 ECR Discounts. Redeemed discounts, subject to purchase limits, aretransmitted to the ECR to reduce the sub-total.

UC 5UC 6

High

MR 2.4 Redeemed Offer Transmission. At the conclusion of the transaction,

the redeemed offers are transmitted back to the PBT SmartShopserver.

UC 6 High

MR 2.5 SmartShop Kiosk. Activate and deliver available offers to a Memberat the kiosk after she biometrically identifies herself.

UC 4 High

MR 2.6 Backup to Failed Bio Auth – Kiosk. Member will be told after a failedbio attempt to enter her 10-digit phone number. After entering thenumber, her offers will be returned for viewing on the kiosk.

UC 7 High

MR 2.7 Backup to Failed Bio Auth – In Lane. Member will be told after afailed bio attempt to enter her 10-digit phone number. After enteringthe number, only the SmartShop offers in her Wallet will be returned.No payment instruments will be returned.

UC 8 High






5.2.3 Merchant MIS


Priority

MR 3.1 Customer, T-Log, Product Hierarchy and Product Logo Export.Merchant creates export files according to PBT published specs forcustomer segmentation data, filtered t-logs, product hierarchy andproduct logos. Files are exported to PBT SmartShop server via FTP.

UC 11 High

MR 3.2 Write New Member SmartShop Enrollments to Merchant Database.During PBT enrollment or afterwards, Members can automaticallyenroll in SmartShop. These newly enrolled accounts will be written tothe Merchant’s customer database.

UC 2UC 3

High

MR 3.3 Merchant Updates T-Logs for Offer IDs. Merchant adds fields thattrack when offers are used in a transaction.

UC 18UC 19

High

5.2.4 SmartShop Application


Priority

MR 4.1 Offer Creation. Merchants and CPGs enter offers into the SmartShopOffer Library.

UC 13UC 14

High

MR 4.2 Offer Pool Creation. Offers from the Library are added to create anOffer Pool.

UC 15 High

MR 4.3 Offer Targeting and Distribution. Households likely to be interested ina given offer are identified according to the targeting strategy and theirprior purchases. Offer relevancy contention (e.g. Coke & Pepsi‘Introduction’ distribution strategy have equal relevancy to a HH) issettled via a process TBD.

UC 16 High

MR 4.4 Offer Communication. Send out Offer Sheet notifications to Membersbased on their communication preferences (email, mobile). Present

Offer Sheet on web and kiosk, using standard templates.

UC 17 High

MR 4.5 Track Offer Activation and Redemption. As offers are activated byMembers and redeemed at check-out, the SmartShop server will trackthese activities and update in real-time. Offers with limits will bedecremented or inactivated after redemptions.

UC 4UC 5UC 6

High

MR 4.6 SmartShop Administration. Merchants, CPGs and PBT will have theability to add and delete users. Users will have an assigned roledefining their privileges within the system.

UC 13UC 14UC 15

High

MR 4.7 Reporting. Reports will be generated showing offer activation andredemption activity. These reports will include straightforward detailsregarding offer activity (for settlement purposes) as well as insightfulanalytics describing efficacy of offers.

UC 18UC 19

High



5.2.5 Professional Services


Priority

MR 5.1 Customer Database Marketing Application. Identify candidateapplications for Merchants that do not currently track customerpurchases. Understand their capabilities as they relate torequirements for SmartShop. Leverage strategic partnership for

business development activities.

UC 12 Medium

MR 5.2 Implementation Project Management. PBT implementation field teamworks with Merchant on the in-lane, in-store and MIS requirements forSmartShop.

UC 2UC 3UC 5UC 6UC 8UC 11UC 12

High

MR 5.3 Strategic Consulting. PBT consultants offer practical advice andstrategic insight for using SmartShop, optimizing offer efficacy andperforming economic analysis. Consulting includes evaluation ofdifferent strategies, customer segmentations, effects of different

discount levels and managing SmartShop vis-à-vis ad flyers/FSIs.

UC 14UC 15UC 16UC 19

High

5.2.6 PBT Financial


Priority

MR 6.1 SmartShop Contract. Develop terms & conditions for Merchants andCPGs’ usage of SmartShop.

All High

MR 6.2 Billing System. Develop functionality to track and bill for fees owed byMerchants and CPGs to PBT and for CPGs obligations to Merchants.

UC 18 High

MR 6.3 Settlement. Establish procedures for the transfer of cash from CPGs

to PBT, and the transfer of cash from PBT to Merchants. Set upseparate accounts and coordinate with Finance as required. Also,establish relationship and procedures with a third party settlementagent.

UC 18 High

Date post:	30-May-2018
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