CVS Health’s ExtraCare® loyalty card program leverages advanced data analytics to drive value creation for over 70 Million front store and pharmacy customers. As a former CVS employee, I had the privilege to be able to meet with the directors of the ExtraCare® program to understand how they leverage algorithms to drive value for customers and the company.
CVS Health is a Fortune 10 Company with services ranging from the front store (where you buy shampoo and deodorant), the pharmacy (where you pick up prescription drugs), the Pharmacy Benefits Management arm (which provides prescription services to your employer or insurance company) and MinuteClinic® (where you go to get flu shots). CVS Health generates ~$140 billion in revenue and ~$4.6 billion in net income on an annual basis in its pursuit of helping patients on their path to better health.
ExtraCare® manifests itself as ExtraSavings® coupons that can be redeemed for specific items or categories ($4 off any $10 purchase of Gillette razors!), and Extrabucks®, which is “free” CVS money that customers can use on any purchase ($2 reward (expires in like 4 days!)). Customers can access these coupons online (by printing or “sending” to card), by using the coupons on their four foot long receipts, or by scanning their cards at portals in the store that will print out their customized offers (also four feet long).
The ExtraCare® programs creates value for front store and pharmacy customers by providing them with customized coupons for relevant products based on past purchases. For example, if you purchase diapers and baby formula, you will likely get a coupon for baby wipes. In this way, customers can receive a discount on products that they are likely to purchase anyway, given their basket of goods. CVS uses various algorithms that leverage the frequency of shopping, the number and category of items in their basket, the volume and price per item, and hundreds of other variables to determine the products that will be offered (they are constantly regressing multiple variable to understand the most predictive ones). Based on subsequent behavior they will determine if a test group, versus a control group, purchased more items or were up-sold on a higher margin CVS brand item. For its email incentives, it runs repeated tests using these algorithms to test various hypotheses (A-B matching tests that will offer similar profile customers a $3 off $15 or a $4 off $20 or $5 off $25 coupon to determine coupon conversion, total basket, and yield).
Value capture on the ExtraCare® program occurs when CVS is able to determine that, relative to a control group that did not receive an offer, it was able to convert, up-sell/cross-sell, or increase the order size of a given customer. The predictive algorithms generate test groups based around various metrics and customer profiles. Afterwards, the data is analyzed longitudinally, as well as relative to a control, to understand how much value was captured from a given program. However, this is not a static process: as new items are introduced, new stores are opened, and customers deepen in their loyalty, CVS has to constantly analyze the results of the programs to make sure they are capturing a justifiable amount of value. In fact, it recently received some bad press about firing its unprofitable customers (e.g. the ones who use too many coupons).
The ExtraCare® program provides a depth and richness of data unmatched by any other loyalty program in the U.S. With 16 years of data linked across pharmacy and front store, and over 70 million active members, ExtraCare® knows more about you than you do. In addition, ExtraCare® offered a onetime 20% off coupon if you linked your email to your ExtraCare® card, providing CVS with a vast, and cheap means of marketing directly to consumers. The processes around running, updating and enhancing the algorithms that run the program have become so streamlined and integrated, that ExtraCare® has become a great lever to quickly boost revenue. One risk to this program is the inertia associated with a large company: given its success, it is unlikely that CVS will ever modify the program, potentially missing out on further opportunities to leverage analytics or machine learning to further improve targeting and yield. Yet, given the depth and richness of data in the ExtraCare® program, as well as the low cost of running these algorithms, the program will likely continue to add value to CVS for years to come.