Use Discounts for Customer Retention?
Drilling Down Newsletter #98 3/2009
Drilling Down - Turning Customer
Data into Profits with a Spreadsheet
Customer Valuation, Retention, Loyalty, Defection
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Hi Folks, Jim Novo here.
There's always a lot more interest in customer retention when
attracting new customers is difficult. Should you use discounts
to try and retain customers? Sure, but if you want to maximize
profits, use them wisely and at the right point in the customer
LifeCycle. Want to know more? Plenty of examples and
"how to" in this month's Question from a Fellow
Over on the Blog, 3 books you really need to read (or give to
others to read) if your company is struggling to develop a proper
culture surrounding the use of analytics.
Speaking of analytical culture, you might like a free webinar I'm
part of with Jim Sterne (Marketing
Optimization Summit) and Jonathan Salem Baskin (Branding
Only Works on Cattle) called Moving Marketing From The Money
Spenders to The Money MAKERS. We will be discussing how the
role of Marketing is changing and what you can do about it. If
this sounds like something you'd like to explore, you can get more
Plenty on the plate, let's get to the Drillin'...
Sample Marketing Productivity Blog Posts
Culture - 3 Books
March 13, 2009
At eMetrics Toronto, I will be moderating a Round Table
discussion group called “Getting
Buy-in and creating an Online Analytics Culture” and on a panel
moderated by Jim Sterne called “From
Web Analytics to Online Intelligence“. At Webtrends
Engage, I’ll be on a panel called “Socialization
of Data” moderated by Barry Parshall. With all this
activity surrounding the Analytical Culture, I can’t help but
suggest 3 books for those of you who are interested in / struggling
with these analytical culture issues...
Continue reading on the blog:
Culture - 3 Books
and feel free to leave comments.
Questions from Fellow Drillers
Use Discounts for Customer Retention?
Q: Most CRM experts agree that discount is a terrible way to
attract new customers. They seem to all agree that these "transaction
buyers" are money-losing customers and have no loyalty to the company.
A: I think using discounts profitably for customer
acquisition depends a lot on your "Brand Personality" and
your business model. That said, often people screw this up and
attract the wrong kind of customer, yes.
Q: But, I have seen a lot of different opinions on the use of discounts
to increase loyalty and retention among current customers.
I have seen experts contradicting themselves on this subject saying that discount is a terrible way to
reward gold customers or to move up customers to a “better segment” and after
some time they contradict themselves mentioning a successful discount case study
(points are a common method used).
Jim, what is your opinion about using discounts in a retention program?
A: First, we have to define "discount". Price discounts have the effect of
reducing margins, but so do "better service" ideas like "VIP phone lines" and loyalty programs.
So you can take your discount on the top line or the operational line, the fact is it costs
money to provide good service to best customers in hopes of keeping them.
I mean, what's the $10 million you spent on a CRM system?
Choose your poison, it costs money to retain customers. The real question is this - can you make money doing it, in any of the above cases.
If by giving a customer a discount I increase their overall profitability, in excess of what I lose on
a discount, then I made money. Same with the costs of a loyalty program, a rebate program, a newsletter, a special room, etc.
End of story. Whatever you do, it has to make more money, or it's silly.
Problem is, most people don't know how to *measure* any of this properly.
This is the topic of the Chapter in the book "Expense and Revenue
You May Not Be Capturing" (Ch 29).
Discounts aren't bad by themselves. What screws people up is not
offering them at the right time to the right customers with the right
value of the discount or operational expense.
Discounting to best customers can be very dangerous - something most people don't
know, let alone measure correctly. You can
lose money very, very quickly. I often rail against this; you have to understand subsidy
costs and how to measure them or you get burnt very quickly. I got burnt for over $1
million in a single promotion doing this - and it was the exact same promotion
I made over $1 million on 6 months earlier. Difference?
LifeCycle stage of the customer.
Or, if you prefer, the process
Here's a real world example. *ACTIVE* (engaged) HSN customers
spent about $320 a month, buying 8 $40 items. If I send them a coupon
for $10 off, they spend $310 buying 7 items at $40 and one $40 item at $30, so I lose $10
*plus* the cost of the promotion. This is subsidy cost. They would have bought anyway, and I let them do it for $10 less.
Said another way, this is the "Pull" effect - some people
will buy without any Marketing at all. These folks are
overwhelmingly active best customers, those who are
"engaged" and have interacted with you Recently.
Perhaps you have put brand new products up on your web site and
found they are selling even before you promote them at all? This
would be evidence of engaged customers, and the value of those sales
is the tangible result of the "Brand Engagement" your
company has created (at least for the week or month).
So, the $10 per customer sale loss represents a devaluation of the Pull
value embodied in your Brand, Service, Products, and Execution. It
literally is equal to the amount of loss you sustain by
"over-Marketing" to a customer who is loyal and already
I suspect it is this issue - known as subsidy cost - that draws the
ire of the experts who are saying "discounts are a terrible way to reward gold customers".
They are correct. The best - meaning most profitable - way to reward loyal customers
is with non-discount aspirational offers that drive loyalty.
These offers could be anything from simply thanking them for their
business (surprising how well this can work if done correctly) to
highly specialized services or access to the company.
Now, if I take this same group of customers and send them a coupon for $10 off any purchase over $50, they
spend $400 for the month, and increase of $80 from the average of
$320. Why? Because on that coupon transaction, the average transaction value is $120 - 3x higher than the average
without a coupon. Did I make money on this campaign? You
At an average 30% operationally loaded margin, I spent $10 to make $24 ($80 increase x 30%) - a profit of $14 on the
transaction before promotional costs.
The same discount of $10 to the same customer segment can generate
completely different behaviors. The trick is to understand
these behaviors through careful testing and measurement using control
So now, let's change customer segments, move later in the LifeCycle
to Lapsing customers, those who are on their way to defecting.
These are customers who have stopped visiting or purchasing and have
not had interactions with you Recently.
Lapsing HSN customers don't respond well to $10 off $50 coupons - it's too late in the
Lifecycle, average price falls over time and they won't "buy up",
the average purchase price won't rocket to $120 from $40 like it will
with active customers.
But if you look at what they like to buy (category affinity), and send them a $10 off coupon for a specific
category, and tell them when you're going to have a cool show on that category, you make a ton of money on the promotion.
Why? Because a huge number of them buy when they wouldn't have
(as demonstrated by the lack of buying behavior in the control group), and a
few "restart" as active customers.
Different segment, different timing, same offer that lost money
with active customers generates profits with Lapsing customers.
How do you know when a customer is Lapsing, when you should switch
from $10 off $50 to $10 off a specific category? You test it; a
Recency analysis and test is a great place to start with this idea, full
example / story here.
You can also take advantage of known LifeCycle purchase transition
behaviors. Many best customers start out buying in one category
and then switch to another; you can run a simple analysis to discover
these patterns. Many moderate value customers simply never make
the transition. But if you know there is a
"likelihood" of the transition and help it along a bit, you
can turn a moderate customer into a best customer.
At HSN, a 60 day old "average customer" who started buying in jewelry,
if sent a $10 off jewelry coupon, loses you money. Why? They already have enough jewelry, response is low, they are
at the end of the Lifecycle for the category. You net no "lift" - they
just spend $10 less that month. But if you send them a 20% off fashion coupon, you make a ton of
money over the next 90 days. Why?
Because if you study HSN best customer buyer behavior, you find
they start in jewelry and migrate themselves to fashion. So what
you are doing here is taking a moderate buyer and "helping"
them to discover a category with a high likelihood of long-term
You're modifying the Lifecycle. Instead of defecting, a portion of them become heavy
fashion buyers - the longest lifecycle, highest margin customers.
You may lose money on
the first fashion purchase. But you end up converting a bunch of
them to a new higher margin product line where they will continue to purchase
Over time, you continue to refines segments and discounts until you
optimize the entire system for maximum profitability; you are using the LifeCycle to
manage margins by applying discounts very precisely. Example of
this can be found here: The Discount
Every business I have done marketing / customer analytics for works the same way. But for interactive, these effects are amplified and become very significant. This is one reason why interactive is different, and why it’s a bad idea to treat interactive like offline - say, by blasting out the same e-mail to every
customer on your list.
So yes, discounts can be bad. But they can be very good. They
are the ultimate motivator, and so are very effective. You just
have to know the who, when, and what of using them.
Have a question on Customer Valuation, Retention, Loyalty, or Defection?
Go ahead and send it to me here.
If you are a consultant, agency, or software developer with clients
needing action-oriented customer intelligence or High ROI Customer
Marketing program designs, click
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'Til next time, keep Drilling Down!
- Jim Novo
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