Programmatic

Someone recently told me they saw loyalty programs as nothing more than "programmatic discounting." I think they meant it as a negative, but I see it as one of the often unrealized benefits loyalty programs can bring a business.

In fact, if you can use your loyalty program as your primary discount tool, it could have a significant improvement on your margins. And there's a simple, rarely discussed reason for this: Most brands end up offering deeper discounts to keep existing customers than they do to attract new ones.

Sounds almost unbelievable, right? It’s not. 

Here’s a look at five brands and their year-to-date discounting by customer type: 

And here’s what those same five brands did last year for Black Friday-Cyber Monday: 

While everyone likes to talk about the problem discounting creates, it’s rare to find a brand that doesn’t look like one of the above. Discounting is a merchandising lever that brands pull and customers respond to. 

The discussion we should be having about discounting isn’t as much about whether brands should do it—that seems like a wasteful exercise, really—but, rather, how they should do it.

Perhaps this is counterintuitive, but loyalty can be a foundational element to discounting less. And the phrase “programmatic discounting” is close to perfect for it. 

Perhaps unwittingly, brands end up discounting more for existing customers than new customers because of “event-based” discounting strategies. Black Friday/Cyber Monday, of course, is the biggest event-based discounting event, but it’s not uncommon for brands to run sales around every other holiday, too.

Those discount events, however, are often more heavily promoted to existing customers via email and SMS. A quick look at the calendar shows you that, well, you’ve got more than one feasible holiday per quarter, especially when you factor in brands who want to drift off Amazon’s Prime Day, too.

It’s easy, then, to set expectations with a customer that a discount event is around the corner. 

Loyalty, though dismissed as “programmatic discounting,” is a counter to this. It’s an earned-based strategy, whereby a customer and a brand agree that a discount will get offered once a customer earns his or her way to it.

If you adjusted your discounting strategy on the whole to be “earned-based,” instead of “event-based,” you could save yourself margin by not offering discounts (or, at least, not as severe a discount) during certain calendar periods.

If you did this, the upside on what you could save in terms of margin is pretty significant: For a brand doing $5M annually, I think they could save about $150K in margin via discount reduction. 

Here’s how it would work: 

If you take a look at the graphs above, you might say a fair starting point for new customer email acquisition is a 10% discount. Brands are usually around 30-50% more generous for returning customers, so let’s agree for the sake of the exercise that the average returning customer gets a 15% discount. (Note: This is, of course, blended. Not every returning customer automatically gets 15% off their orders.)

Here’s how I would pull that average returning customer discount down: 

First off, I’d make sure my blended discounting for returning customers stayed level with my blended discounting for new customers. You’re probably still going to end up with subscription discounts, you have to participate in Black Friday/Cyber Monday, etc. So, tie those two figures closer together—just like they are in the BFCM chart. 

If the average new customer is currently getting a 10% discount, make sure returning customers average out to about the same. 

Then, tie your loyalty program to something richer. 15%, maybe 20%, off for every $250 spent. If you’re anything close to $50 AOV, that’s one in every five purchases from a customer. Not too generous, but not too far out of reach. (Analyze your data around repurchase rates to see where a larger, earned-based discount might help better incentivize the next purchase.)

The main goal, though, is to offer a discount that drives up AOV on that specific purchase. Our data has shown that percentage-based loyalty rewards drives up AOV from returning customers by something in the realm of 30%. If you can do that with a 15% discount, use that. If it takes 20% and the incremental gains are worth it, use that. For the sake of simplicity, we’ll tie our theoretical example to 15%.

If you did this, you could end up with a business that looks something like this:

In this example, a $5M brand could be saving $142,000—nearly 3% of revenue—in margin by turning its loyalty program into the foundation of its discounting strategy.

It’s counterintuitive, perhaps, because loyalty programs are often associated with more generous rewards. But the reality is that we’re already generously rewarding customers (probably too generously rewarding customers) by giving them discounts based on calendar holidays, not value.

This would shift that approach, and actually reduce the reliance on event-based discounts, but preserve the customer’s expectations by offering them discounts just for joining the program.

As an industry, the loyalty program market, especially in DTC, has spent too long trying to get retail’s way of measuring loyalty—incremental repurchase rate—to stick.

This is tough in DTC for two reasons: 

• First, most brands don’t have the type of purchase frequency that retail has. 

• Second, most brands don’t have the type of volume that retail has. 

Both create a world in which brands would likely be waiting a year or longer to measure loyalty in a more traditional retail sense. 

Maybe, though, loyalty is exactly what it was dismissively referred to as recently: Programmatic discounting. And if it is that, you’d benefit from using it that way.