Last year, our newsletter flipped a characterization that loyalty’s “programmatic discounting” is a bug into a feature.
Discounting—or, at least, the impact that discounting has on margins—is more pertinent today than it was 6-8 months ago, so I thought it was worth revisiting this topic.
First, some background:
An under-discussed aspect of retention is how much it actually costs to keep a customer buying from you. SaaS vendors, generally, will tell you that it costs X more to acquire a new customer than it does to retain an existing one. And that is probably directionally true. But, somewhere along the way, brands have modeled that existing customers can be retained at, essentially, zero marginal cost. Maybe the cost of an email or SMS message, but nothing more.
That is not a full accounting, though.
Brands, of course, use discounts to bring customers back, and some brands use richer discounts for their existing customers than they use for their new customers. From our original newsletter on this topic:
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.
That post goes on to talk about what type of margin a brand could claw back if they were to move their richer discounts for existing customers into their loyalty program and reduce the discount for non-loyalty customers to the same level used in new customer acquisition.
That is cool, but I’ve been wondering if it goes far enough. What if loyalty, really, is a vehicle to deliver personalized discounts?
The end result of this is significant margin improvements from two levers:
A reduction in blended discounts. Some customers end up with discounts, because the same discount is offered to all customers. What if that discount wasn’t needed to incentivize the customer and just ate margin from the purchase?
A reduction in discount code leaks. Because the same discount is often accompanied by the same discount code, that discount code makes its way to consumer tools like Honey, which appends those codes to checkout for customers who are otherwise unaware of a discount.
With a personalized discounting strategy, you’d reduce blended discounts by reducing and/or removing the discount from customers who didn’t need the full offer. Compounded over your customer base, this is probably good for 4 to 5 raw percentage points on your blended discount rate.
And, further, with a personalized discounting strategy, you’d tie those discounts to unique, one-time codes that run through your loyalty program, meaning code leaks to consumer tools like Honey wouldn’t unnecessarily eat away at margin. Depending on your brand’s popularity, this could pull back another few percentage points.
I’m bullish on this idea at this time, because every conversation our team has is around growing profits. You have to grow the business, too, yes, and topline revenue is a strong indicator of that growth, but if you attack the bottom line simultaneously, you can not only save more money for your business, but generate more to invest in it.
