Use Customer Data for Smarter Discounting

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Eric Tobias, founder and president, iGoDigital
Eric Tobias, founder and president, iGoDigital

Especially during peak times, customers opening their inboxes are barraged with discount offers and free shipping promotions. When it comes to closing the sale or winning the race for additional wallet-share, few techniques have historically proven more effective than discounting. However, with the number of retailers offering discounts, what used to be the fastest way to a customer's heart (and a subsequent conversion), now barely registers as a competitive advantage.

Marketing is forever changing, but the ultimate goal of profitability through customer loyalty remains constant. While discounting will always remain an important tool in the promotional arsenal, marketer's today have access to something even more powerful than discounts and offers: customer data. Retailers who successfully and responsibly leverage data to offer highly targeted messages will go beyond those serving the same generic one-size-fits-all discounts.

Smart(er) discounting

As organizations attempt to conquer the mountains of information that has become the reality of today's “Era of Big Data,” marketers are faced with one overarching challenge:  How to make the most effective use of data to deliver the most relevant experience to customers.

The answer requires an understanding of the retail customer base and segmenting audiences by profitability. In line with the widespread 80/20 rule, most retailers will discover that 80% of profits are driven by the top 20% of customers. A related industry theory gives further insight into this, holding that 3% of your customers will always shop with you, whereas the other 97% will purchase with varying degrees of loyalty.

Applying these theories enables retailers to align their customer audience segments against a profitability scale. At the top are the most loyal and most profitable customers. Since these customers will shop with you anyway, offering discounts, coupons, or shipping offers will likely entice them to buy what they would have already bought, resulting in lost profits. For these shoppers, abandon the traditional discount promotions in favor of other unique experiences and offers that provide additional value and reinforce their loyal status. For example:

  • In the fashion industry this may equate to a retailer offering a “first look” at the season's new fashion styles.
  • For customers of a book retailer who have shown interest in a particular author, offer a preorder promotion allowing them to be “first in line.”
  • As a sporting goods retailer, invite valued customers to private demo/trial days for new equipment.

There is another customer segment to consider when crafting a discounting strategy. There are many online shoppers who frequently interact with a site, but infrequently buy. The trap to avoid is treating every potential customer the same, giving them the same discount or relying on sheer volume to drive results. By linking customer behavior and product data together to drive segmented, targeted digital marketing campaigns, retailers can generate positive returns without offering a discount. 

For instance, in the case of one apparel retailer a standard, unsegmented email campaign rendered these typical results:

  • Resulting in 2.9 orders per 1,000 sends
  • Open Rate: 17%
  • Click Rate: 25%

Using behavioral segmentation, the retailer sent an email campaign to customers who had viewed jeans, but not purchased in the last 30 days. The email highlighted some of the best selling jean styles, but did not offer any kind of discount. By targeting the audience with this messaging relevant to their interests, the metrics improved dramatically without offering any kind of incentive:

  • Resulting in 8.5 orders per 1,000 sends
  • Open Rate: 42%
  • Click Rate: 52%

There will always be a place for discounting in the merchandising mix. After all, the vast majority of shoppers will continue to need that incentive to visit your site in the first place. However, as those shoppers spend time on your site, they're giving you indications of their habits and preferences.  Use that information to go beyond the generic discount and deliver targeted offers that reinforce the uniqueness of each individual customer. Discount or not, a targeted, data-driven marketing strategy will result in higher conversions and increase customer loyalty.

Eric Tobias is VP, web products at ExactTarget.

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