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Loyalty and ROI: Striking a balance with discounts

Savvy marketers understand the cost efficiency of keeping good customers vs. the expense of hunting for new ones, particularly when a tough economy has stretched resources thin. So when these companies spend a lot of time and money figuring out how to configure their loyalty program, they look for answers about critical success drivers like points, redemptions through partners, and accrued-value expiration.

But once the program is up and running, most companies miss a major opportunity to increase program ROI. The problem is this: Too much focus on program results and not enough on customer results.  Discounting is a great example of how customer insight can change the dynamics of the program to improve ROI.

Ask yourself, though: Are you over-discounting? In an effort to keep loyalty program customers coming back, many companies use discount offers and coupons in all (or nearly all) customer communications. On average, it is an effective strategy that drives traffic and purchases.

However, there is a price to be paid even beyond the cost of the discount itself, because by constantly discounting you are training your customers to look for and wait for deals – reducing the likelihood that they will buy at full price. What is even more painful is that companies almost always have the feeling that they are over-discounting, but they don’t know how to break the cycle.

There is a way out of the discount trap. First, we need to recognize that not all customers are equal when it comes to sensitivity to discount offers. Some are impulse buyers willing to pay full price; some are “coupon clippers” who won’t buy anything at full price but will buy something they don’t need if it’s on sale (great target audience for clearing merchandise); some are in between.  The key is to understand the differences between customers and then use that insight to vary offers based on how sensitive they are to discounts.

A simple way to differentiate is to look at the percentage of total items purchased at a discount for each customer. Another way is to evaluate responsiveness to communications with a discount vs. those without.   Once you have done this, you can experiment with replacing discount offers with more relevant product (full price) offers for those customers who appear to be less sensitive to discounts. Over time you will find out the right mix of discount and non-discount oriented offers, striking a balance with on-target, cost-effective communications.

Realizing the untapped potential of your loyalty program starts with asking questions that go beyond the traditional measures – questions that lead to increased customer insight once you have answered them. Better understanding customer differences in areas such as discounting will enable you to make key changes to your program that will in turn drive your ROI higher.

Andy Cutler is chief strategy officer at Mercury, a Boston-based, insight-driven marketing agency that drives growth and profitability for clients through enhanced customer experiences. He can be reached at [email protected]

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