Tuesday, February 10, 2015

Discounts Sabotage

Image courtesy of JSF0864
Is your customer acquisition (and retention) strategy based on discount pricing? How's that working for you?

Discounts might be working well to bring customers in the door, but do they stay after they're in? Can you keep those that you acquire? Are you creating a precedence that is not sustainable?

A couple weeks ago, I wrote a post about the phenomenon where customers buy on price but also leave on price. I answered the question, why do customers really leave?

Today, I want to address the acquisition/retention strategy that many companies undertake -  discounts: how they play into the price/value equation and how they impact or sabotage acquisition and retention efforts.

Is your customer acquisition strategy based on discounts, discounts, discounts? Whether your business is a subscription-based model (think dish/cable or telecom) or you're a retailer (think Kohl's) - or it's Black Friday - you've used discounts to bring customers in the door.

No doubt, customers love coupons, sales, and other discounts! I confess, I do, too. But I don't always buy a product or shop at a store because of a coupon. First, I have to have a need, or I have to be in the market for such a product. Second, if I've purchased from that company before, depending on the experience, the coupon may or may not entice me to purchase from them again. Discounts aren't a given; discounts don't mean that it's a slam dunk, that you'll make a sale. You still have to work for it.

I know that acquiring customers is important; I just wish that companies would put at least as much effort into keeping the customers they already have, with a real CX strategy. If they did, they wouldn't have to work so hard to get new ones. Not that they wouldn't need them - you always need customers to keep the business alive - but your existing customers would become an extension of your sales force and do some of the work for you. And save you money!

People who buy because of discounts are classic examples of “mercenaries.” Mercenaries are one segment of customers in the classic HBR Apostle Model, a model used to segment customers based on two dimensions, satisfaction and loyalty. They are defined as customers with high satisfaction and low loyalty and are in your store or have subscribed to your service because they are/were driven largely by price.

How do these customers feel about your company? Your brand? How was the experience? Can you keep them? On Black Friday, for example, they achieve at least short-term high satisfaction because they bought something they want/need at a reduced price; however, they are not committed to your company, hence not likely to purchase again (unless, of course, you offer up some more discounts). They aren't customers for life. You have not connected with them nor have you created a relationship with them. And, most likely, the experience was an after-thought. They haven't connected with you, either. The rest of the year, if you keep feeding them coupons every month, oh sure, they'll come back - if they need something and happen to have your coupon in hand. If they don't have a coupon, will they go elsewhere?

How do customers feel about your brand? There's an interesting story I'll share. It has many variations, and its origins are unclear; it is often attributed to Winston Churchill:

Churchill: Madam, would you sleep with me for five million pounds?
Socialite: My goodness, Mr. Churchill... well, I suppose... we would have to discuss terms, of course... 
Churchill: Would you sleep with me for five pounds?
Socialite: Mr. Churchill, what kind of woman do you think I am?!
Churchill: Madam, we've already established that. Now we are just haggling about the price.

Something to contemplate...

Can discounts be a viable acquisition strategy? Perhaps. The better question is probably, is it a viable retention strategy? If it is, it's a transactional relationship, not a long-term, ongoing relationship. As soon as something goes wrong - and it will - or a better deal comes along - and it will - customers are ready to switch (again, think cable, dish, or telecom providers).

Once customers are in the door with discounts, they need to get hooked. I think you need to set expectations and then wean customers off discounts quickly. Price fairly. Deliver a great overall experience. (Price is part of the experience; it just shouldn't be the driving force behind the overall experience or behind why people stay/leave.) And help customers see the value over time. Price is what you pay, value is what you get... right?! So let's help customers see what they're getting for the price they pay - and help them understand that the relationship is not going to be based on that addictive drug called discounts.

Think about your cable, dish, or telecom provider. These companies are notorious for their discounts, especially for new customers. By the time the customer's first year of extremely-discounted pricing has ended, he forgets that his fees are going to increase dramatically. When he gets that first bill at the new rate, he either wants to switch or demands another discount because, let's face it, the service was likely not that great (right, Comcast?). It sets a precedence; it creates an expectation for ongoing discounted pricing. And it creates and perpetuates that buy-on-price/leave-on-price phenomenon.

Which came first, companies relying on discounts as an acquisition strategy or customers demanding discounts? Which is worse? Need some examples of companies that don't need to offer discounts? Apple and Ritz-Carlton come to mind.

The customer rarely buys what the business thinks it sells him. One reason for this is, of course, that nobody pays for a ‘product.’ What is paid for is satisfaction. But nobody can make or supply satisfaction as such—at best, only the means to attaining them can be sold and delivered. -Peter Drucker


6 comments:

  1. I ran my own business for a while Annette. One of the pieces of advice I was given was "price high and justify". Now maybe the advice would have been better the other way around "justify then price high".

    Competing on service, or quality, or product is always more successful than price, and a whole lot more fun.

    ReplyDelete
    Replies
    1. Great perspective, James. The other way does sound better. If companies deliver a great experience, discounts become irrelevant. People will pay for a better experience.

      Delete
  2. Hi Annette,
    You ask the question 'Can discounts be a viable acquisition strategy?'

    Wouldn't be interesting if we slightly rephrased it as "Can discounts be a viable attention strategy?'

    Adrian

    ReplyDelete
    Replies
    1. Ah, great point, Adrian. They do raise attention/awareness... but they're not sustainable as a retention strategy, either for sure.

      Delete
  3. More fuel for the fire:
    Have you heard of the Groupon effect? Researchers found that Yelp reviews mentioning the word "Groupon" offer ratings that average 12% lower than those that don't. http://som.yale.edu/sites/default/files/files/groupon-effect-ycci.pdf

    ReplyDelete
    Replies
    1. Oh wow... that's interesting, Jeff. I hadn't heard of that before. I'll check it out. Thanks!

      Delete