Customer Development
By Tim Young
Anyone who has small children is probably familiar with the book, “If You Give a Mouse a Cookie.” The story goes that the mouse will probably ask for a glass of milk, and it snowballs into the mouse engaging in many activities and never leaving. So, I will ask the same question, what if you give a loyal customer a discount?
A data scientist at a conference recently told his audience, “I would never give a discount to a loyal customer.” After laughing, I wondered if the guy had bothered to read his company’s press release on its reward program.
I am a math geek. I love math. But I also understand how it can lead you astray. It can identify insights that, if turned into strategies, can be disastrous long-term.
First you need to ask yourself this: “Should I treat customers who have propelled my company’s success worse than those I just met?”
If that doesn’t give you pause, then consider this. Your best customers today could become your competition’s best customers tomorrow. While you are busy trying to attract their best customers, they are doing the exact same thing to you. Eventually, even with a little dumb luck, the competition is going to entice your best customer to at least try them once. That is where it starts, and for some customers, they may never come back.
The hospitality and airline industries have figured out that rewarding your best customers pays off long-term because those customers spend the most with you over time. They are usually part of the heaviest spenders in that industry, and when you get ahold of one, you don’t want to lose them to your competition. So you reward the behavior you seek and encourage repetitive behavior.
You might be saying, but the airline and hotel industries are different, that this doesn’t relate to my industry.
Ok. How about the telecommunications and video services industries? They actually take a completely different approach to discounting. They offer most of the discounts to the newest customers and try to have long-term customers pay maximum price. There isn’t a lot of competition in these businesses so there are not many price wars like the two industries above that are open to everyone. Instead, the price wars are aimed at acquisition and stealing away customers from the competition. How’s it working for them? Is anyone taking a strong growth position that can’t be matched?
What if a company decided that they were going to take half of the acquisition money they spend and instead use it to retain customers?
They could still offer the really cheap introductory prices but they wouldn’t last as long. I mean, over the long haul the discount doesn’t account for much and it’s the programming and service that keep people loyal right?
Then the company decides to start rewarding customers for their longevity. The longer you stay a loyal customer, the better the annual price. At some point you may not be able to lower the price any further but you could offer exclusive services or early access as the value add. Then when your competition tries to steal away your customers, your customers stay put. The lure of the introductory pricing isn’t worth it. Over the long run it doesn’t pay. The most loyal customers become your advocates and actually help you attract even more customers. I wouldn’t hold your breath waiting for this model to come to market, but I really do think it would work.
One last quick example of providing discounts to loyal customers. Check out Kroger’s financial results over the last decade and then try to find another company anywhere in the world in any industry that has done what they have done: 37 Consecutive Quarters of Positive Comp Sales. And they have accomplished that with a customer first strategy, where loyal customers not only receive discounts but on the identical items they like to purchase!
Most of us are in business to make money, not to give it away, so you have to be prudent in how you spend your discounts.
But getting back to the opening question, what happens if you give a loyal customer a discount?
I hope your answer is more thoughtful than the analytics expert at the conference.
