Why discounts are good, yet not great for loyalty

“People are not loyal, and they are looking only for better deals!”

well…

I have five drugstores in my closest neighbourhood. Moreover, two of them are located in the same building I live, ten walking seconds apart from each other. If you only invested another minute, you could visit the third one, and adding three more minutes would be more than enough to be in all five. 

They all look alike, which suggests that they are visited regularly by the same sales reps who used analogous POS materials. All of them sell the same drugs. And, what I recently discovered, the pharmacists also switch jobs from one place to another—a couple of them who used to work in one location some time ago, now work in another.

The only technique all these drugstores use to stand out from the crowd is to lower the price, decorate the shop windows with yellow and orange discounts labels and play the hunger games, fighting to death on prices. Well, when even the employees are not loyal, how to expect that customer will be?

Marketers complain that our societies are discount-oriented. Researchers will present the findings from the studies proving that we’re all smart shoppers, so no one is loyal, and everyone is only looking for the best deals… Seriously? If it doesn’t cost me a thing, I’m happy to look for other options. But there is a widespread between being smart and not wanting to be screwed off, and lacking loyalty. People are price-sensitive, especially in emerging markets, where a relatively large part of the consumers lives from hand to mouth. But even in the mature, wealthy markets, people compare the prices on commodities, as there are always more options to spend your salary.

Many brands and marketers are so crazy about discounts because people generally care only about the things that are visible to them. And they focus on the things that they can measure. When you only have a hammer, all your problems tend to look like nails. So if only sales figures are in the board’s interest, your brand will be stuck in this false paradigm like a self-fulfilling prophecy. Still, suppose management understands that revenue depends on other factors as well, starting from customer satisfaction, brand awareness, or physical and mental availability. In that case, it can open a completely new blue ocean of possibilities. Even in the most competitive branches, like FMCG retail chains, there are many other things that customer cares about. Some people prefer one chain above the other, even if the prices for the basic, comparable products are matched. But it doesn’t mean much unless you don’t know how to measure the impact of these factors and present a sales report convincingly and reliably.

Five dimensions that determine your customer decisions.

There are five general dimensions, why people will consider you, and determine if they stay longer with you. And the price is only one of them. Let’s look closely at every single one of them.

1. Products or services range you offer—is that something consumers need or if it solves consumers’ problems.

It is a truism to say that people have different needs. Starting from the bottom of Maslow’s hierarchy of needs, the obvious one (stop being hungry) to the more sophisticated (I want to belong, I want to be proud of myself). The harder it is to fulfil the need, the higher price people can pay. When you target your offer closer to the pyramid base, the environment you operate in becomes more competitive.

The only way to move from this inconvenient situation is to grow the category you are in. Consider this example in the grocery store retail chain: an average family has 5-10 meals in their ongoing repertoire. Probably, you can name yours. If you want them to buy more products from your brand, you must help them to extend this range. Educate them about the new options and make them feel that they will belong to the latest consumer category by preparing fresh fancy meals. All people do the Italian or French cuisines. And by simplifying the recipe and adding semi-prepared products, you will lower the barrier to achieving it, which can make them proud. It is why you can find the Italian week in your closest grocery store or a new limited collection in the fashion store. So if you want them to buy more, if you want them to pay a premium, your role is to educate them on what they can do and make it simpler to achieve.

You can measure it with the customer LTV metric. You need to understand what determines it and try to develop customer baskets by adding products that better solve your customer’s problems, give them a feeling of belonging, or make them proud.

2. Customer satisfaction—do people feel that you care?

Another cliché: people won’t remember what you said or what you did. They will remember how you made them feel. And it goes beyond just being nice. Consumers want to deal with brands that care about their time and money. Every single interaction with a brand creates either promoters or detractors. You can easily measure it with the most straightforward question you can ask: “How likely you would recommend us to friends or colleagues”. And you can find hundreds of great examples of how other brands connected the scores with revenue, measuring the positive influence of promoters and the negative impact of detractors on your income.

But measuring is only a beginning. Following the customers’ feedback, improving your operations day by day, and making their life easier and simpler, you can expect a positive return on this investment.

And it is more about removing the obstacles rather than delighting the customers. My favourite example is the impact of self-serve tills. Imagine, if you have to buy eggs and sausages for your breakfast— will you choose the store with queues or the one with the self-serve payment? Will you care more for price or your time?

NPS metric has a short but robust history of measuring customer satisfaction on sales. You will have a chance to read more about it soon on my blog.

3. Brand— do they know you? What do the others think about you?

Before buying from you, I need to know that you actually exist in the market. That is a prerequisite. But maybe even more important is what do other people think about you and how it will impact my decision. How will I be perceived as your customer? Especially these days, when social media strongly affect people’s decisions, brands can take advantage of it and create a sense of belonging. Imagine Harley Davidson—it’s not only a brand— but it is also a way of leaving. By using specific brands, you manifest who you are and what you believe in. You like it or not, people are constantly judging you by the brands you are surrounded by. What car you drive, what phone you have, what clothes you wear, where you do your groceries.

Brand positioning may have a tremendous impact on your customer base size and, what follows, your revenue. This is super visible in the extreme example when consumers from different moral or political reasons announce the boycott of a specific brand. It usually provokes an opposite reaction on the other side of the fence and boosts the demand at your adversary’s.

How to measure the branding impact on your sales is a never-ending discussion in the industry. I advise focusing on the most reliable and objective metrics, like brand awareness, brand penetration, and share of media voice.

4. Physical availability – are you close enough?

I can love you, but if you’re too far away, I will not consider you. I need you here and now. Long-distance relationships rarely survive, and also customer loyalty has its limits. People buy their clothes only on Champs-Élysées, Paris,  even if they live on another continent, but if you read this blog, you’re probably not representing these brands, and these are not your customers.

So your customers’ loyalty is often negatively correlated with the distance to your store. Think about how many times you decided to buy something in a store you don’t like, just because it was closer? Or order online from a store that offers you next-day delivery, even if the price wasn’t the lowest.

The rule is that the harder it is to find your product, the lower the loyalty is. Parallelly, the easier it is to get your product (it’s available in abundance, everywhere) the bigger the “loyalty” is, as measured in repeated purchases. Both from your core and light buyers. This is why retail chains fight for the best locations, constantly looking for white spots. And the arena for an ultimate game in e-commerce is delivery time, where the next-day delivery becomes a competitive disadvantage.  

5. Price.

 Last but not least. Price is the value carrier for all of the above-mentioned dimensions. It helps you evaluate the value of alternative costs attached to the purchase, so it’s always subjective and depends on the context.

My favourite example is “Thaler beer research” from Richard Taller, described in his book Misbehaving. In vast simplification, two students groups were asked how much they would be eager to pay for a beer, the first group being in an expensive resort on the beach, the second in the city centre, close to the corner store. It is no surprise that people will happily pay more for a can of beer in the resort than in their local grocery store.

Context always determines the amount you’re ready to pay. Imagine how much you are eager to pay for commuting to the airport four hours before the departure, and how much, when you are already late? It is why you carefully check the price of every item on your Saturday morning weekly shopping, but not so inattentively, 5 minutes before the store closing hour, rushing by the staff the same Saturday (knowing that all stores are closed on Sunday).  

Measuring the impact of your pricing strategy and how it influences customer spending, is one of the fascinating parts of retail. More and more often, this process is automated and relies on sophisticated algorithms.

Rules of the game.

Knowing the five dimensions is only the beginning. It is crucial to understand who sets the rules. You can play only as your opponent allows you to, and some brands dominated your category and imposed their own game rules.

  •     E.g. Amazon positioned itself as an “everything store” and dominated the e-commerce market using price and availability as a competitive advantage. It is why the other marketplaces and online stores follow their lead in the eCommerce game.
  •     E.g. Apple dominated brand and customer satisfaction field. It is why they can demand all ridiculous prices for their products, and people will still wait in the long queues to be first to buy their products.
  •     E.g. Coca-Cola dominated physical availability field. Many times is easier to get a can of Coke than a glass of water (not to mention other soda brands). So many people choose it, even if they are fancy about something else.

At some point, you should acknowledge that although all dimensions are essential, you can’t dominate all of them simultaneously. Even the giants as above can’t win them all. It’s impossible, too expensive, and unreliable. It opens the opportunity window for your brans. By attacking their Achilles’ heel, you can set up your own game rules. It may sound impossible, but the truth is that nothing is forever, empires collapse, and David can triumph over Goliath.

Just consider what will pay off the most. And since more brands will stay entrapped with the price-only dimension, it gives you a space to walk your own path.

Let's talk!

Please help me develop this blog. Let me know if you want to learn more about direct communication and integrated media planning.

adam-nowak-lets-talk-single-post-adamnowak.blog

Get inspired