Retailers’ discounting strategies can prove costly mistake study reveals
Discounts of more than 30 per cent attract ‘cherry-pickers’ who don’t buy again, a study conducted by customer engagement specialist Optimove* reveals.
According to the findings, customers whose first purchase is discounted by over 30 per cent are less likely to buy from that brand again. This challenges the sales strategies of many retailers who use heavy discounting to boost trade, in particular in the upcoming holiday season.
While slashing prices is a major strategy for acquiring new customers in the last months of the year, the data shows that with discounts rising to over 30 per cent, retailers are in danger of attracting ‘cherry pickers’, defined as shoppers who buy a single bargain, but will not be drawn by the discount to buy more from the retailer at a later date. These customers have little future value, so the large discounts aimed at them can make a negative impact on the bottom line.
However, of the customers whose first purchase is a discounted item, discounts of 5 per cent -30 per cent do help to entice individuals. Up to the level of the 20 per cent discount mark, the likelihood of this customer making a second purchase rises.
This could be an open goal for retailers ready to focus on customer retention and get ahead of the competition, as only 5 per cent of retailers believe their customers remain loyal, and only 24 per cent see retention as a top priority.
“Over the holiday period, retailers are waging all-out war for new shoppers, but acquiring one-time shoppers is extremely costly, especially when retailers use price slashes as a major acquisition strategy,” says Alon Tvina, managing director of EMEA for Optimove.
“The victory of acquiring a new customer may well be hollow: customers making the most of large discounts on offer over the holidays can end up hurting profit margins quite substantially, if they don’t become more regular shoppers. Discounts of over 30 per cent do generate revenue from one-off purchases, but they only bring in profit in the short-term. These customers are unlikely to make a second purchase unless it is similarly discounted,” he adds.
Tvina continues: “On the other hand, not only do minor discounts of 5-30 per cent cut less into profit margins, but they tend to have the effect of ‘charming’ customers, who become more likely to come back for a second purchase. The holiday season is a huge opportunity for retailers to forge more permanent relationships with new customers, but getting discounting strategies right requires a deeper understanding of different types of customers and their behaviours. Using discounts smartly to attract customers and keep them, will give marketers an opportunity over the coming months to convert one-time buyers into loyal, returning customers.”
* Optimove’s data comes from analysis of over one million transactions by online shoppers over a two-year period.