discounting_1

I’m routinely surprised by how many tire & auto service retailers continue to promote a 10% discount as a consumer incentive. It’s like walking down the main street of one of those quaint old towns where you can be sure there is an Oak Street and a Maple Street and nothing has changed since the 50’s.

But times have changed and so should the way these retailers engage customers. Discounting is a bad habit with many pit-falls and many discount-heavy retailers in all types of categories are now out of business.

 

Lack of consumer influence

In an age of Black Friday door crasher specials of 50-75% off and discount de-sensitized consumers, many tire & auto service retailers continue to believe that 10% off is going to influence people. And because so many shops offer the same 10% off, it does ZERO to differentiate the retailer in a fickle marketplace where people expect epic deals in order to tear themselves away from taking selfies and keeping up with the Kardashians.

When confronted with a 10% discount offer – online or in a direct mailer – many people will roll their eyes and sarcastically think, “really…a whole 10% off…are they kidding?” and then just take their vehicle to the closest place around and keep doing what they have always done. Of course they wind up taking the discount (why wouldn’t they?) but the discount is an afterthought…it rarely influences current customers in any proactive way and certainly does nothing to drive new customer trial.

 

Unfavorable Cost Structure

Aside from the lack of consumer relevance and traffic-driving influence, an even bigger problem associated with discounting is the cost. Most tire & auto service retailers are working on much smaller gross margins than other retail verticals; for example, most apparel stores work with huge margins, so they can offer big discounts and still make a profit (or can they?) – but the automotive retailer is lucky to have gross margin of 25-30% – so a 10 or 15% discount consumes 1/3 to 1/2 of their profit.

Many retailers appear to be in denial about the fact discounts cost them money; I actually had one store owner tell me, “Well it’s not a real cost…we don’t get an invoice for those discounts”. I have to think he is no longer in business because 85 or 90 cents on the dollars just don’t go as far as 100 cent dollars when it comes time to pay the rent, staff and suppliers.

 

Wrong Type of Customers

The final problem with using discounts is the sort of customer it tends to attract…deal chasers. These people are rarely loyal to any retailer; they use the internet to scrounge around for the best discount, show up, make their purchase and leave. There is no ongoing relationship; they will only be back if the merchant has the best discount they can find next time they are in need of the service or product in question.

 

A Better Way of Engaging Customers

As someone who sells loyalty reward programs for a living, I’m always using the discounting argument to help illustrate the manner in which a well structured loyalty program can not only better influence valuable customers but also reduce marketing costs and increase overall profit.

 

Reward Customers Want To Hear From You

Loyalty reward programs are permission-based sales tools. The customers who enroll are opting in…they are giving the merchant permission to engage them in a different way – one where they agree to be added to the retailer’s email or text database and receive periodic communications (monthly is optimal) about different offers. Open rates of reward program campaigns are much higher than normal – so your message is getting through to the customers; there are no wasted or “spilled” ad $$ expended on the radio, print or TV ads normally used to promote discounts in an effort to try and attract people to their stores.

Customers are rewarded based on their purchase behavior and this can be anything the merchant would like to see happen in their place of business but should ideally be based on the treasure trove of transactional data the retailer has for each customer – helping make relevant offers to the customer; the more relevant the offer, the greater the response.

People who enroll in a reward program are likely to be the merchant’s best customers; they expect to be back and they appreciate the fact that if they come back and if they make certain purchases, they will earn rewards and possibly bonus rewards. Because they expect to accumulate rewards on an ongoing basis, they are not looking for that one big discount; they are looking at the retailer relationship in the longer term.

 

Optimal ROI

Reward programs are also performance-based sales tools. Instead of a sunk marketing cost like discount or a paid ad that can’t be tracked, every $ invested in a reward program is tied to a sale that is easily tracked using the retailer’s shop management software.

Because a reward relationship is based on the consumer’s expectation of repeat visits & accumulated rewards, the reward cost can be more modest (usually 2% – 3% of the purchase amount) and actually saves the retailer 7-8% versus discounts on every impacted purchase (reward program members are typically not eligible for discounts…i.e. no “double dipping”).

The net of it all is the reward program, while better engaging the customer, helps reduce discounting and associated advertising costs. Further, because reward earners tend to be open to ‘loading up” in order to earn bonus rewards, the retailer can capture greater market share from the customer, further increasing sales & profits – at the expense of the competition.

 

Retailer Case Study

To illustrate the significant impact a properly structured and executed reward program can have on a retailer’s business, consider the following case study of a tire & auto service retailer with multiple locations.

We used 6 months of pre-launch transactional data to determine the retailer’s historical average # of visit per customer, $ spent per visit and total $ spent in the period. We then compared these averages to 6 months of post launch data, using 4 groups of customers:

  1. Existing customers who did not join the reward program
  2. Existing customers who did join the reward program
  3. New customers who came in for the first time post program launch and joined the program
  4. New customers who came in for the first time post program launch and did not join the program

As you can see, the results are quite compelling…

discounting_chart_avgvisits

While existing customers who did not join the program visited about the same # of times in the pre and post launch periods, existing customers who did join the program increased visits by 22%, coming in almost 4 times – almost 75% more often than non-reward customers. As well, new customers, many of whom were attracted by the opportunity to earn rewards came in 45% more often than new customers who did not join the program. In an industry where the average customer only has each vehicle serviced 2-3 times per year, this is a huge “win” for the retailer.

discounting_chart_avgtransactionsize

As with # of visits, the average transaction size was also profoundly impacted by customers’ participation in the retailer’s reward program. Existing customers who did not join the program continued spending about the same amount each visit, while customers who took advantage of the program increased spending by 16%. Further, new customers who joined the program tended to come in with a big initial purchase, knowing they’d earn a lot of rewards, spending about 75% more than non-reward customers.

discounting_chart_totalspend

When you multiply the higher # of visits by the larger transaction sizes, you can clearly see the impact a reward program can have on participating customers: existing customers who joined the program increased total spending by over 40% – a difference of 129% versus customers who did not join and new reward-earning customers spent 152% more than new customers who did not join the program and 75% more than existing customers who didn’t join.

In summary, reward programs create better communication and transaction volume with customers while replacing more expensive discounts and the costs associated with the advertising needed to communicate them.

By Graham Farrell, President, Lift & Shift Loyalty Programs