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Are New-Customer Discounts Destroying Customer Loyalty?

How many additional email addresses have you created to be able to take advantage of a deal offered exclusively to new customers? Time and time again we see brands offering discounts to only new customers. Messages like “Sign up today for X% off” or “one-time use coupon for new customers” appear in pop-ups and push notifications. While we’re all marketers, we’re also all customers.

Seemingly, brands (retail brands in particular) are aiming to gain new customers versus nurturing relationships with existing ones. There’s been a constant battle between acquisition and lifetime value. But why? What are the benefits, if any? Are there certain industries that should prioritize new customers over existing customers?

We did some digging to see if we could get to the bottom of when and why brands offer these new customer discounts.

Understanding Flexibility and Customer Value

Two Yale School of Management professors, Jiwoong Shin and K. Sudhir, explained in the MIT Sloan Management Review that shopping flexibility and profitability are the two metrics to look at when determining whether your brand should offer discounts to new customers, existing customers or both.

What is Shopping Flexibility?

Shopping flexibility is when the customer has the ability to switch brands with ease. This could be due to a number of factors like convenience or availability. Shin and Sudhir used airlines as an example. Someone may prefer a specific airline because of their service and availability of direct flights to their hometown. But, if that customer is going to a different city, and their preferred airline doesn’t offer a direct flight, they’d likely switch to another airline.

How Do You Determine Customer Value?

Shin and Sudhir go on to explain that, as a take on the 80/20 rule, a certain segment of customers may contribute to a majority of a brand’s margins. “[American Express, for example] reported that the best customers outspent others by 16 to 1 in retailing, 13 to 1 in restaurants, 12 to 1 in airlines, and 5 to 1 in hotel/motels” In this example, there is a high percentage of the margin coming from a small, but dense, concentration of top spenders. Therefore, American Express is considered to have a “high concentration in customer value.”

Using Flexibility and Customer Value As a Guide

To determine whether or not your brand should offer discounts to new customers, existing customers or both, you need to examine your customers’ shopping flexibility and your brand’s concentration in customer value.

According to Shin and Sudhir, if your brand has a high flexibility and a high concentration in customer value, you should aim to delight and retain your existing customers. If you have either low flexibility, a low concentration in customer value or both, then you should aim to get new customers.

Why? Low flexibility means customers aren’t likely to move away from your brand. Shin and Sudhir use wireless providers as an example. They generally have contracts with customers, so it’s hard for customers to switch to a competitor. Low concentration in customer value means that all customers are contributing roughly the same amount to your margins.

So, it makes sense that if your customers are less likely to leave and/or every customer has equal value, that you’d aim to acquire new customers versus striving to keep existing customers.

Customer Discounts Should Fuel Lifetime Value

Based on the advice of Shin and Sudhir, certain industries can benefit from drawing customers away from competitors by offering discounts to exclusively new shoppers. However, it’s not a one-size-fits-all solution.

While we know acquiring new customers is more expensive than keeping existing ones, that shouldn’t be the deciding factor for marketers. Instead, brands should focus on the relationship they’re forming with each customer and strive to increase their LTV. A discount should be used to appeal to the individual customer, in the hopes that it will increase their engagement with your brand and provide more value in the long run.

Nowadays, forming relationships with individual customers is taking precedence over marketing to customers based on broad categories. While segmentation is an important element in a marketing strategy, it’s now possible to get more granular in data collection, allowing you to personalize messaging for each customer. Creating this unique customer experience keeps customers engaged with your brand and, as a result, boosts LTV.

Cross-Channel Marketing: This Time, It’s Personal

Creating a personalized customer experience is not only about the messages you’re sending, but where you’re sending them. If you can understand how each customer interacts with your brands, you have a better chance of connecting with them. Therefore, cross-channel marketing in itself, when done right, is personalized marketing.

So, instead of thinking of customers as new and existing, think of them as people. How does this one customer want to be marketed to? Have they purchased something in the past? Did they use a coupon? If so, maybe they’d purchase another product if they had another coupon.

The advice from Shin and Sudhir is a good jumping off point, but if you want to take your cross-channel marketing to the next level, request an Iterable demo today.

 

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