October 14, 2018

Using Discounts To Influence Customer Behavior

The biggest marketing challenge I get to see is this ...
  1. Merchandise Productivity isn't acceptable.
  2. Marketing is blamed for the decline in productivity.
  3. Marketing does not have the proper tools in the toolbox to fix a merchandising problem.
  4. Therefore, marketing enacts all methods of discounting ... including free shipping, 10% off, 20% off, 30% off, 40% off, 40% off plus free shipping, and the classic ... loyalty program points.
  5. The customer attracted to discounts, promotions, and loyalty points becomes "the customer" ... in other words, a self-selection occurs where the customers who love various marketing programs are more likely to respond to the programs, and/or prior full-price customers become discount-centric buyers, and once that happens, the customer is less likely to go back to full-price purchasing activity.
  6. The brand is paralyzed ... locked into discounts/promotions without a solution for the merchandise productivity problem.
You'll tell me that discounts are unavoidable - they're a competitive tool you are forced to use. Ok.

So if we assume you cannot get out from under 30% off plus free shipping, and you cannot improve merchandise productivity, then we have to realize that "something" needs to be done.

So look at the table above. Do you see the color bands? The color bands represent customers with comparable monthly response levels. The color bands demonstrate customers with comparable behavior. Look at the purple band. These are customers with monthly response rates between 5% and 10%. That's a pretty good level of responsiveness!

When a customer becomes loyal, the customer is responsive, and the customer can be moved somewhat. 

When a customer is a first-time buyer, the customer is responsive for a brief period of time.

We owe it to our businesses to do something about this short timeframe. There are more customers in these three segments (first three month after a purchase) than there are in any other segment. We can use discounts to influence these customers, sure. But maybe we need to have a Welcome Program that helps grow our customer base before the customers lapse and we have no choice but to use discounts/promotions as our only lever.

Merchandise Lifetime Value - MLV - Depends On First-Year Performance

Let's say that a new item performs in the bottom 45% of the assortment. Five-Year Cumulative Demand = $348. Let's say that a n...