Podcast 01: How to Keep Customers Around Longer and Buying More—the Magic of Discount Ladders

Hey everybody. Welcome to the Nerd Marketing Podcast. The podcast where I try to give you clear, actionable, data driven strategies to grow your business. My name is Drew Sanocki, and I’m your host. The title of today’s podcast is ‘You are spending too much money on dumb-ass promotions.’

Basically what I want to talk about today, is discount ladders and subsidy costs, and promotions, and how a lot of retailers are leaving money on the table by not implementing these things properly. Bill Bain, the founder of Bain Consulting has said “Your best new customers are your existing customers.” And that’s a very nerd approach to marketing, and something I believe in, and what I’m going to argue in this podcast, is we should be using promotions effectively to try to keep your customers around longer, and that’s just money well spent.

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The problem is, most retailers out there discount too much. Think of Bed Bath & Beyond for example, where I know I get a 20% off coupon every week. Online retailers are often no different, they discount way too much, and what they’re doing here, what they don’t realize is there’s this hidden thing called a subsidy cost, and that’s basically the cost you bear by spending promotion dollars to create a transaction, when the customer would have bought anyway.

In many cases, you’ve got customers out there, credit card in hand, ready to buy, and you are giving them a promotion to buy something on sale, so naturally [00:02:00] will lose out on the full margin, you’ve spend a promotion dollar that you didn’t have to spend, that’s called a subsidy cost.

On the flip-side, you’ve got plenty of retailers who never promote at all, and I get that. A lot of these are ones who really care about their brand. I was just at an E-commerce conference last month, and met a lot of great brands that are selling online, trying to really build up that brand equity, and one of the first things they said to me is “Hey, we just don’t want to promo. We never want to be on promo, we never want to be on sale.” I get that, too.

The problem is that customers naturally have a lifecycle, and they will eventually burn out on your brand and probably defect, and stop being customers anymore, that’s a very good time to use a promotion.
Let’s redefine the word promotion as a pretense to this podcast, it’s not just a discount on a retail price. Promotion can be any sort of incentive that you give that customer to get them over the hump to buy. If you do really care about your brand, and you never want to have your brand associated with a percent-off discount, then for you maybe a promotion means something a little extra, like added gift with purchase, or access to improved service, or free shipping, or something like that. Take the promotion as I’ve defined it that way if you are trying to build up a brand and never want to be on discount. I get that.

Again, the problem is that some retailers our there are discounting too much, they’ve got a high subsidy cost, and other retailers don’t discount at all, and they’re missing out on an opportunity to retain their best customers.

The solution that I use, that I don’t want to say I’ve come up with, bit it’s been around in database marketing for a while, is called [00:04:00] a discount ladder, and a discount ladder is basically a system that ramps up the magnitude of the discount or the promotion, with the increasing likelihood that the customer will never come back.

For example, after 30 days a customer hasn’t purchased. If in your case, a customer purchases every couple of weeks, if after 30 days, if after 1 month that customer has not purchased from you, you send them a 10% off coupon, and after 60 days if they still haven’t purchased, you send a 20% off coupon, and after 90 days if they still haven’t purchased, you send them a 30% off coupon. As you see, I’m ratcheting up the discount amount with the likelihood that the customer will never come back to buy from you again, and it works. These kind of discount ladders work, because customers go through phases. They go through phases of their engagement with you. Initially they are very engaged. Think about yourself when you find a new retailer where the clothes fit you perfectly and you love the look, you’re really engaged, you shop there a lot, you might go back again, and again, and again.

After a while, you move from that engaged phase into a more apathetic phase where you could care less, there are a couple of other options out there, maybe you check out the site from time to time. Then after that apathetic phase there’s the detached phase, where you’re really not going back to that website at all, and the retailer really has to impress you to bring you back.

Those 3 phases – Engaged, apathetic, and detached, are almost universally true in retail. It doesn’t matter if you sell washer machines, BMW’s, or underwear, the duration of those phases is certainly very different if you’re buying a car versus if you’re buying shaving equipment, but in general, customers follow [00:06:00] that lifecycle where they’re really engaged with you. Initially, it’s a great time to sell to them at full margin, and eventually they defect, and they become more detached, and that’s when you want to ratchet up your promotional activity.

A discount ladder’s a great solution, and if your most recent customers, your most engaged customers don’t take the bait of the lower discount, then as they get less recent, as they get more detached, then the appeal of the bait increases until at some point they can’t resist it. That’s the logic behind ratcheting up your promo over time. If the customer never takes the bait, then they’re not worth marketing to in the first place, or they’re not worth the expense of promoting to. I would argue that you forget those customers and move on, they’re not good customers.

Again, doesn’t have to be discounts here, we’re just talking about the magnitude or the value that the customer places on this promotional activity. Discounts are the easiest thing, and that’s what I’m going to talk about here today, but again, it could be gifts with purchase, or a service, or anything else.

There are 3 big advantages to implementing a discount ladder, or using this discount ladder mindset when you think about promotional activity.

1. The first advantage is, it’s way more profitable than just sending blanket promotions out to your list. Why is this? It’s because you’re best allocating your promotional budget. The least recent, the least likely to respond customers get the biggest discount, whereas the most recent, high response customers get the smallest discount. When you implement something like this, you’re hedging against subsidy costs, you’re minimizing them, and you’re reallocating that money to where it’s needed most. If you have a fixed amount of money to spend on promotions, I would argue that you don’t want to spend promotional dollars [00:08:00] on every customers, you want to spend more money on the customers who are least likely to come back to your site to buy, so this is just a more efficient, more profitable way to spend your marketing budget.
2. The second advantage is that, if you implement a discount ladder, you are reducing email overload. You’re getting closer to that holy grail of the right message at the right time, right? Your emails become instantly more relevant. This is permission marketing at its best, Seth Godin would love this, because if I am buying from your retailer, and I receive your email every week or so, and at the top of each email there’s your space for your promotional activity, I would expect your promotional activity to be more relevant to me in my cycle of engagement with your retailer. Initially, when I love your retailer, I don’t want to hear about promotions, I just want to hear about new products and cool things, and then over time when I’m becoming more and more detached, and maybe I’ve found some other alternatives, that’s when you require promotional activity to bring me back, so you’re always keeping the emails super relevant. I want to keep opening them up because you’ve got the most relevant offer for me at the right time. That’s reason number 2.
3. The last reason, reason number 3, is that if you implement a discount ladder, you’ll find that they can be automated, so you create this automated customer retention effect, right? Any email software now, from MailChimp, to Klaviyo, to Bronto, offer email automation, some level of email automation, well the beauty of the discount ladder, is you can set certain rules and build your emails ahead of time. Going back to my earlier example, the role might be after 30 days I want this 10% off coupon to go out, after 60 days I want the 20% off coupon to go out, [00:10:00] and after 90 days I want the 30% off coupon to go out, and if at any time a customer acts on one of those coupons, and they purchase, they fall out of the sequence, so they do not get the subsequent coupons, right?

This is a much easier way to come up with your promotional activity than sitting in a conference room every week, or every month, and debating what kind of promotions you should send out that month. I would say 90% of the larger retailers that I work with, they do the latter. They spend a lot of human time and cost and energy on the weekly promotional meetings where they come up with promotions that are really marginally different, week to week, and they don’t tap in to customer behavior like a discount ladder does.

Automation is a great advantage of a discount ladder, and I would add the caveat here that you should be testing discount ladders over time. You want to find what the most effective ones are. In my experience, response rates vary by type of media ads, your business, one business may find that a 10, 20, 30% ladder works very well, another business might need smaller discount levels, so 5, 10, 15, for example. Still, another business might work better with free shipping, free shipping, gift with purchase, free shipping, even bigger gift with purchase, something like that, so it’s important that you test out these combinations month to month, before you settle on one discount ladder that you set in stone using your email software.

That’s what I wanted to talk about today, discount ladders. I wanted to talk about what they are, and 3 advantages of them, and in the next podcast, I’m going to [00:12:00] show you how to get started implementing a very basic discount ladder in your own retailer to start making money, virtually in 1 hour, a month.

As an added benefit, if you go to nerdmarketing.com and sign up for my email list, I’ll send you a template that I use to set and score a simple discount ladder at my own retailer, and at many of the clients I work with. This is as close to a guarantee as there is in retail, this discount ladder that you will get if you sign up for my list, will make you money if you’re not using it. It takes an hour or 2 to set up, really an hour or 2 to work on it every month, and you’ll have a real life’s out retention program, so that’s it on discount ladders, I’ll talk to you next time.

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Again, my name is Drew Sanocki, and this is the Nerd Marketing Podcast. Thanks.