Ep 120 | Should you discount during COVID?
This week Allison Hartsoe, CEO of Ambition Data discusses a nagging question: Should you discount products to reap higher sales during COVID? She talks about the impact for businesses of discounting now. Then she outlines a discount strategy that any company can use based on your data maturity and current consumer demand.
Must Read! Should Companies Discount During COVID?
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Allison Hartsoe: 00:00 This is the Customer Equity Accelerator. If you are a marketing executive who wants to deliver bottom-line impact by identifying and connecting with revenue-generating customers, then this is the show for you. I’m your host, Allison Hartsoe, CEO of Ambition Data. Every other week I bring you the leaders behind the customer-centric revolution who share their expert advice. Are you ready to accelerate? Then let’s go! Welcome. Everyone. Today’s show is about discounting. I originally invited a guest to help me discuss this topic, but the questions were so deep and numerous that I ended up doing the research myself. I reviewed several articles from HBR, as well as a podcast and the classic database marketing text called the customer loyalty solution by Arthur Hughes. And today, I want to share with you what I suspected and what I found out about discounting during COVID. I’m Allison Hartsoe, the CEO of ambition data, my team, and I use digital data to create healthier, stronger businesses as measured by the strength of their returning customers.
Allison Hartsoe: 01:13 We talk about this as customer equity and customer lifetime value or CLV is the tool we use to measure it. You can think about us as tech-enabled services because, through our personal approach, we tune the data to reflect your business. Now, this approach is not right for every business, but for a fast-growing direct to consumer businesses, I think it’s a natural fit. You can find out more by downloading our free customer-centric, CMO guide, which you can find at ambitiondata.com/cmo-whitepaper. So today we’re going to talk about discounting. Why should you care about discounting during COVID? I’ve been thinking a lot about this question because, for the first time ever, I saw an 85% off discount in a store that was not closing. And I realized that discount sales clearly drive purchase behavior. One direct to consumer shirt company I knew use this as a regular strategy.
Allison Hartsoe: 02:15 They religiously pushed sales, all types of sales, Father’s Day sale, warehouse sale, graduate sale, any kind of sale on and on. If you transacted with this brand, it became very clear that you would never buy anything at full price when you could just wait for the next sale. And that is a bonafide strategy. We all love to get a great deal, but when this online retailer cut the introductory price too low, they sacrificed value and started acquiring customers who performed differently than their classic high-value customer. The new discount shoppers expected that the first shirt they bought at a deep discount would be the same quality as a more expensive shirt. And that’s the value disconnect. And they complained bitterly when it was not. These complaints reached other prospects and customers who started sharing stories that the customer’s quality had changed. Had it? No, but the sense that you paid a reasonable price for a good quality shirt eroded across both the low-value discount shoppers and the higher value long-term shoppers as a result of this increased social media reviews from the new low discount shoppers.
Allison Hartsoe: 03:31 So the question I’ve been thinking about is should online retailers discount to drive up sales now and reap the short term revenues, which could offset crushing losses that many businesses are seeing, or should they hold their pricing and maintain the value of the brand, perhaps strive to create deeper customer relationships, customer connections, even if revenue is down. Classic customer-centric thinking about discounting is that it’s a mass marketing technique. Discounts are not meant to build close personal relationships. Think about it. A close relationship is built on shared values, quality, friendship, service, lots of good communication. And in the same way that you might not give your neighbor $5 for a cup of sugar because it would be insulting. And instead, you might offer a cup of coffee or a few flowers from your yard. This is the same thing that discounts do. Discounts send the wrong message to valued customers that, Hey, we want to buy your loyalty.
Allison Hartsoe: 04:40 Our products are overpriced, and we don’t really care about you. We only care about your money, and while we’re not overtly trying to send that message, it’s very easy to do that. But I believe in the digital age that we can use discounts appropriately with the customer base. It’s almost like with a good sense of data. Maybe we could have our cake and eat it too, but it’s complicated. So I want to do something different in this episode. I’m going to make a two by two grid, and I invite you to do this with me together. I’m going to break down why discount is complicated, and what kind of discounting structure you should be using in certain circumstances, I’m going to use demand, meaning the overall consumer demand for your products during COVID and cross it with analytics, maturity, particularly digital data analytics maturity, meaning how easily can your company understand customer behavior and execute make a change based on that data.
Allison Hartsoe: 05:45 So if you’d like to hit pause, grab a pen and get a piece of paper to follow along with this very cool two by two grid. Now first, let’s talk about the axes. Consumer demand is closely related to industry during COVID. If you cannot sell at full capacity, think travel or restaurant industries, then it’s a darker world than if you sell online. And you’re seeing a demand increase, think Amazon or groceries. So, our first column or our Y access is low demand versus high demand. So that’s top to bottom. Second, our X access. We’ll have data analytics maturity, and this maturity controls how simple or sophisticated your strategy can be. For simple analytics, think limited-time sales or clearance rack by SKU category, but for sophisticated think baseball ticket prices, which take into account whether team, location, timing of the sale. So, our X-axis is low maturity versus high maturity.
Allison Hartsoe: 06:58 Then I’ll, now she got another minute and number the quadrants bottom left one, top left two, bottom right three and top right four. That’s the order that I’ll use to discuss the discount strategies. And note that a company can put a foot in several quadrants at once. So, for example, the warehouse supply chain could operate differently than the eCommerce arm. And I’ll give more examples as we go. Quadrant one low demand, low digital maturity. In this quadrant, think of retail stores that depend on foot traffic or anything you might find in the mall. These are commonly places where we see big sale signs and maybe even expect discounts, but these companies can do more than just raise or lower a price, they can be really creative. And along these lines, I need to credit Rafi Mohammed, who wrote the art of pricing as well as the 1% windfall for this next statistic.
Allison Hartsoe: 08:04 He talks about McKinsey, who did a study, where they found that a 1% increase in price if demand is how constant would average an increase in operating profits by 8.7%. Now you might be thinking as I was, well, why does that matter? Well, when you think about this, it shows how much small changes in price can create big changes, positive or negative in the bottom line. So, while McKinsey was talking about an increase in price, think about that as you’re slashing prices, what that could be doing to the operating profits at the bottom line. And while supply chains in disarray, I would be very hesitant about adjusting price. If, as a retailer, I really wanted to be in business next year, especially if like Hertz, my business was already fully leveraged. So, what can you do in this quadrant? Rafi says to consider discounting with dignity. And I love that phrase.
Allison Hartsoe: 09:07 So just definitely had to credit that to him. And that just basically means that instead of slashing prices, consider that the price is coupled with our perception of value. Now, I find that’s true on almost all of our quadrants, but it gets more and more granular as we move across the four quadrants. And so, in this particular quadrant, which is subject to price slashing, it’s very important. How do you maintain that coupling with value? Well, one way to do it is to think about good, better, best options, and that has the effect of highlighting the value of the better and best products. So, when you say good, you’re basically saying here’s my value at the better and the best levels. It also allows room for upgrades, which could be quite frequent, depending on your industry. One example of this, going back to our mall analogy is the jewelry stores.
Allison Hartsoe: 10:04 If a diamond jewelry store takes advantage of this concept, they often do it through the trade-up idea. So maybe today you can only afford a small diamond for your loved one when you get engaged, and maybe you’re young and just starting out, but tomorrow you can trade in that diamond and buy the next size up. So, the retailer goes from too expensive, no sale to getting the sale and anchoring future sales while keeping the price and the value-aligned. Do you see what I mean? So, could your company benefit from a trade-in or a trade-up policy during the time of COVID? This is a great thing to think about because it keeps customers anchored into future sales by interacting with you again, and again, next up is quadrant two with high demand and low digital maturity. You can think of quick-service restaurants. In the time of COVID, the lack of lunch traffic from office workers, as well as a reduction in catering from offices, hurts quick-service restaurants in downtown areas.
Allison Hartsoe: 11:14 But they’re also seeing an uptake from suburban stores where people are downshifting that is that the families or individuals who want to order out, but don’t want to pay top dollar every time, maybe ordering from a quick-service restaurant instead, Oh, many quick-service restaurant chains have very data technologies that keep their data maturity low, but here creativity can be about understanding what your customer’s true needs are. So pre COVID. I think about this customer experience option as something like Fred Meyer’s childcare, while you shop, they have these play areas where you can check in children under six in a small area. And instead of them reaching out to pull things off the shelf and stick them in your cart, you can shop in peace for up to an hour, or similarly, McDonald’s also has well-known play structures. I think I heard once they had the most playgrounds in the entire world.
Allison Hartsoe: 12:14 So quite an achievement there. And they also, this technique does not require intensive data crunching to know that these experiences fulfill a customer need, and that need will help increase sales. Now, post-COVID most restaurants have added delivery services and online ordering, which might’ve been lacking before, but when it comes to discounting loyalty programs associated with it with an app is where they really succeed. Even if they’re not ready to act on the information, the data collected now from loyalty programs can be used to help understand customer preferences. And we’re discounting makes the most sense, which is to incentivize a higher frequency or recency of purchase. Would a loyalty app make sense for your business now? Would it help you collect customer information that your current systems are missing? And could that, in turn, help you become more strategic about your discounts? You bet. I also want to mention in this quadrant bulk-purchasing when sales are down. Some companies encourage the purchase of multiple items at once.
Allison Hartsoe: 13:28 Think of most household consumables like cleaning products or paper products or food staples. I don’t know if you’ve noticed this, but I’ve certainly noticed recently in my Amazon searches that I’m seeing a lot more in bulk items, even what I’m just trying to buy one. One can be hard to find. So, we give up and rationalize that. Well, we’ll use all of this eventually. This is an excellent strategy of “discounting” without losing the alignment of value via the bulk sales. So, another great strategy for this quadrant two section. Now quadrant three is all about low consumer demand and high maturity. And particularly now I want you to think about casinos, hotels, airlines, uh, in this quadrant. Years ago, definitely pre COVID, one of the casinos in the South Lake Tahoe area, asked this question about loyalty. Sure, our loyalty program, are we basically paying people to come, who would otherwise buy from us? If you’ve ever tried to get a loyalty program off the ground, that you have run into that question from someone on your management team.
Allison Hartsoe: 14:42 So the casino was running a vast loyalty program, which comped guests’ rooms and drinks and chips to gamble. And the belief was that these perks, which were essentially discounts for highly valued customers, were necessary or they would not return. So, they ran a test with a control. I just have to stress that because every now and then, I see a test without a control. Why do we need to put a control behind every test? Because if we do not, then we cannot tell the effect of the test. It’s always a lot going on. You have to be able to separate what happened in the test. So, they started with a small audience and tested their theory where they were overcompensating this high-value customer group. Yes, but not totally. They found that certain features like a free work room were highly valued in certain groups of customers.
Allison Hartsoe: 15:35 So they simply had to realign the value with the program. So, they went a little bit further and found that they could differentiate the program by customer lifetime value. In other words, customers who love the brand and came frequently would respond to different incentives like special dinners or event tickets. Then customers who did not come frequently and responded to hotel rooms and free drinks. Now fast forward to the COVID area, and consumer demand is low, lower than we’ve ever seen it. And what we see is hotels and airlines tapping into the future value. So, customers know the rates are very low, and the way they tap into future value is to know that there’s pent up demand, and they allow travel for these particular discounts far into the future or future. So, here’s a great rate on a cruise. You can book through 2021, or here’s a great rate on a hotel package.
Allison Hartsoe: 16:38 Again, book to 2021, 2022 far into the future. We know that they’ll be demand and it will be bounce back. And part of this is also the no worries cancellation policy, book now if you can’t travel, push it out or cancel with no extra fees. Now the theory here, too, is that this is a sunk cost for the consumer. And at the point that you go to cash in that vacation, you might even upgrade in the future. So what could you do in this quadrant to remove the mass treatment of your loyalty program? Are you passing out endless points without the right incentives to help people cash them in? Of course, customer lifetime value is a great tool to help you target the right segments, even when demand is low, and your tactics need to be future-facing. Now, finally, we’ve arrived at quadrant four, which is high demand, high maturity.
Allison Hartsoe: 17:38 This quadrant has changed a lot. Think of pre-COVID Disney world, carnival cruises, certain ballparks, and post COVID think food delivery services like grub hub and Uber eats. And I’ll even put Domino’s here too. There are quite a few companies that are being pushed into higher maturity here. I’m going to use Peloton as an example because not every company started out with high demand and high maturity in this quadrant. In fact, there was a great cartoon that came out from Marketoonist, which pictured a bunch of executives sitting in a conference room, talking about the impact of COVID and this wrecking ball coming in as digital transformation, basically showing how digital transformation was accelerated in the COVID era. So, I’m going to use Peloton as an example, because last fall, I finally broke down and bought a Peloton bike. It rains a lot in Oregon where I live.
Allison Hartsoe: 18:43 So I got the bike, and I tried out multiple programs in this system, in the heart of COVID less than six months later, I sold it. Why? Well, despite all of the electronics and the metrics and the really geeky stuff that I love to see about getting in shape, the company hadn’t figured out me. I did not want to train as a competitive cyclist. I wanted to keep in shape, but not kill myself doing it. And there was no setting for this. Essentially the machine could not tune its recommendations to me, and that’s not pelotons fault. It’s just that at the highest level of maturity companies operating in this space, no, they actually have to improve or augment the data that’s coming in. Peloton never asked me the right question that they could use to augment their data other than basic class ratings and instructor ratings, no qualitative information was collected from me for the entire time, until after I left.
Allison Hartsoe: 19:47 Now, compare that to stitch fix, a company that surveys you constantly while also augmenting the descriptive details about all their clothing so that it can make good matches and improve them. They have a huge competitive advantage in the way they collect and augment their data. So discounting, companies in this space use discounting as just one of the many arrows in their quiver, but you’ll find that it’s most often attached acquisition. It sounds like this. Join now, and we’ll give you a hundred dollars, which I like to interpret as our cost to acquire you is way higher than a hundred dollars. So, if you become our customer for this, we both win. Okay. That’s good. But what these companies are really doing is they’re pushing the relationship with you to be part of our tribe. They want you to reflect your values in their brand.
Allison Hartsoe: 20:45 Now, I definitely wanted my athletic values to be reflected in my purchase of a Peloton, and Disney similarly wants you to feel special as their guests. And they’re very good at that. So, for companies with high data maturity and high demand, they’re very good at using emotional appeals to trigger value and help you believe that you are part of their tribe. And so that whole aspect of discounting is back to my original example, with the cup of sugar, from the neighbor, you really feeling that cup of the flowers come over for your cup of sugar. Instead of somebody giving you the $5 coupon for your cup of sugar. So, there’s a discounting effect, but it doesn’t feel that way. A different example is Dominoes. They were already high maturity when COVID began, and their stock price has increased another 17%. Part of their maturity was that they could deliver to any location, be it your neighborhood park or your house.
Allison Hartsoe: 21:53 And they had extensive tracking of the order from the moment it was placed in the oven to the car, to your door. And so, they were really appealing to your sense of wanting to know that it’s ready, that food is coming. I mean, you almost feel like you’re in a restaurant and somebody is taking your order, and they’re checking back with you, but they’re also not shy about offering discounts and they gamified them so that you end up with a free pizza after every six orders, which of course increases the frequency of your orders. We started with quick-service restaurants in quadrant two, and dominoes are a great example of one that crossed over to quadrant four through the skilled use of data. In this quadrant, strategic, skilled use of data allows companies to run very narrow tests and make granular improvements that impact the bottom line as well as to innovate.
Allison Hartsoe: 22:51 The trick, however, is to keep doing this, but it becomes difficult for competitors or imitators to keep up. If you’ve mastered your data, then what areas of innovation do you see sense exist in your company, but maybe you just haven’t tested them yet. A good place to start is to ask around the call center, programmers, anyone on the front line. They probably already know what you need. Start there and see what kind of great innovations come out. Those innovations can be so much stronger than just a discount. So, what’s the grand conclusion. Should you discount during COVID? Well, it is important to keep pricing steady, and to get creative with discounting, align it with value. Think from your customer’s point of view, because they don’t think about discounts as cost-plus, which might be how your financial department thinks about it. They think instead if I didn’t buy this here and now and what I go somewhere else, and how much time would that take, and would I get a better price?
Allison Hartsoe: 23:58 So let’s say you’re convinced and you really want to try some different tactics for discounting or here’s a tactical checklist that you can think about. First, consider your company’s readiness to execute and the broader consumer demand for your products right now. That was basically how we outlined the quadrant, the two by two grid. So, thank you for working through that with me. I like to take these problems apart and think about them logically. And that was what made sense to me when I started to unpack the discounting strategy. Is that discounting strategy, right for you now, where do you fit in the quadrant? Are you high or low demand now? Are you high or low in your customer data maturity? Now, there is a similar chart that I built mapping the customer-centric maturity curve, which I use completeness of customer data on the Y-axis and your ability to execute on the X-axis.
Allison Hartsoe: 24:56 That one’s a lot of fun. I’ve had that out for a while, a link to it in the show notes, but you can also find it by searching journey to customers centricity ambition data, or I think it’s also journey to customer-centricity on YouTube. Now, if you need help, of course, you can always get in touch. I love this stuff because it makes companies not just better, but more resilient over time. And I think that’s kind of the better world that we all strive for is companies that are sensitive to their customers, innovating, driving change, existing really well, bringing value that just pulls it all together for me. Now, if you want to talk to me, feel free to email me at allison@ambitiondata.com, or you can find me and talk about this subject or a variety of others that we’ve had on the podcast. I’m on LinkedIn as Allison Hartsoe, H A R T S O E, or on Twitter @ahartsoe A H A R T S O E, as always. You can find links to everything we discussed, including an image of our two by two grid today at ambitiondata.com/podcast. Thank you for joining me. Remember, when you use your data effectively, you can build customer equity, it’s not magic. It’s just a very specific journey that you can follow to get results. See you next time on the customer equity accelerator.