UNDERSTANDING YOUR CUSTOMER BASE:
FULL PRICE VS DISCOUNT BUYERS
What follows is a lightly edited transcript of Episode 4 of the Inevitable Success Podcast with Damian Bergamaschi and special guest Mike Ferranti. (Listen Here)
How could you use purchase history to better understand your customer base?
Today Mike Ferranti walks us through just that with a holistic marketing strategy to maximize both profit margins and profit volume for any business especially retailers. Turning the tide starts with understanding how we the marketer can have a material impact on profit margins if we tailor our approach to both full-price and discount buyers respectively. As a bonus, we will also share a simple winning email tactic that maximizes the value of your best customer and by the way, most marketers are not doing this.
“The reason we had you on today is that we read your recent article named ‘Full priced customers, How to get and keep them’ and wanted to go deeper on that topic. Can you share with us why you went there?”
Like the answer to many questions, it starts with customers. Going back to the recession, which I guess we bottomed in around 2009 retailers were under tremendous pressure. And so, what was their highest performing Channel? What was the vehicle that was easiest to access revenue through? Of course, it’s e-mail right. Low cost, reasonably good impact, good response, and when you send enough of it eventually your response rates will start to dial down. Now we saw some similarities in the use of direct mail but of course, it’s a much higher cost medium. Brands were looking to get more response and times were tough so what did they do? Well it’s simple they discounted and they discounted and they discounted and they discounted. The upshot of that is kind of what you might expect really, that becomes habit forming that becomes an expectation and once an individual is expecting the discount then there’s a behavior that is very measurable and the results will make most retailers very uncomfortable when they have the resolution to see it. And that is the consumer starts to wait and defer purchasing until the discount comes.
“What are ways that they could know that it’s happening, that they can measure it. You know you mentioned the results.”
The first dichotomy that you look at is who are the customers that bought a discount? Who are the customers that bought at full price? So, one of the things we were always surprised to see is the number of brands that didn’t have dexterity with their customer data to answer that question at any point in time. You know one size fits all or batch and blast is still the predominant form of outbound marketing even today. Why? It’s easy.
That’s the biggest thing, it’s easy number one and number two when the costs of the campaign are so low an email is the primary culprit here.
It’s not email that’s the culprit it’s the marketer’s decision making based on resources they have, timing etc. But when they make that decision to just batch and blast and not really discern between those two and to be fair that’s usually driven by the fact that the level of effort to get that information would be significant for many brands. And so, I might not have been so surprised when you know a 50 million dollar brands struggled to get that answer and execute accordingly. You have conversations with executives at 50 billion dollar businesses and some of them say the same thing. That’s really the driver it’s you know the perceived impact in the moment is always quite low the pressure to act and drive that sale is always high.
When it comes to e-mail the costs of doing so are quite low. The unit cost of sending e-mails approaching zero so that that’s the confluence I think that gets them to exhibit that behavior in the first place. So, if you segment between and if you make the commitment that we’re going to discern between full price buyers and discount buyers, that’s the first step. That could be done by calculating off of list price or you know depending on how your transactions are logged, stored, or captured that may be a little more difficult or a little less difficult. But what we’ve found is it is not a monumental task it just requires a commitment to do it and to be fair there’s a third category that I think is as important and maybe more important to discern and that is those who have had both behaviors. There are folks who only buy at discount, folks who have only paid full price to date, and then, of course, folks who have done both. They’ve bought at discount and they’ve paid full price.
“Some of the things that folks expect, for example, is if a customer is wealthier and more affluent, of course, they pay full price. I can’t tell you the number of luxury brands or accessible luxury brands that we’ve worked with who had that expectation only to find out that those luxury customers were consuming discounts as much and sometimes more than other customers.”
We had an interesting example where a luxury brand identified a segment of their customer base that was more towards the millennials they were younger they were buying luxury products. But the initial reaction from some of the highest paid people in the room as you know to get those kids out of here out of our database. They don’t have any money we can’t sell to them. So, the first response to that is, of course, well they’re already your customers so it appears you do sell to them. But let’s go a step further and in addition to finding out that they were posting very high average order values
We also realized that they were more consistently paying full price. So now you must reconcile this limited affluence or low affluence younger customer is paying full price. That gets to sort of a little bit of the psychology of full price first discount. So, it’s not just the fact that they paid less but there’s a certain experience today and it is it can be prevalent amongst Millennials but it’s spreading very quickly where there’s an experience you get when you get the best deal. It’s exciting. It makes you feel like you accomplished something. These things lead to the experience more than the dollars are driving that behavior. By the same token those millennials that we saw paying full price consistently they got a certain experience as well and that experience was they were making a purchase that made them feel good to have the very best product the very best quality the very best brand. It felt good to spend a lot on it. It really distinguished that purchase as an event for them.
“You mentioned in the article that the customer is always in control. Is that what you mean when you say that?”
The customer is always in control for sure, especially in the digital age. By that I mean they have perfect information. More perfect information than ever before. So as compared to walking into a physical store having limited options and being inconvenienced with going to another store that might have the product. Of course, in the digital age, every option is a click away. But nowadays every brand can be searched for a coupon or an incentive. Promotions are categorized and indexed by Google. There are numerous players out there. There are plugins that go into your browser that will automatically tell you where to get the best deal on that product or price or category. There’s a new type of pressure on the retailer. Finding the individuals that are more likely to appreciate that experience of buying the brand, the experience of buying something that is maybe a little bit of a stretch. Is very different than finding a customer or a prospective customer who really appreciates the experience of getting a great deal. Not to mention doesn’t necessarily have the same resources. So that’s a big part of what you can expose when you can really dissect those populations.
“If you’re going to put a strategy together with a goal of improving margin where would you start?”
The very first place I would start is by looking at where the margin comes from in your existing customer base. There are two ways we look at that margin. Number one there’s margin on a unit basis or on a transaction basis and then there’s the customer that produces the greatest margin across the board. So, it’s important to remember that just because a customer consumes some promotional value or utilizes incentives it doesn’t necessarily mean that they’re bad customers. In other words, if I get a 10 percent discount when it comes and that gets me to make one more purchase but that increases my total margin that I produce as a customer for that brand by 25 percent.
“Then when you say that you mean you know the life-to-date value.”
Yeah, margin volume. So, the concept of margin volume versus margin as a percentage. Same thing with profit margin versus profit volume. So, it’s the total amount of profit or the total amount of margin that a consumer is responsible for.
“So is it important because you know that’s the absolute amount of money that you make as a business?”
It’s tied to that and I only point that out because we will see. Sometimes it’s driven by the CFO’s office or some mandate. You know the pendulum tends to swing a little bit one way or the other and sometimes wildly. If you’re going to miss the quarter any discount is acceptable to make it even from brands who are really saying we’re not about discounts that’s not our brand. You’ll see that behavior. However, it also goes the other way where the percentage margin that they get on every sale must be at a certain place. And so that that change is kind of the way you think about it. Whereas if you’re doing it, segmenting and analyzing the customer base on the value that you can get from a specific target then you can begin to maximize margin volume or profit margin for that cohort. That’s considered kind of next level for a lot of brands especially middle-market brands.
“Can you just explain when you say cohort what do you mean in that context?”
In this case that might be those who bought both full price and at discount or it might be the full price only buyer. Right. So, if we see in one group, one segment, or cohort that the full price only buyer and we’ve seen this more than once full price only buyers. It’s full price so you’re getting 100 percent of the margin that you would expect to get can’t get any more than that.
On the other hand we’ll see in those who bought at both full price and that discount if the discounts are managed wisely and that can be done because we know that a full price buyer has the potential to buy full price and therefore all we must do is throttle that incentive down for that target. That might be enough to get them to buy. Why? Because we already know they aren’t a discount only buyer. So that little insight alone can inform the nature of the promotion, the value of the promotion dollars that are consumed, and it could tick up or increase your margin on that sale. Now if that were also to accelerate or get one incremental sale in a period that will increase total margin volume or total profit margin.
“So that’s maybe how you would approach somebody that did both, full and discount. How would you approach somebody or a cohort that did exclusively full price or exclusively discount purchases?”
Let’s start with full price, full price is easy. One of the things we like to say is, “never offer a discount to a full price buyer again unless you really must.” So, the default behavior when folks say there are two ways to go about it one is there’s a discount approved and we want to get more response and we need to reel in some sales and so marketing might get an x percent offer approved. Well, we can look at that cohort and say okay well this is a full price only buyer if were approved at 20 percent plus free shipping. Maybe we just start with free shipping. Let’s see how that does. If we don’t get a click or an open assuming we’re using email we could always have a follow up a few days later or a week later with 10 percent and free shipping. What you’ll find is you’re real and some of those at full price. So unequivocally you have increased your yield you’ve increased your margin volume.
“That’s interesting. Even in my own experiences I’ve seen that there is a difference between you know it’s not just a dollar amount it’s how you offer you know the incentive. I have seen differences in behavior of offering free shipping versus taking the exact same a dollar amounts off the purchase price and it blows my mind because it shouldn’t, in a rational economy do that, but it really does.”
There’s many other examples of that. We have seen examples where if you were to say it’s a 10 percent off offer with an average order of 100 dollars has ten dollars in value if you offer 20 dollars in value on a gift card with purchase now that 20 dollars cost you nothing unless they make a subsequent purchase. Right. Right. And so, these are some of the things that direct marketers do.
The important part is to remember and I think the thing you could take away from that and your listeners can take away from that is you know there’s a lot of ways to be creative around how you communicate with those different cohorts and those who have exhibited different behaviors when it comes to discount consumption promotion consumption. The best example for the full price buyer I think just starts with it with a different type of touch altogether. Right. And folks are sort of wringing their hands sometimes saying what are we going to send. And they say we could send new product we could send the same products but you know what’s going to stimulate behavior. One of the things that we have tested and seen some value in is simply extending a touch that is appreciation based.
While that may sound like you know well that makes sense or that won’t work or something else. Everybody has an opinion. What we’ve seen is when you have a very high-value customer and you simply say you’re one of our most valuable customers. We appreciate the relationship you have with us. We appreciate that you’ve been with us for a long time. Thank you. Well, I would just say stop and think about how many of those e-mails you’re getting how many of those are relevant. How many of those have you seen and it does, in fact, generate sales even without a direct call to action or an incentive? So that’s a starting point right.
If you’re thinking about customer relationship management at any level or CRM that’s not a bad starting point for someone who’s really trying to elevate their touch strategy or their communications with customers. In the process, you’re improving your yield and your margin and you’re improving the number of full-priced purchases you could pick up.
“You’re a marketer and let’s say you execute one of those types of touches to this cohort what does the type of KPI or metrics you would check first to see if it’s working?”
So one of the things we like to do and this simple one that everybody could do is if you use an appreciation touch we do a couple of things. One is I like to have a letter from either a designer if it’s the brand.
I like to have something that really gets a little bit of intimacy with that brand. Someone who’s engaged with the brand tends to appreciate that more and you can measure that in both open and click rates and e-mail and you could also measure it in conversion rate. So, the most engaged customers with a brand will you know will tend to buy off a message that simply said thank you. That’s the 0 percent discount. That’s the full price purchase you love to have. And oh, by the way, you’re doing it with someone who you’ve taken a positive step in developing the relationship. We teach children you know to say thank you and please but we could probably do it a little more in our marketing.
“What do you do if through the Great Recession you had to adopt a strategy of being aggressive discounter and you are now hopelessly addicted to discounting and you don’t know how to get out of that. What do you do first?”
We have a sort of very famous case study on this today. Everybody remembers J.C. Penney brought in new executives; an ambitious new plan that we’re going to have low prices every day and we’re going to get rid of the coupons. We’re going to get rid of the discounts and of course, that was one of the sorts of epic examples of it’s simply not working. Ultimately what did they do they brought in the old CEO and the first thing he did is he brought the promotions back and everybody got to have that experience they had at Penney’s, which was hey I got a great coupon in the mail. Can’t wait to go to the store and buy it. Now I can use it online. You know that has been proven. And there are other examples of other brands. Talbott’s tried it. It is very difficult to change habits right changing consumer behavior is not something you do simply by taking away the thing that triggered the behavior.
So the bad news is there’s no silver bullet for taking a consumer who’s is exhibiting and developed the habit of either waiting for the discount or is habituated to the experience of getting a deal. The stimulus is that incentive shows up and the reward isn’t the dollars to your earlier point. It isn’t that just you have five dollars more in your pocket. The reward is when you feel like you got a bargain. You got better than expected maybe better than most. It feels like winning right. If that feels like winning for you as a consumer then taking it away feels like losing right. So that’s not a problem I would look to solve by just taking away the discounts. That just doesn’t work.
The only thing that we’ve seen work is when we again break that discount buyer down into subgroups and we start looking for is who are the folks that have the highest engagement, the greatest monetary value. And we start doing experiments with reducing promotional impact. And you must create offers that utilize promotional impact but don’t degrade profit or margins as significantly. And so that example where we come up with a clever marketing offer that is a much higher incentive if you make the second purchase you get a gift card with purchase feels like they’re getting more. But it’s divided across two purchases. Of course, we could set and test the level of that subsequent purchase. And so, we could be creative with pricing and promotion to find pockets where we can do better because not everybody is the same even within that cohort. But that said there’s a target that will do much better and that’s customers you don’t have yet.
That’s where it comes down to identifying net new customers that are far more likely to spend full price in the first place.
“So if I kind of summarize that it sounds like you must first have a bias to acquire new customers that are likely to buy full price right. Next would be to start treating the discount buyers looking for offers or messages that maximize value. But knowing that you’re not going to completely change that purchasing behavior and then also take your existing full price buyers and start to give them different types of touches that are not discount for example appreciation or some sort of exclusivity. For those that do both you’re basically experimenting with the messaging offer. So, it’s basically no matter where you are to go forward strategy you just start treating groups special, as they should be.”
As soon as you take the reality of that cohort into consideration whatever it is good or bad you know the odds of being able to move the needle go up right. And so, the only thing I would add to offer promotional messaging approach is segmentation right.
So by breaking that cohort down into its components we now start to find pockets where we could see heterogeneity or differences between the two and those differences are where the opportunity lies. So, you know I mentioned new customer acquisition one of the things that you know folks often say well we just want to sell full price purchases to our existing customers and what you know sometimes there’s an educational component there you must let the data speak for itself. You must show that while you can make incremental progress a lot of these organizations and again it starts in the CFOs office oftentimes you know they’re looking for a bigger change. They’re looking to really turn the tide. And if that tide took you know since 2009 to create that that could be a real challenge. Right.
There’s a couple of things that I would point out. Number one for the brands that can do it. If we look back at the sources that those acquisitions came from or some of those acquisitions they came in a discount. Typically, the first is a discount purchase. So that’s our first thing we’ll look for who are all the individuals in the customer base in the database that bought at discount on the first purchase then we might stratify that down and say for those individuals how many of them ever bought at full price. Subsequently, the biggest cohort of individuals that bought at discount also have another challenging attribute or something in common and that is they also only bought one time. And so that gets into a whole conversation we can have about one time buyers.
But it also gets to who are these folks in the first place and the source is just one part of it. If that source is slick deals dot net which is a very famous and highly trafficked discount website or any one of hundreds of coupon sites that tells you a lot about what kind of customer that is and the thing to remember is that any time you send out that heavy 80 percent off offer on clearance and you send it to everyone the odds that that offer winds up on one of those discount sites where you will now attract more and more of those discount consumers heavy discount consumers discount only buyers that those sites are exclusively trafficked with. Well that starts that’s going to start to have implications on the makeup of your customer base. You’ll start to stack the deck with more and more discount buyers by default.
The other thing is affiliate programs often will do the same thing. So, you’re a top affiliate could be driving a lot of discount purchases. We’re so excited because we get a low cost per order but we also got a low potential customer and now the marketers are faced with the challenge with the database full of low potential customers go increase margin.
“I’ve absolutely seen that and it’s not just on new customer acquisition. A lot of those you know they can cannibalize your existing customer base because there’s this behavior where you’re about to check out and then you go and see “wait can I get a dopamine hit. Can I win?”
These things should be scary for a marketer. After we present all the data and we define the problem and it’s all its color you know there’s this sort of moment where the hand-wringing begins and they say well we needed a better idea what can we do.
The best strategy here is to start to stack the deck in your favor as opposed to against it and to do that you must stack it with high potential high-value customers and that is a that is an entire conversation and maybe an entirely new podcast. But that’s the real answer right. If you really want to change the behavior of a customer base you need to introduce new customers that behave differently like better customers better customers.
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Host: Damian Bergamaschi
Special Guest: Mike Ferranti
Mike is the Founder and CEO of Endai, brings 20 years of marketing, analytics and technology depth. He has developed solutions and software to major brand clients and niche marketers alike. Mike is a recognized thought leader in the database, search engine, email, and direct response marketing. He provides commentary and analysis to the media including Bloomberg TV, Brandweek, and DM News. Mike earned an MBA from The University at Albany and an Entrepreneurial Masters from the Massachusetts Institute of Technology.