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GUEST COMMENT Big discounts could mean a big mistake for retailers this holiday season

Christmas is fast approaching, and it’s that time of year when retailers are focusing all of their efforts towards cashing-in on the increased traffic and transactions. Over the years, the number of transactions before Christmas has shot up as extreme discounting from Black Friday and Cyber Monday.

Monday campaigns become more widespread

For many retailers, the months leading up to Christmas can account for up to 40% of annual sales, with first-time purchasers bringing in 50% more transactions over the Christmas period. With trends like these, it’s clear why the holiday season can be a make or break moment in many retailers’ trading calendars.

Using price reductions to entice customers has become an increasingly popular practice for retailers looking to make the most of the holiday uplift in sales. But whilst retailers can make large chunks of their profits during the pre-Christmas sales period, simply offering huge reductions as a means to attract new customers might be doing more harm than good.

When it comes to driving brand value and building customer loyalty, it’s essential retailers think about the long-term impacts relating to sales, revenue and customer retention.

In the face of growing competition, the pressure for retailers to discount heavily before Christmas is huge. To get more people through the door or through the online checkout, retailers very often find themselves competing with each other by offering the biggest price cuts. Whilst this can certainly increase sales, shifting stock is unlikely to sustain long-term profit and revenue.

Having a discount offer is most valuable for retailers if it helps the customer to buy full price items alongside reduced items. If big discount offers aren’t designed to encourage this behaviour, savvy shoppers who know exactly where to look for these best offers will simply pursue the lowest prices and then stop engaging with an outlet as soon as the sale stops.

So whilst discounting is certainly an effective tool for acquiring new customers, how can retailers develop better strategies for customer retention after the Christmas sales peak?

Research we conducted at Optimove, based on the experiences of – e-commerce companies we work with, revealed some fascinating insights. Looking at the data from over 1 million transactions by online shoppers over a two-year period, we found that discounting a product by 30 percent or more, attracts those customers who make a habit of buying heavily discounted items – the ‘cherry picking’ customers.

Retailers end-up attracting these shoppers when they offer such large discounts, and the cherry-picking customers do not return to buy other products unless a similar discount is on offer.

We did find, however, that where a first-purchase carries a discount of between 5 and 30 percent, new customers tended to be ‘charmed’ by the reduction, and more likely to return to the brand to make subsequent purchases.

This data clearly demonstrates that discounting can be a useful tool to support customer acquisition and to build a lasting relationship – one which extends further than the initial purchase – but that careful attention should be paid to the level and type of reductions. Smaller discounts are more likely to encourage customers who will return and buy more products in the future.

Currently, many retailers are discovering that Black Friday deals don’t always generate as much income as hoped. With heavy discounts, profit margins can be tiny against sales of large volumes of reduced items.

Loss-leader pricing strategies to draw consumers in with the hope of selling non-discounted goods rely heavily on the promise of establishing an on-going relationship with the customer. It takes a lot of time and effort for retailers to acquire and sell to a new customer just once, so it’s in a retailer’s best interest to think carefully about how their Christmas season discounting strategy supports customer retention, in order to avoid costly mistakes.

If the insight from data analysis is telling us that offering smaller discounts can be more effective for retaining customers and boosting profits in the long term, what else can retailers do to implement a better discounting strategy that’s just as competitive at this time of year?

Retailers shouldn’t forget their existing customers when thinking about acquisition strategies – retention is just as important as an acquisition. With loyal brand customers often being more lucrative holiday shoppers, marketers should focus on this group and strive to please them during the season of holiday uplift.

Applying a data-driven approach can help retailers deploy a discounting strategy with the power to generate long-term relationships with customers. With access to data analytics and personalised services, retailers can apply discounts which can be tailored to customers as individuals, creating a genuine sense of value and relationship for the customer.

Using historical data to create targeted and personalised shopping experiences for existing customers can be highly effective in helping your brand stand out and appeal to existing customers at this time of year.

Offering VIP treatment, with access to limited edition items for example, or rewarding loyal customers with pre-sale shopping rates, free shipping or gift-wrapping can be very powerful draws to pull in existing customers over the holidays. Viewing the holiday season as a time not just to acquire new customers but to convert first-time buyers into year-round shoppers is key.

With such pressure to offer massive discounts before Christmas, retailers should take the time to think about what they hope to achieve from the holiday season and what will really appeal to their customers.

With insights revealed from analysing customer data, retailers can avoid the costly problems associated with blanket discounting and create an approach that not only attracts new and existing customers but will also inspire them to return and add long-term value. Ultimately, strategic discount strategies can help retailers build long-term relationships with their customers and boost their profits not just over the holiday season, but year-round.

Author: Roni Cohen, Director of Data Science at Optimove.

Image Credit: Fotolia

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