Coupons and direct discounting are not always effective tools for enhancing customer loyalty and improving profits.
There is a lot written about coupons and discounting in academic literature, and most experts agree that tactics like these don’t generally enhance customer loyalty. Here’s what some loyalty experts have had to say:
“A [loyalty] program should reward the use of the card over time rather than on a given purchase” (Nunes & Dréze, 2006).
Bain & Company’s Frederick Reichheld (1996) suggests that coupons and promotional pricing do not “inspire loyalty in new customers, and actually discourage it in old ones.” Referring to a restaurant study, Reichheld points out that “loyal customers who do not have coupons feel short-changed … [and] frequent price promotions tend to convince them that [the] product is not worth its normal price.”
Have you ever felt annoyed when you went to pay for something and then realized you forgot your coupon? Ever not wanted to pay full price for a product or service for which you regularly see 30-50% discounts for?
Reichheld’s Bain & Company colleagues, O’Brien and Jones (1995), warned that “onetime promotions can cost a great deal of money and do not, as a rule, generate loyalty. They do indeed change customer behavior but often in ways that are undesirable in the long run. Any positive impact is washed away as soon as competing companies launch their next promotions.”
Adding their own insight, Yi and Jeon (2003) state that “price promotion is likely to elicit overstock problems and reward price-sensitive brand switchers rather than loyal customers. In addition, price promotion does not have a long-term perspective needed for nurturing customer loyalty.”
Coupons and discounting encourage additional purchases, but additional purchases do not always lead to higher or more profitable sales in the long term. To be effective, coupons need to be used strategically, and with care.
Coupons, discounts and special promotions can encourage consumers to buy more and buy more often. A sale on a particular product may encourage a customer to buy more than they need, and stock up with the excess. “Ultimately, [however] customers will settle back into a state of purchasing what they actually need,” resulting in the long term in consumers buying what they would have eventually anyway, but at a discount which is expensive for the retailer (Keiningham et al., Loyalty Myths, 2005, p.120).
Frederick Newell (2000) recognized that coupons under certain circumstances can be effective, “but they don’t build relationships, and they don’t buy brand loyalty.”
Discounts and coupons work for some brands and businesses, but not for all.
We at PR Loyalty Solutions believe that coupons and special promotions under certain circumstances can be effective tools, like at enticing new customers to try a product or service for the first time, or enticing consumers to first come in the door. Once the promotional offer has brought the customer’s attention to the brand, however, the trick is to make the customer loyal and return to buy again. Special promotions, we argue, do not necessarily enhance customer loyalty, except perhaps in the case of low-cost producers and transaction buyers; rather, they can bring consumers to the starting line of the process of loyalty building. Businesses need to be very careful with coupons, however, and, when employing a coupon campaign, businesses need to use them strategically.
(Copyright PR Loyalty Solutions, 2011)
(Source: “Customer Loyalty Programs: What Makes an Effective (Community-based) Program?”, Peter Roundhill, MBA Thesis, University of Victoria, 2007)
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