Are You Alienating Your Best Customers?

By Rieva Lesonsky

In today’s economy, offering discounts, sales and price cuts is almost essential for a small business hoping to attract and keep customers. But did you ever stop to think that price cuts or discounts could actually be driving your customers away?

That’s the result of research by Eric T. Anderson, a professor of marketing at the Kellogg School of Management, and Duncan I. Simester, a professor at MIT. The professors studied how price cuts affect businesses’ best customers and those who have previously bought products at full price.

For their study, Anderson and Simester worked with a retailer that typically had high prices and only rarely discounted products. The professors created test catalogs and mailed two versions—one with shallow discounts (an average of 35 percent off) and one with deep discounts (an average of 62 percent off). They then tracked the purchasing habits of the 55,000 customers who received the catalogs.

In the short run, the lower prices did increase demand. However, when the study examined customers who had recently paid full price for an item, they found some interesting results. When this group got a catalog with deep discounts, they were far less likely to make a purchase. “A substantial portion just stop buying,” Anderson said. “We call this the boycott effect.”

Those who got the deep-discount catalog placed 14.8 percent fewer orders than those who got the shallow-discount version. More alarmingly, 34 percent of customers in this group who got the deep-discount catalog placed no orders at all, as did 27.1 percent of those who got the shallow-discount catalog.

Not only did the discounts lower the full-price customers’ purchase rate, but the effect continued for nearly 20 months after they got the catalog.

“Our study showed that the customers who are antagonized [by discounts] are not the worst customers—they’re the best customers,” Anderson said.

What are the takeaways for business?

• Consider any price cut carefully, balancing the need to attract new customers with the risk of alienating old ones.
• If you must offer discounts, target the offer—for instance, only to new customers or those who have never paid full price in the past.
• Keep offers private. Instead of store signage or site-wide discount announcements, use mail or email to provide deals to the groups least likely to pay full price. This way your current customers won’t know about the deals and won’t be offended.

Image by Flickr user VectorPortal (Creative Commons)

This entry was posted on Wednesday, March 21st, 2012 at 6:00 am and is filed under Business Development, Email Marketing, Marketing, Sales Process, sales process, Small Business, small business. You can follow any responses to this entry through the RSS 2.0 feed.


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