Where the ‘Culture of Discounting’ Meets the Law of Diminishing Returns

When the retail market got tough, retailers got desperate. As the slumping economy dragged down sales, many retailers reached for the obvious solution: the discount.

They printed reams of coupons. They offered recession specials. And they took deep cuts on their margins. In fact, they offered so many discounts and made them so easy to find, that consumers became addicted to them.

It turns out that retailers may have been offering discounts to customers who would have been willing to pay full price without special incentives – thus cutting into their profits.

The question is, now that they’ve created this “culture of discounting,” is there anything retailers can do about it?

Ben Salmon of Pitney Bowes Software, who has a background in retail, says retailers need to get more sophisticated about their marketing. While retailers have always been good at providing incentives to buy, they continue to make a critical mistake.  

“They treat every customer the same,” Salmon says, with “very untargeted, unsophisticated communications.”

An advanced form of predictive modeling called uplift analysis could help retailers avoid giving away the store, so to speak.

Uplift analysis goes beyond traditional segmentation and customer targeting and allows marketers to identify the customers who will pay full price without a discount. It classifies customers by four types.

• Sure Things: Customers who will make a purchase without being offered a discount.
• Persuadables: Customers who can be convinced to buy with the right offer.
• Sleeping Dogs: Customers who would be spurred to look elsewhere if they received an offer. 
• Lost Causes: Customers who will never buy from you again.

Naturally, the “persuadables” are the group that interest marketers most. So, once identified, these customers would continue receiving offers, while the “sure things” would not. That way, offers and their associated costs — from delivery to the potential loss on margin — are kept to a minimum.

By narrowing their focus, marketers can strengthen customer relationships, avoid alienating customers better left alone, and increase ROI.  

“The benefits of targeting smaller groups are clear — cost savings achieved from fewer contacts by telemarketing and lowering of customer fatigue through selective contacts,” says Suresh Vittal of Forrester Research.

Uplift modeling has been used successfully in service industries like  telecommunications. T-Mobile Austria, for example, achieved higher retention rates at sharply reduced costs by marketing only to “persuadables” – customers it identified using Portrait Uplift from Pitney Bowes.

But retailers in general have been slow to embrace this new approach, even though Gareth Herschel, Research Director at Gartner, calls uplift analysis a “must-consider concept for every organization with significant campaign management activities.”

Steve Topper, a solutions architect with Pitney Bowes Software, theorizes that many retailers have been so focused the last couple of years on developing their social media presence and coming to grips with multi-channel marketing that they haven’t had the time or resources to experiment with technologies like uplift analysis.

“I don’t think the retailers know what’s in their arsenal yet,” Topper says. “There’s only so much they can take on at one time.”

Consider the case of J.C. Penney. Over the last year, the flagging, century-old retailer tried to eliminate hundreds of sale events in favor of a consistently low-price approach. What they once described as “sales” became “month-long values,” with prices dropping as much as 40 percent across the board. They added higher-end product lines. They freshened their advertising.

But customers did not respond. In the first three months of this year, J.C. Penney lost a staggering $163 million, according to news reports.

“It’s very, very difficult to retract and put the genie back into the bottle, when that’s what people expect you to be,” says Sucharita Mulpuru, a principal analyst at Forrester Research.

But Topper says retailers simply can’t afford to perpetuate the culture of discounting as it exists today.

“The last four years, in particular, retailers were challenged and they went into the discounting business and now they’ve got to get out of it,” Topper says. “They’ve got to get out of it from not only a pricing standpoint but from a marketing standpoint as well.”