Optimal Discount Levels and Uncovering Hidden Consequences

A leisure industry client faced an apparently simple decision: identifying the optimal retail discount that would meet two important objectives. First, an increase in membership of their core loyalty programme – as a result of advertising discounted retail rates for loyalty card members, it was hoped that new customers would be attracted. Second, an increase in overall sales margin – it was hoped that the discounted rate would lead to clients actually spending more in the shop than previously (to compensate for the discounts). Clearly a discount promotion could help with both objectives, but what level of discount is optimal? Large enough to attract new customers, but not so large that total margin is eroded by the discount itself?

Three levels of discount were trialled over a three month period. A small discount had no noticeable effect on attracting new membership – the savings did not draw enough attention to actually push non-users of the loyalty programme to sign up. A big discount clearly improved perceptions of the loyalty programme, with both higher sales and lower cancellations confirmed. And although it also increased spend amongst the loyalty card members, total spend did not increase so the end result was an erosion of margin. The third option that was trialled, with a mid-way discount level, looked promising with positive impact on both membership and total margin, but before rolling it out we wanted to understand what had eroded the spend at the higher discount-level.

Analysis revealed that it was non-members who were buying less, where the high level of discount was trialled. We confirmed that this was not due to cannibalisation, in other words this was not due to loyalty card members buying “for” Non-members. So why were non-members buying less? Analysis of site MI and EPOS data revealed that queues were to blame, something the client had not anticipated. The high discount had such appeal and attracted so many more loyalty card members into the queue, that they were in effect bumping Non-members off the queue.

Having confirmed that this unexpected impact was behind the overall negative outcome, the client was able to implement the mid-level of discount, whilst prioritising queue management to maximise margin. Rollout of the mid-level discount was successful, with both original goals being met: improved acquisition and retention for the loyalty programme, and incremental retail margin. One year on the client is now developing a second tier of discount levels, building on this original work.

Leisure industry client, operating across 80+ locations, servicing tens of millions of customers each year

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