Why Discounts and Rebate Programs Don’t Work

Death by discounting

Times have changed and so should the way automotive retailers engage customers. Discounting is a bad habit with many pitfalls and many discount-heavy retailers in all types of categories are now out of business.

Rebate pitfalls

Rebates don’t influence customer behavior

Do you think a 10% discount will influence customer behavior? Think again…

Black Friday specials with 50% discount have desensitized consumers to rebates and discounts. And because so many shops offer the same 10% discount, it does nothing to differentiate the retailer in a fickle marketplace. 

When confronted with a 10% discount many consumers will roll their eyes and sarcastically think, “really … a whole 10% off … are they kidding?” It is not likely to grow the customer base.  

Discount programs evaporate profit

Discounting may lift your sales, but at what cost?

Most automotive retailers are working on much smaller gross margins than other retail verticals. A tire and auto service retailer is lucky to have a gross margin of 25 to 30%, so a 10% or 15% discount consumes 1/3 to 1/2 of their profit.

A 10% Discount means 10% less revenue from existing customers!

Many retailers appear to be in denial about the fact discounts cost them money. A store owner once told me: “Well it’s not a real cost…we don’t get an invoice for those discounts.” However, offering rewards of 10% simply means you have 10% less to pay for rent, staff and suppliers!

Discounting creates the wrong type of customer loyalty

The final problem with using discounts is the sort of customer it tends to attract - deal chasers. These consumers are rarely loyal to any retailer. They use the internet to scrounge around for the best discount, show up, make their purchase, and leave. There is no ongoing relationship. They will only be back if the merchant has the best discount, which they can find next time they are in need of the service or product in question.

If rebate programs don’t benefit retailers, what’s the alternative?

The best rebate alternative - Reward Programs

Loyalty programs increase customer engagement and customer retention

Customer loyalty programs are permission-based sales tools. Customers who join are opting into the program voluntarily. They give the merchant permission to engage – they agree to be added to an email list or text database and receive regular communications about different offers. 

The email open rates for reward program campaigns are much higher than normal, and your message actually gets through. It’s much cheaper to send an email to your customer list than to advertise online, on radio, TV or in print. 

Customers are rewarded based on their purchase behavior. Customer data are used to make relevant offers to the customer. The customer experience is enhanced with a relevant offer which leads to a better response.

People who join a reward program are likely to be the merchant’s best customers. They know they will earn rewards on an ongoing basis and are much more likely to become loyal to the retailer.

Reward programs create optimal ROI

Reward programs are also performance-based sales tools. Instead of a sunk marketing cost like discount or a paid ad that can’t be tracked, every dollar invested in a reward program is tied to a sale that is easily tracked using the retailer’s shop management software.

Because a reward relationship is based on the consumer’s expectation of repeat visits and accumulated rewards, the reward cost can be more modest (usually 2% – 3% of the purchase amount) and actually saves the retailer 7-8% versus discounts on every impacted purchase.

The net of it all is the reward program, while better engaging the customer, helps reduce discounting and associated advertising costs. Further, because reward earners tend to be open to ‘loading up” in order to earn bonus rewards, the retailer can capture greater market share from the customer, further increasing sales and profits – at the expense of the competition.

What difference can it make?

Retailer Case Study

Consider the following case study of a tire and auto service retailer with multiple locations which illustrates the significant impact of a properly structured and executed reward program. After implementing a loyalty program, existing customer spending increased by more than 40%. New customers that enrolled in the program outspent customers who didn’t join the program by a whopping 152%! 

Here are the details: 

We used six months of pre-launch transactional data to determine the retailer’s historical average number of visit per customer, the dollars spent per visit and total spent in the period. We then compared these averages to six months of post launch data, using four groups of customers:

1. Existing customers who did not join the reward program
2. Existing customers who did join the reward program
3. New customers who came in for the first-time post program launch and joined the program
4. New customers who came in for the first-time post program launch and did not join the program

As you can see, the results are quite compelling…

While existing customers who did not join the program visited about the same number of times in the pre and post launch periods, existing customers who did join the program increased visits by 22%, coming in almost four times – almost 75% more often than non-reward customers. 

As well, new customers, many of whom were attracted by the opportunity to earn rewards, came in 45% more often than new customers who did not join the program. In an industry where the average customer only has each vehicle serviced 2-3 times per year, this is a huge win for the retailer.

 As with the number of visits, the average transaction size was also profoundly impacted by customers’ participation in the retailer’s reward program. Existing customers who did not join the program continued spending about the same amount each visit, while customers who took advantage of the program increased spending by 16%. Further, new customers who joined the program tended to come in with a big initial purchase, knowing they’d earn a lot of rewards, spending about 75% more than non-reward customers.

When you multiply the higher number of visits by the larger transaction sizes, you can clearly see the impact a reward program can have on participating customers: existing customers who joined the program increased total spending by over 40% – a difference of 129% versus customers who did not join and new reward-earning customers spent 152% more than new customers who did not join the program and 75% more than existing customers who didn’t join.

In summary, reward programs create better communication and transaction volume with customers, while replacing more expensive discounts and the costs associated with the advertising needed to communicate them.

Lift & Shift offers a powerful B2B reward platform that can help your company leverage its sales data to drive incremental purchases with customers and channel partners or motivate sales staff. We work with manufacturers, distributors and service providers to analyze sales data, identifying purchasing gaps and other valuable targeting opportunities. 

We create and deliver highly relevant offers to customers, in-house sales staff or sales associates, motivating your target audience to respond, using a wide array of appealing reward options as influencers. Our performance-based reward structures deliver an unparalleled return on investment, with absolutely no wasted budget. 

Our customizable reward platform enables clients to easily benefit from a robust loyalty reward program. It's affordable and includes Lift & Shift’s turnkey professional program administration. We take care of everything so you can focus on your key initiatives.