Earlier this week we had Jason clean the ducts in our house. This is the second time we have hired him. The first time Jason helped us he was friendly, polite, and took the time to explain why duct cleaning is important and what his process was. We liked the guy, so we hired him again. He gave us a “loyal customer” discount of $50 off. Many businesses do this. Other businesses offer coupons and discounts for new customers. This begs the question, “Is it better to offer discounts to new customers or loyal customers?”
“That’s a great question Tim!” you’re probably thinking right now. This is a question I’m thinking through myself, so let’s explore the answer together.
Offering Discounts for New Customers
- Offering new customers a discount lowers the risk for people to try your product for the first time. This means more people will try out your product. All things being equal, the more people that try your product, the more people will buy your product again.
- Offering new customers a discount makes it easy for you to track the effectiveness of your marketing campaigns. For example, if you provide distinct coupon codes for various marketing campaigns, you can measure how many new customers you received from each. If you have a good system in place, you will even be able to track the lifetime value of the customers and learn which marketing avenue brings you better customers.
- Offering a coupon can be a good way to get new or potential customers to sign-up for your email list, which gives you more opportunities to communicate to them in the future.
- Offering a discount means that you lower your profit margins. The bigger your discount the more likely you are of attracting new customers. Some businesses will offer such a large discount that they end up losing money at the beginning, in hopes that new customers will stay and continue buying. (Here’s a great article in the New York Times on calculating the math of whether it’s worth it to offer a Groupon deal to attract new customers.)
- If new customers are offered a discount for the first purchase, they may expect to always have a discount in the future. The bigger your discount, the less likely it will be for your new customers to pay full price in the future.
- Offering discounts makes your business look desperate. Many people believe that “you get what you pay for.” With a discount, they perceive your product as lower quality, which means that they will devalue your service.
- Discounting products will attract bargain hunters, which are usually more difficult customers. They are more demanding, less loyal, and take up valuable resources from your company.
Offering Discounts for Loyal Customers
- It’s easier and cheaper to sell to loyal customers than to find new ones. It costs a business 5-10 times more to acquire a new customer. Loyal customers also spend 67% more than new ones with repeat purchases. The higher operating margins your business experiences with loyal customers means that you can easily give discounts while remaining profitable.
- Offering discounts to loyal customers makes them feel appreciated. It’s a great customer retention tool. Our favourite Japanese restaurant offers a loyalty card (pictured below). Every 5 meals we buy, we get a free dish. I love going there because it has great food, but also because I like collecting stamps on their loyalty card. It’s fun every time we get a free item.
- This is a great way to introduce new product lines to your loyal customers and make it easier for them to try it.
- Offering discounts through a loyalty program is a great way to collect important information about your loyal customers (i.e. their buying habits).
- Offering discounts can be a good way of getting customers that haven’t purchase in a while to consider buying from your business again.
- Loyal customers are people that appreciate and value your service at the full price. Offering them a discount could indicate that you do not value your product at full-price.
- You train your loyal customers to get into the habit for waiting for a discount before they buy. For example, the web hosting company we use offers a 55-75% discount every Cyber Monday (the Monday after Black Friday). This has happened 4 years in a row. Sometimes I wait for this deal before I buy their product. Even though I value their service, it’s nice to be able to get a good product AND get a discount.
- Offering discounts or a loyalty program takes time and resources.
Should you offer discounts to new customers or loyal customers (or to both or to none)? The “right” answer is probably different for each business.