It is a generally accepted principle that it is more expensive to acquire new customers than it is to keep old customers loyal. Additionally, Pareto’s 80-20 rule tells us that our most loyal customers are responsible for bringing in as much as 80% of our overall sales. It’s easy to see why customer loyalty and rewards programs have “gone viral” in the business industry over the last decade.
With the dawn of flash sale websites like Groupon and Living Social, however, businesses – large and small alike – are forcing us to take a closer look at these long-standing business maxims. Many businesses are jumping on the flash-sale bandwagon, seeing the droves of new customers lured into their stores and offices by one-day discounts and super savings. But very few of these “wagoners” are evaluating the potentially negative impact these deep-discount offers can have on the loyalty and retention of their best customers.
A 2010 study by Rice University’s Jesse H. Jones Graduate School of business discovers that one-third of the businesses using Groupon promotions are breaking even on these offers – at best. Additionally, customers that take advantage of Groupon offers generally have the “coupon-clipper” mentality. They are visiting the promoted business solely because it is offering the best price with its Groupon offer. They don’t make return visits, and they don’t spend as much money or tip as well as the broader customer base.
Your most loyal customers, on the other hand, don’t need coupons to get them to visit your business. They know through experience that your business is where they want to take their patronage. With these customers, certain promotional offers can in actuality prove more damaging than beneficial; for example, the loyal sports aficionado that orders season tickets each year would be less than enthused to discover a 50% Living Social offer the day after he ordered his tickets for that season.
Careful planning is required to ensure your existing customer loyalty and retention is not negatively impacted as you attempt to maximize your flash-sale and one-day-discount efforts. We suggest the following four practices to help you find a balance between the two:
Alert Your Existing Customers of Upcoming Special Offers
Providing your current customers with a notification via email or another direct marketing outlet will allow them to prepare for the upcoming sale or special offer. But more importantly, it communicates to your customers that you want them to be the first to know about special savings – and everyone likes knowing that they are in the loop. Keeping your customers “in the know” helps you earn and maintain their trust – and is a far better than letting them find out about Groupon deals after the fact.
Prepare for the Potential Rush of New Customers
Flash sale customers are probably going to be prepared to encounter longer lines, empty shelves and flustered – or unavailable – employees. Your loyal customers, however, are returning to your business expecting the same level of quality customer care that they’ve received on every past visit. Ensure you have the proper resources in place at your business – prior to launching a Groupon or Living Social deep discount offer – to prevent your existing customers from having negative experiences.
Offer Discounts Only at the Right Time
As with all marketing efforts, when using Groupon or Living Social you need to ensure you are offering the right special offer or discount at the right time. For example, if your business runs on a seasonal cycle, you probably don’t want to run one-day discounts immediately after the heavy buying period. Deep discounts may be infinitely more effective when used to bolster sales during a seasonally sluggish period or when used during an intense buying period to win new customers away from the competition.
Don’t Discount the Power of Word-of-Mouth Advertising
When they see the temporary sales spikes that come with many one-day discounts, some businesses have mistakenly decided that Groupon was the basket in which to store all their eggs. And while sales spikes of that nature are far from a bad thing – especially in today’s economy – businesses should take care to ensure that flash sale sites and deep discounts don’t replace word-of-mouth advertising or customer loyalty programs. According to a “Referral Programs and Customer Value” – a recent study published in the January 2011 issue of the American Marketing Association’s Journal of Marketing – referred customers generate higher profit margins than other categories of customers. Encourage your loyal customers to refer their friends and family – and reward them for it. Keep your good customers happy and they’re bound to bring in more good customers.
Using the latest research and long-time business maxims, we recognize that focusing on long-term customer retention is the true key to overall business success. The most profitable and loyal customers are not created through one-day discounts, but through a solid history of positive experiences founded on good marketing practices and quality customer service.
Flash sale companies like Groupon and Living Social do appeal to many businesses as a method of new customer acquisition – and can be effective when used properly. Businesses should take the proper steps to ensure that acquiring new customers does not come at the expense of long-term loyal customers.
Have you tried using Groupon, Living Social or any other flash sale sites to drive new customers into your business?
How have these offers worked for you?
What challenges have you faced with using deep discounts?
How have you resolved these challenges?