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Making Loyalty Profitable
A discussion of how to profit from different types of loyalty functions

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Loyalty Systems for Profit

Discount Cards: Easy to set up, hard to manage

As business people focused on turning a profit, we easily can see the benefits of offering a discount in some way. That means that some business people first think that offering a discount is the best way to get more business. Some people look to offering a discount card. Others look to more elaborate systems.

Discounts, by themselves, are not very profitable to the business. A discount is cutting into your profit. In some cases, the discount cuts the profit completely and you are selling at a loss. To make discounts profitable, they need to be managed. This management consists of planning the discounts, negotiating the discounts, reviewing the results, informing customers of what they need to do to get to the next level of discount, and making sure that the discount is targeted to the right customer.

First off, the general public is not as motivated by money as we are. Thus, in most cases, we do not get the results we want when we just hand out discount cards in a retail setting. So, how to make discounts profitable?

A. Plan the discounts

The first time a business person thinks about offering discounts, they often think only of handing out a discount card. The customer will bring that card back in and get a percentage off the total bill. This is an unplanned discount as it applies to all goods and services. We don't have the same profit margin on every item nor do we make as much off of every customer.

One way to plan the discount is to offer different discounts to different people. For example, someone who can drive a lot of traffic to the place could get a higher discount than those they send.

A planned discount can be where the discount percentage can be different for different items we sell. Thus, items where we don't have the higher gross margin will get a lower discount. This requires that the discount system gets integrated into the POS system so that the discount can be applied item by item to each receipt.

B. Negotiate the discounts

"Business to business" discounts are always negotiated. You can start with one level of discount and offer a graduated discount system based on how much gets sold each year.

We can do the same with consumers. Discounts can be based on the volume of purchases from the previous month.

C. Review the discounts periodically

One of the biggest problems with many discount systems is that they were set up and then, never reviewed to see if they make sense. The result is that there will be customers who are not purchasing much who are being granted a large discount and others who are much better customers not getting much from us.

The review of the discounts needs to include the volume of purchase by each customer, the types of items or services being purchased, the profitability of those items, and the current discount level. This periodic review will help to make sure that the discounts are actually producing the needed sales increases.

D. Let the customer know what is needed to reach the next level

A discount needs to be a motivator for the customer to spend more money with you. In order to do that, the discounts need to have different levels. Then, it is important to periodically remind the customer of what they would need to do in order to get to the next level of discount.

When you do not have a set of different discount levels, then the customer only needs to do the minimum sales needed to get a discount and could just stay at that level. However, when customers can see that with a little more effort, they could get a bigger discount, they may be motivated to spend that extra amount with you.

However, customers forget how you have organized the discounts. They need to be reminded of that ever so often. With these reminders, you let the customer know that you are indeed tracking their purchases and their use of the discounts you are giving them. They can be shown what their purchase history is and see what they could do to get the next level of discount.

E. Tailor the discount program to the types of customers you have

It is important to recognize that not everyone reacts to a discount offer the same. Business owners and others who are "money aware" react the strongest to discount offers. Thus, discounts are best in a business to business setting.

The general public does not react to discounts as much. It takes a lot of training and pricing work to get the general public to react to discounts. For example, JC Penny found that they had to price items quite high and offer deep discounts to get the sales they wanted from the general public. They found that the average purchase price their customer was paying was only 47% of the average list price. That is a very deep discount.

To make discounts work and be profitable takes a lot of effort. It takes planning, negotiating, reviewing, and customer education to make discounts profitable. This effort can pay off when a customer can swing a lot of business your way.