Discounts vs. Gifts in loyalty programs for digital buyers

Following up on our previous post regarding the benefits of setting up a loyalty program, here we discuss the correct proposition to make such programs effective within the overall sales and marketing strategy. More specifically, we analyse whether it is better to provide discounts to the most loyal customers or if it is better to provide some other form of benefit such as gifts.

A recent survey by Comscore (April 2015) indicates that digital buyers perceive discounts and gifts as the most valuable benefit for enrolling into a loyalty program. Other items with lower value ranking were Free Shipping, Exclusive Access to Sales, Elevated Status etc.

We will focus on discounts and on gifts since these are ranked as the most valuable to the customer.

comscore loyalty

In the Comscore research, Product Discounts ranked as most valuable between 58% (US) to 65% (Western EU), while Free Product, Gift Certificates or Cashback for Frequent Purchases ranked between 47% (Brazil) to 62% (US). This means we can assume that from a customer perspective the difference between cutting down the price and giving a gift is negligible. But is this true from the company perspective?

We in kooma·looma believe that it is much better for a company to add value to its offer instead of reducing the price.

If the customer perceives the same value, his purchase behaviour will be the same (or at least quite similar) whether he is offered a discount or a gift of equivalent value. And from a company cost perspective the two strategies could be quite equivalent.  However discounts don’t necessarily foster a long term loyalty. They will make the returning customer happy for sure. But what if the same or higher discount is made by your online competitor to acquire a new customer? Especially in a digital ecosystem, where customers can easily compare prices and obtain the best offers, discount strategies that lead to price wars should be avoided. On the other hand, providing customer with points that can in the future be redeemed in the form of gifts has some great advantages:

  1. They add value to what the company is selling (while discounts reduce the sale value and also the perceived value by the customer).
    If the gifts are valuable and are something that the customer really needs or aspires to have, the program can stimulate stronger return behaviours. For example knowing that since I am loyal I get a discount is different compared to knowing that if I return 10 times I will obtain a certain prize.
  2. The cost of the loyalty is actually incurred when the customer demonstrates his loyalty. If a company will give the customer a gift only after 5 purchases have been made or after certain amount has been spent, the company will incur all the cost of the gift only when the loyal behaviour has happened. For the users that have purchased less than the target set (example made only 2 purchases instead of 5) the company will not incur expenses, but still have in place a strategy to incentivize users to return.
  3. Gift based loyalty campaigns let the company set measurable loyalty promotion targets, strategy and monitor results. For example a company may notice their loyal users purchase their products 7 times in one year, and might be interested in stimulating the user to make 10 or more purchases in one year. By giving a prize after 10 purchases a company can actually target a higher average purchase rate.
  4. Gifts can also be an insight into a company’s customer. If there is a variety of prizes, knowing what prizes are valuable for a specific customer enables the company to understand more about its customers’ needs and aspirations.