Peter Krišťák, 18.01.2018

Is there a short-term loyalty?

Retailers never stop surprising us with how persistent they are in constantly playing new tricks on us, in the form of sales and price promotions, in order to elicit our business from us, which they would otherwise never get. Which of these gimmicks work?

For the first time I came across the expression ‘short-term loyalty’ during one, in other respects high-quality, conference. Not only do I consider the brand loyalty to be a myth (the customer is not loyal but just temporarily satisfied with the value, which he perceives when being served by the brand in return for his/her money), the term “short-term loyalty” is for me an absolute oxymoron. It is no wonder that in Czech Republic and Slovakia a half of all daily grocery products are sold at discounted price, when such a concept has becomed natural in the language of the people responsible for their sales and marketing.

No, short-term loyalty does not exist. What exists are only short-term marketing activities with the ability to increase revenue temporarily. However, in order to really increase also the overall absolute net margin and to avoid adverse long-term consequences (a spoilt customer expecting reduced prices also in the future; an image of a poor-quality sale; a price war) several rules have to be followed.

Children and terrorists are not to be negotiated with

The first rule is to employ emotion-generating marketing activities instead of price promotions always when possible. In our region, we experience this tactic mainly as parents of children younger than 10 years. Although we do our best to resist in the beginning, finally, our kids always find a way of making us collect some soft toys, hero figures, or stickers. This activity of retailers may seem silly at first sight. However, as long as the activity is properly performed, the trade effect in a form of extra margin definitely exceeds costs of its creation. Moreover, competitors will never be able to copy it completely (unlike a price promotion) and it can be repeatedly realized for years. Its disadvantage is its widespread use which, in an attempt to reach the required effect repeatedly increases the costs of creativity and implementaiton. In some variations (interesting competitions, the wheel of fortune etc) it works also for us, the adults.

Do we really get the VAT refunded?

The second rule says that if need to use price promotions, you should employ clever psychology. For instance, retailers do not actually refund us the VAT. They just tell us in different words that they have a roughly 16% discount for us. They do it on purpose because in most people not paying the VAT evokes a discounts of 20% (VAT rate in Slovakia), which automatically saves the retailers their money. What is more, this offer produces in customers a feeling of a very special offer thanks to which they have been able to “outfox the system” and get something for free. The advantages are that this communication does not attract so much customer attention to the extent of discount, as well as the fact that it is too silly for even an average competitor to copy. Clever psychology is also hidden in the offers such as “buy two and get one free”, free delivery or a gratis gift.

The later the hour, the higher the discount

The third rule is to segment customers according to their willingness to pay as best as possible. Kaufland in Slovakia has come up with an offer to increase gradually the price reduction on fresh assortment, fruit and vegetables in the evening hours, with the amount of discount growing every hour till the closing-time. Though the tactic in this case will not probably be temporary, the offer does not apply for the whole day. This is an example which neatly illustrates the effort of retailors to segment the customers in time in a natural way into those who respond sensitively to discounts and those with a less sensitive reaction. Less price-sensitive customers will not change their daily routine and will not come to do their shopping in the evening.

At the same time, through inventing and promoting such an unusual “game” Kaufland has attracted the attention of the target price-sensitive segment more efficiently. Therefore, this segment will probably come in the evening to “play a game” and will thus help ease the overload of customers in the peak shopping hours. This will subsequently improve the shopping experience for the less price-sensitive (and more value-sensitive or comfort-sensitive) segments. As long as this segmentation proves to work, I can imagine that a wider share of Kaufland’s assortment may be used in this game with the evening shoppers – while price will not be the only chaning variable.

I do not have a crystal ball but ….

The last rule is to never stop learning and to try always predicting what will happen ahead of time - not only to evaluate what has happened. Due to the nature of their business, retail chains dispose of a large number of data thanks to which they can measure the impact of their past decisions objectively and in detail. Just to measure, however, is not enough. Results of the measurement have to be translated into the ability to predict the effect of intended pricing and promotions decisions efficiently and ahead of time. This way every short-term discount action can be pre-evaluated regarding its impact not only on the immediate revenue but also on the margin and on the profit for a longer period of time, including the accounting for post-promotion dip and cross-promotion effects, as well as the expected change in price of direct competition. All this at the level of each product item, branch or sales channel.

Although current practice and tools of the most progressive teams are still a long way from the crystal ball, already today they bring a non-negligible extra percentage points of gross margin to the bottom line.

Peter Krišťák

Author is partner and founder of Pricewise

He specialises in pricing and revenue management

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