What is the best discount to attract new customers?
When setting up the discount campaign for attracting new customers, what is the best strategy? or would there even be a one-size-fits-all discount rate? If it is the LTV(lifetime value) of the customers that you are pursuing, i.e., you intend to build long-term relationships of good retention with your customers, we will provide you with valuable yet simple practices based on the latest marketing research on the topic.
Usually, when focusing on attracting new customers, we don’t consider much on customer retention. Based on the latest marketing research, the two factors are quite related due to the metacognition of customers. What is metacognition? Consider how your customers think about how you think your discount may affect your customers … …
Let’s not get trapped in the nesting dolls of metacognition theory, back to the topic of new customer discounts and customer retention. You may check the reference papers if you want to get deep insight into the theory. From the research based on metacognition theory and long-term marketing data, neither a low nor high discount rate would build a better customer retention rate than a moderate discount rate. And the low discount rate is worse than no discount. Here low discount rate means a discount lower than 5%, a moderate discount rate means a discount between 5% and 35%, and a high discount rate is above 35%. The taxonomy of discount rates could be applied to most domains directly or should be easily adjusted to other specific campaign scenarios. We could have a clear perspective from the figure in the research:
The marketing advice from the research is pretty simple and practical: prioritize a moderate new customers discount rate unless you know what you are doing. We don’t think that this defines a one-size-fits-all discount rate, but we are sure that this provides a reasonable starting point to do some try-and-error on your new customers' discount strategy.
References:
[1] Peter Wright, Marketplace Metacognition and Social Intelligence, Journal of Consumer Research, Volume 28, Issue 4, March 2002, Pages 677–682, https://doi.org/10.1086/338210
[2] del Rio Olivares, M. J., Wittkowski, K., Aspara, J., Falk, T., & Mattila, P. (2018). Relational Price Discounts: Consumers’ Metacognitions and Nonlinear Effects of Initial Discounts on Customer Retention. Journal of Marketing, 82(1), 115–131. https://doi.org/10.1509/jm.16.0267
