Time for Intelligent Discounts: How to Increase Profits on Black Friday

Time for Intelligent Discounts:
How to Increase Profits on Black Friday

Historically, Black Friday got its name from the fact that this is the day that retailers begin to turn a profit, or become “in the black”, as the beginning of the holiday shopping season generates a significant portion of annual sales.  In 2016, 154 million US consumers shopped over Thanksgiving weekend, up from 151 million in 2015.  These shoppers spent on average, just over $289 a piece, with 44% doing so online.  NRF reported 174 million shoppers from Thanksgiving through Cyber Monday in 2017.

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Most retailers in the US, and even abroad, participate in the retail promotions during this period, some 83% in the US, to the point where this is no longer considered unique.  In fact, fewer and fewer consumers are interested in facing the crowds for in-store Black Friday deals, and while online sales are an alternative, today’s price-sensitive consumer understands that online shopping offers worthwhile deals year round.  In fact, in an Accenture survey, 64% of consumers said they do their holiday shopping all year round, enjoying online discounts offered on deal websites and via specific loyalty programs, such as Amazon Prime.

Black Friday, and similar holiday discounts, generally do increase sales volume for the duration of the sale, but do they achieve the long-term goal of gaining customer loyalty?

Do these discounts promote a “discount-only” behavior amongst the customers, in which the customer only makes significant purchases during a sale?

Do these trends, together with the obvious decrease in profitability caused by the lower prices actually do more harm than good?

In 2016, 61% of UK retailers believed Black Friday was unprofitable, up from 32% in 2015.  This is due to the low margins offered and the costs of handling the increased volume for duration of the sales.  Many US stores see an increase in sales during the holiday season, yet a significant slump in the months following.

With Black Friday lowering profitability, the subsequent decrease in sales and the fact that these deals do not necessarily convert new and loyal customers, retailers should seriously consider if participation is their best course of action.

Personalized Incentives Drive Profitability

Instead of seasonal holiday discounts, retailers should consider switching to personalized incentives. Personalized incentives offer your customers deals that are customized to their specific interests and shopping trends. They are generated for different customers based on artificial intelligence that carefully studies their prior shopping data in order to determine the most suitable offer for them.

Machine learning systems detect the shopper’s purchase probability, their price elasticity and their emotional responses.  This data is combined to offer customized deals to different shoppers.  These incentives, offered year round, and not just on peak sales days, create a host of ongoing benefits to retailers, namely:

  • Increased conversions and sales
  • Increased profit per sale
  • Increased customer loyalty and retention

Increased conversions and sales

15% of retail, healthcare, and financial services companies that effectively implement personalization strategies is projected to experience a revenue shift of close to $800 billion by 2022.  In fact, brands integrating digital technologies in order to create personalized experiences are already reporting increases of 6-10% in their revenues.

Personalized incentives offer customer’s deals on their favorite brands or products, discounts on their birthdays, or offers that suit their previous shopping history and lifestyle profile.  These personalized offers affect purchasing decisions and have higher conversion rates.

For instance, 59% of shoppers who experienced personalization claim that it influenced their purchasing decision.  Amazon reports a 60% conversion rate on personalized offers, and 75% of the content watched on Netflix is from recommendations.

Increased profit per sale

Personalized incentives take each specific customer’s purchase probability and price elasticity into account.  Different customers can be offered different deals, customized to their personal preferences, detected in their shopping history, in order to foster conversion.  As such, in some cases, the retailer may enjoy higher profitability than when offering the same discounts across the board to all shoppers, as each shopper has a different price “sweet spot” where conversion is likely.

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For example, a family with numerous children may opt to purchase children’s sneakers when a “buy one get half off” deal is offered, while a single child family would prefer a 20% discount, so as not to purchase an extra pair of shoes.  In fact, family #2 might not purchase on your site if the only option requires buying 2 pairs — they may look for an alternative.  When the specific price elasticity  of the customer is taken into account, the discount itself can be customized to achieve both increased conversions of the customer at optimal profitability to your business.

Increased customer loyalty and retention

Customized incentives make customers feel a personal connection with the retailer.  When deals match their personal shopping preferences, they feel the retailer has taken the time to get to know them.  They appreciate the fact that the retailer is offering them deals that are specifically for them.

Instead of a one-off conversion for a specific discount, such as Black Friday, ongoing personalized deals foster customer loyalty.

A personalized incentive approach focuses on retention and return sales.  Considering that it costs 5 times as much to convert a new customer, compared to retaining as existing customer, the importance of building customer loyalty is clear.  Additionally, studies have shown that increasing customer incentive rates by 5% can generate an increase of 25-95% in profitability.

With 89% of retailers claiming that customer experience the key factor in driving customer loyalty and retention, combined with the profitability of retention, companies should focus on making their customer feel appreciated.

As 53% of customers switch companies if they do not feel appreciated, and 78% of consumers are more likely to be a repeat customers as a result of targeted offers, personalizing your relationship with your customer and making them feel cared about is a strong tool towards achieving high retention rates.

For example, grocery shoppers feel appreciated when their favorite brands of produce are offered to them on discount, and as “one man’s trash is another man’s treasure”, online retailers can make each and every shopper feel appreciated, encouraging repeat visits and optimal customer lifetime value.  This appreciation will drive retention—a key goal of any retailer.

Invest where and when it counts

Discount days such as Black Friday have been shown to significantly decrease profit margins, with some retailers claiming these discounts are not profitable at all.  In general, new customer acquisition is expensive, costing up to 5 times as much as retention.

Companies should consider ongoing, targeted investment in their customers, via personalized incentives.  Personalization has been shown to increase conversions and foster retention rates.

Combined with the opportunity to maximize profitability by customizing discounts to each customer’s price elasticity, these intelligent discounts are by far a preferable alternative.

Understand how to meet your customers’ expectations in today’s increasingly competitive retail industry. Download our free white paper today.

need to be cautious using price elasticity — can we change this to personalized segmentation instead please ?

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