We’ve talked a lot about customer loyalty and reward programs in the context of scientific principles. We’ve looked at continuous reward schedules, interval schedules, and ratio schedules. Each schedule has a drastically different decay rate: the rate at which users stop interacting with you once you end the promotion.
Reward schedules are particularly relevant now, in the midst of Q4 promotions. Today, let’s discuss a principle I call “Pavlovian marketing,” which originates from reward schedules’ decay rates.
Pavlovian marketing stems from the idea you train users to only shop with you when they know they’ll receive a discount. At a Shop.org retailer meeting I keynoted, several retailers told me they’re afraid to do any promotions on a regular schedule. Profit margins decline while their customers wait for these coupons before buying.
The science goes back to Ivan Pavlov, but those who followed in his footsteps make the science important to this discussion. Pavlov demonstrated that dogs (and other animals) can be trained to respond a certain way to stimulation. Pavlov trained the dogs to salivate when they heard a bell because during training, the bell was always accompanied by food.
Pavlov’s followers furthered his research and showed certain behaviors can become so conditioned they occur only when the stimulation occurs. In other words, the dogs could be trained to salivate only at the sound of a bell.
These findings greatly affect marketers. When we constantly give out coupons, not only do we provide a stimulus for buying, we also actively train customers to buy from us when they get coupons. Some may argue this is the point of coupons, but there’s a secondary effect. If the coupons occur on a continuous reward schedule, we train people to shop only when they get a coupon. This can be disastrous for sales margins, as well as for brands.
Are You Guilty?
You’re guilty of Pavlovian marketing if you send monthly coupons with big discounts. You’re also guilty if you do this quarterly, but hopefully customers need your products more than once every three months. If they do, they’ll continue to purchase throughout the quarter but may save big purchases for when they receive the coupon.
You’re equally guilty if you offer coupons in more creative, yet still constant, ways. Many companies have tried sending email to customers a week after they abandon their shopping carts. This promotion typically lets customers take 10 percent off if they buy the items in their carts. It need only happen once to make customers realize this is a business rule and will happen every time they abandon their carts. Many companies that tried this idea later abandoned it because they saw the data trend: users abandoned carts to obtain discounts.
What about your reactivation campaigns? Do you send coupons to turn dormant customers into active ones? If so, you basically tell people not to buy too frequently — they’ll get huge savings if they lay low for a while.
Q4 Promotions Lead to Q1 Decay
Every Christmas, I warn retailers to be careful about their end-of-year promotions. Will holiday customers remain loyal buyers in Q1? If your Q4 strategy is to use a lot of coupons to induce purchases, the answer is probably no.
Train users to shop with you because of discounts, and you’ll see a large drop-off once the promotions end. Smart companies focus on brand image and customer retention based on wide selection, great customer support, and personalized service.
Yet most companies spend Q4 promoting free shipping or huge discounts. This undoubtedly means a high top line this season, but one that comes at a great cost to the bottom line. Margins are razor thin, and the company must foot the shipping bill. Promotions such as free shipping on every purchase are continuous reward schedules. These have the most severe decay rates. Come January 1 and no more free shipping, you’ll lose a lot of customers.
Are We Doomed?
Are we doomed to lose all our customers without promotions? Can we realistically survive Q4 with no promotions or coupons in the face of heavy competition? Of course not. Here are a few ideas that can help achieve the best of both worlds; a successful Q4, without the huge customer drop-off your competition will experience in Q1:
- With every promotion, use extensive personalization to show customers you know their interests. Don’t just send a free shipping or 10 percent off coupon. Send an email that lists products they may like based on past purchases along with that discount. Though this still provides a discount, it also reinforces you understand your customers and want to have a dialogue with them. This idea goes well beyond a specific promotion or season.
- After the holiday season, wean customers off the Q4 promotions and rewards slowly, don’t drop them entirely. For example, increase the free shipping threshold over time so it isn’t a reward people get with every purchase. Or convert it from a continuous schedule to a less frequent one. This is better than abruptly stopping the program as it won’t alienate users quite as much.
- Implement a different reward schedule that isn’t continuous, such as a ratio-based reward (something that happens every X purchases). This keeps people shopping with you after the holidays if X purchases haven’t occurred yet. It also keep them interested throughout the year.
- Use Q4’s increased traffic to alter customers’ behaviors to be more profitable. Then, create a reward structure based on this profitable behavior.
Many retailers have a problem with single-category shoppers, for example. These shoppers buy from one category consistently but not from other categories in your store. Reward these people for shopping outside their comfort zone, such as a 10 percent discount when they buy a product in a category they never bought in before. Not only does this provide customers with a discount (for competitive reasons), it adjusts their behavior. Even when there are no more active promotions, people will still think of your site for these other categories, whereas they might otherwise have gone to competitors.
Happy, Profitable Holidays
With careful planning and an eye toward long-term loyalty, you can have a great Q4 and create a loyal customer base that sticks with you next year. Avoid Pavlovian marketing. If you train people to respond to the wrong stimuli, you effectively tell your best customers to only shop with you when margins are razor-thin. If you attract new customers based solely on such promotions as free shipping with no plan to make them loyal customers, you’ve done yourself no favor for the off-season.
But if you marry the need to be competitive with a smart strategy for keeping customers based on your service quality, personalization, and rewards that operate on an inconsistent basis, you’ll give the holiday gift that keeps on giving: customers who buy from you all year long.
Until next time,
Although this column was first published Dec. 2, 2005, the principles outlined here are just as relevant today as they were back then.
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