A well-known retailer who we’ll simply refer to as retailer X, recently announced a bold move: They are going to offer customers who use their store-branded credit card, a 5% discount on purchases. In their testing, they have found an increase in same-store sales as a result of this tactic. It should be noted that, from what’s been reported, their testing was not conducted on a national level. Therefore, the outcome from this move has not been fully measured.
At first glance, this seems like a very effective tactic. Not only do they build their credit card business, but at the same time, force loyalty by offering a 5% savings.
But could there be a downside?
When you offer a 5% discount on purchases (if you use the store’s branded credit card), you make a few, shall we say – “unintended” statements with regard to your pricing:
1). Our prices are higher
If you are willing to drop your prices 5% across the board, then you are acknowledging to the consumer that your prices were 5% higher to begin with. After all, how are you able to cut 5% if you were already offering the lowest prices possible to your customers? No one likes the idea of having paid more for something than they should have. This newfound knowledge has the possibility of creating suspicion from the perspective of the consumer.
Additionally, this move creates an incredible “rebuttal” marketing opportunity for this store’s closest competitor (the largest retailer in the world). If their competitor is smart, they will begin to advertise that their prices were/are lower than the retailer offering the 5% discount, and that the lower price is available to EVERYONE – without having to carry around a store-branded card. The worst thing their competitor could do is play the role of the “follower” by matching retailer X’s 5% offer to card holders.
2). I am being punished (if I don’t have the card)
Obviously, retailer X is offering the discount as a means of expanding the number of customers who have their store-branded card. This is somewhat of an “interesting” move during a time when people are being encouraged to reduce their debt, eliminate unnecessary credit cards (i.e. store-branded cards), etc. In other words, someone who is being financially responsible, will be PUNISHED for their actions by paying 5% more than other customers who have made the decision to carry around an additional credit card.
I may be wrong about how this move will be perceived by the public, but it’s a well-known fact that no one likes the feeling of having paid more than they should have, or paying more by doing something that may jeopardize their financial situation. I have no doubt that this move will increase sales among loyal retailer X customers.
The bigger question, however, is the impact on the population that might have considered shopping at retailer X, but may now have some reservations due to the lack of possessing the store-branded card. After all, someone who now walks into retailer X without the store-branded card, will have to accept the fact that they are going to be paying 5% more than they should have. Will that fact result in more folks applying for the store-branded credit card, OR will it make people angry – thus resulting in them taking their business elsewhere? We shall see.
A general credit card like Visa, Mastercard, American Express, or Discover Card, can be used anywhere. A store-branded card has but one use. And while a 5% savings from retailer X is nothing to sneeze about, there is the possibility that what you pay at “the other place” (the competitor) might be significantly lower than the prices at retailer X – even with the 5% savings.
Businesses – both large and small, frequently make price reduction moves without considering the potential fallout. They also risk hurting their business by not utilizing the best language to present their offer. This mistake can end up costing a business a great deal of revenue. In the case of a small mom and pop type of business, the cost paid for potentially foolish moves can be quite severe.
There are countless ways in which a business can offer a price reduction (discount, savings, or whatever term suits you best), but most of those options do more harm than good. What is good for business A may not be right for business B.
…Dr. Marc