How different discount strategies can change customer behavior

A Repeat Customer Insights customer was asking about how to combine the automatic segments with a discounting strategy they're considering:

We want to offer larger discounts for vip and loyal customers, smaller more frequent discounts for low aov or average customers etc

Discounting can have a major influence on customer behavior and has the potential to shift the segments around a lot (for better or worse).

Using the Frequency-Monetary (FM) Grid:

1. Giving smaller, more frequent discounts to Low AOV customers could drive their AOV lower (and your average AOV lower). If they are spending less than typical per order, having more frequent orders with a discount would probably end up causing their order sizes to shrink. But that could increase your order volume and if the orders are profitable, it'll add to the bottom line. Could be good to move product and fill out any excess capacity.

2. Giving a larger discount to your High AOV and Whale (FM) customers could also cause their order sizes to shrink too as the discount eats into the AOV. But that could also move your storewide average AOV to shift higher since those customers have typically placed orders above your average AOV.

Using the Recency-Monetary (RM) Grid:

3. The top 3 rows are the recent customers so they are more active, the bottom two are probably defected or on their way out. If you target the Recent low spender (RM) segment, those are customers who haven't spent that much with you overall (their total lifetime value). Giving them frequent, low amount discounts could get them to buy again and slowly increase their total value (moving them towards the top right). You might even consider short expirations with their discounts to drive urgency and get them buying sooner.

4. Large discounts could be useful for the Recent high spender (RM) and Recent whale (RM). The more they order, the more to the right they move. The discount amount would offset their total value and your profit so be mindful of that.

#3 and #4 are the better tactics in my opinion, #2 is better than #1 but both of them can work if you are careful with your discount amounts.

Eric Davis