Do you go all in for discounts or great customer experiences?

Discount or better customer experience?

I’m sure this is a topic that divides marketing and salespeople everywhere. It’s clear that there are two camps and that each is right in its own way, which you can see for yourself if you follow the commercials on your favorite TV shows a bit more attentively. At around the same time that Lado was singing about Hofer’s prices, Magnifico was sadly discovering that there’s nothing to be done about shelves and pallets. He probably wanted to say that Spar offers a better shopping experience than the discount grocery stores, but I’m sure that most people didn’t understand this message. At our office we started discussing which side had the more effective campaign. Like it or not, we ended up in two camps.

Discounts work partly because we all understand them.

Personally, I think that discounts take advantage of a particular human weakness. If the discount is big enough we get the feeling that it pays off, and this generally takes (most of) us beyond the limits of good judgement. When we buy something because it pays to do so, we get a special feeling of happiness. I’d argue that it’s like getting a little dose of dopamine. If something’s available at a really good discount, we buy it because it’s such a good deal in the first place, and not because we really need the item. The discount is primarily a good answer to the question, “When?” Now, because we’re afraid we’ll miss out on this opportunity (the FOMO effect).

Managing discounts may also seem to be an art, but if we take a closer look at industries that best know how to use them, we quickly recognize repeating patterns. Twenty years ago, Studio Moderna was already doing what the fastest growing Slovenian retailer has honed to excellence today. I don’t think they’re running out of steam today because they’ve lost their sense for the discount game. Instead, I’d say that what they’re missing is that they’ve never known how to effectively communicate with customers younger than 50. And today’s 50-year-olds have also mostly moved to different communication channels than the ones most used by this age group during the golden age of the first Slovenian retail phenomenon. If Gizzmo is also added to the group of retailers that are masters of the discount, it’s clear that what they have in common is that they sell products with exceptionally high markups. Much higher than the ones on items for daily use or the ones used by most service companies.

In service industries, customer responses to discounts work in a similar way, but managing these discounts is quite a bit more complicated. The reason for this greater complexity is mainly that the price is conditioned on the service structure. The discount is only an illusory category if we can figure out how the service structure is being changed. Just think about how cheap an airline ticket with a budget airline looks, and then how quickly you can double the travel costs by selecting a few options. You end up paying the same price as with a traditional airline. You’ll only fly to London on EasyJet sitting separately from your wife once, because you didn’t want to spend the extra €10 per seat in order to select two seats together. From then on, you’ll always pay the extra fee to choose your seats. It only takes one time having to cram your hand luggage into that little measuring frame upon boarding and not being able to make it fit, so you have to pay €60. You’re never going to want to risk that again.

In any case, you choose an airline based on one price and, in the end, you also choose to pay more. They simply offer additional payment options that you can’t or don’t dare resist. Generally because you don’t want to take a risk.

The curse of businesses that bet on exceptional customer experiences

One of the challenges that has to be met if you want to build your business on the great experiences you guarantee your customers is how they will recognize these experiences. But this isn’t the key challenge; at least not in my opinion. Today it’s pretty easy to test practically everything before buying it, but it’s much harder to get a sense of what’s worth testing. I’m convinced that nothing’s more powerful than a sincere recommendation from a satisfied customer, which spontaneously spreads through his social circle. But all indications are that enthusiasm for a great experience alone isn’t always enough. Companies that know how to recognize their customers’ enthusiasm and encourage them to make a recommendation at the right moment are a step ahead of the rest. If only things were so simple . . .

If I had to express an “outstanding experience” mathematically, I’d say that it’s an experience that far exceeds expectations. “Expectations” is a dynamic category, however. One quickly falls into the trap of rising expectations, and it’s only a matter of time until it becomes impossible to “surprise” your customers anymore. A typical example is the butcher in my neighborhood. Years ago, when I first purchased meat for a Sunday barbecue from him, I was super happy and surprised when he cut off another little bit and added it to the bag, telling me to try it on the house. After that, I experienced something similar every single time I visited him. Just like all his other customers. But the moment it first happened that my order wasn’t accompanied by that free hot dog, I felt a touch of bitterness. The higher expectations I’d developed in my own mind were suddenly not being met.

I could easily share other sour moments when I built up overly high expectations based on too much enthusiasm and a recommendation from friends or acquaintances for some craftsman, hotel, or restaurant. Everyone who’s ever had something like this happen has probably reacted in the same way: you’ve adjusted the recommender’s credibility in your mind so that next time you won’t be swept up by this person’s wave of enthusiasm. At least not for the same industry. It seems quite ironic that with each experience we encounter on the basis of a recommendation, we refresh the potential of each individual recommender’s expectations. Gradually, we “compartmentalize” our social circle according to the competencies our contacts apparently have. You know, nobody asks me where to find a good trail for a thrilling mountain bike descent in Upper Carniola. Where to eat well and which winemaker makes a great tasting are often the subject of calls from my acquaintances, though.

Are you going to call Lado or Magnifico?

I don’t know which of them made better use of the advertising euros spent on them. I can only guess and speculate, because the results aren’t public. I do know, though, that similarly different approaches are taken by telecommunications providers in Slovenia. In doing so, the challengers bet almost everything on maintaining their leanness and competing with the lowest possible promotional price, while defenders of the market position strive (at least they think so) with the quality of their services. But despite the fact that with some you get a customer support agent on the phone in less than a minute, and with others almost never, the results seem to show that low-priced challengers are quite successful in conquering the market so far. Supposedly also with a profit per service user . . . There are many more similar stories like these. Have you ever wondered how Delavska Hranilnica managed to attain such a market position within Slovenian banking?

Is the golden formula “bring in customers with discounts and keep them loyal with great experiences?”

No. In business development there simply aren’t any golden formulas. It’s just a matter of time before something that’s working great at the moment stops working. Things are attractive only for as long as they seem sufficiently unique. Just like great experiences stay great only for as long as they exceed expectations. And sometimes people have to go have an experience somewhere else in order to appreciate the great experience they had “at home.”