Library Research Customer value, acquisition and retention
A 35% Discount Buys Customers Worth Half as Much
What are the customers you win with a discount actually worth? Michael Lewis followed them at a newspaper and an online grocer, and the deeper the discount, the less they were worth.
Michael Lewis, 2006
Long-term value of new customers, by how they were acquired
What he was looking at
Discounts are the oldest acquisition tool there is, whether it’s a cheap first month, a free trial or a percentage off the first order, and they reliably bring in more customers.
But what are those customers worth afterwards? That’s what Michael Lewis, a marketing professor, asked. He built a model of why customers acquired on a promotion might behave differently from everyone else, and then tested it on customer-level data from two businesses, a newspaper and an online grocer.
What he found
“acquisition discount depth is negatively related to repeat-buying rates and customer asset value.” Lewis (2006), abstract
And the effect was big:
“a 35% acquisition discount results in customers with about one-half the long-term value of non-promotionally acquired customers.” Same
Why would that happen? His explanation centers on uncertainty:
“customer uncertainty provides an explanation for why promotionally acquired customers have lower repurchase rates and smaller lifetime values” Same
One way to read it is that a discount lowers the bar for trying the product, so it brings in customers who are less sure they want it, and plenty of them find out they don’t.
What it means
A discount also works as a filter, and it filters the wrong way. The customers who need the discount to say yes are, on average, the ones least likely to stay.
Does that hold every time? No, because who gets the discount matters. Other research found that deep discounts to first-time buyers increased their later purchases, while the same discounts reduced purchases by established customers. But if you judge an offer only by how many customers it brings in, you’ll keep choosing the deeper discount, and you’ll keep buying customers worth less.
Where it shows up in a revenue team
- Cost per acquisition falls with a deeper discount. Value per customer can fall even faster.
- Free trials, first-month deals and “no money down” are all versions of the same trade.
- Judge an offer by its cohort a year later, and not by its sign-ups. What did each month’s new customers return, broken out by the offer they came in on?