It’s that time of year again – 'The Holidays.' We all know what that means, mass hysteria for finding those all-important deals that retailers offer at this time of year. As the floodgates open and waves of deal-seeking consumers flock to the internet to spend their holiday cash on Black Friday and Cyber Monday deals, you'd think to start the season with a bang via a flash sale would drive some serious value, right?
Not so fast. According to Wharton Professor Peter Fader, Black Friday and its partner, Cyber Monday, are almost entirely counter-intuitive to building long-term revenue. Peter shared his views about Black Friday and Cyber Monday on our podcast, the Customer Equity Accelerator, here are some of the highlights.
"Black Friday is the day when you identify your worst
customers and treat them like royalty." – Peter Fader
Why do we think Black Friday and Cyber Monday are lousy ways to increase sales?
The most skeptical perspective would say something like, “Black Friday and Cyber Monday are the days when you identify your worst customers and treat them like royalty." These customers are the ones who are very price-sensitive and rarely buy with us except when we have stuff on sale. Why would you ever cater to these people when it trains your best customers to also only purchase during sales?”
Perhaps you think I’m overstating the negative impacts of discounting here, but often companies look retroactively in the data to find a very similar story. Let's take a look at why most companies fall into this fast-cash trap and how you can avoid it.
So, why do I think companies do this?
#1 – The companies that don’t have visibility into the needs of the individual customer can only hear the ka-ching of “We’re selling tons of stuff.” So, they don’t worry about tomorrow and just celebrate today.
#2 – Many companies are caught up in the moment and the naïve belief that being the customer's best friend will turn the customer from ugly ducklings to beautiful swans. They think they know what the consumer wants, and by discounting the right product, the customer is going to love them and buy more in the future at full price.
#3 – Competition. Retailers know that their competitors are offering Black Friday deals, and they don’t want to be left out while their customers flock to other brands.
These reasons, and many more are understandable. But take a step back and look at the big picture: what future revenue can you expect from your customer base? Will offering a big sale increase this? Or will it merely subtract from full price purchases you can expect in the future?
Focus on building customer lifetime value.
You’ve probably heard the terms customer lifetime value (CLV) and customer-centricity, but how clearly do you understand how to implement CLV and customer-centric strategies?
Customer lifetime value represents the cumulative projected future profitability of each individual customer. The problem with utilizing CLV today is that many use the term quite loosely and tend to forget the literal meaning of the three words (especially the value part). They'll base CLV on historical profitability, look solely at a slice of the future revenue, or only take a limited range of customer activity into account. It’s no wonder why most vague definitions of CLV don’t truly reflect the value of a customer base.
Too often, when marketers and business leaders think of CLV, they assume there’s a type of non-spoken, contractual relationship with their customers. They believe that what they're currently doing will keep them coming back in two, five, or ten years from now. However, it's clear that not all customers are created equal and that future intent to purchase widely fluctuates in any given customer base. To succeed, today’s leaders need to be hyper-aware of what marketing, products, and digital behavior differentiate high-value customers from low-value customers. Identifying and acting upon these variables is how customer-centric companies rise and dominate.
Let’s be more customer-centric retailers this time of year!
Instead of playing defense to keep every customer that walks through our door, we need to aim higher in our customer pyramid and play offensively by creating more value for our high-end customers.
Current Black Friday/Cyber Monday activities belong in the low-value customer defensive playbook. You can still offer some discounts and messaging for Black Friday/Cyber Monday to stay competitive, but likely not to the extent that others are doing it.
Instead, let's focus on activities aimed at our valued high-end customers. Perhaps offer "Special VIP Only" shopping hours and events as rewards for the people that already love us.
Convinced that you should do something different for Black Friday and Cyber Monday? This is where to go from here:
Everything relates to really knowing your customers and CLV is one way to do that. And discounts and promotions are NOT the way to treat high value customers - in fact what Pete is saying is just the opposite. We need to bring more heart into the picture. Black Friday has no heart. It's all transactional. But what makes customers loyal over a lifetime is an emotional bond. Discounts and promotions are only one tool that marketers have at their disposal. By understanding the deep motivations of loyal customers marketing can release more unique "value experiences" to encourage the long-term bond.
Now we can turn Black Friday and Cyber Monday events into a working model to scale customer lifetime value.