Research library Customer value, acquisition and retention
A 35% Discount Buys Customers Worth Half as Much.
Michael Lewis followed customers won with discounts at a newspaper and an online grocer. 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: a cheap first month, a free trial, a percentage off the first order. They reliably bring in more customers.
Michael Lewis, a marketing professor, asked what those customers are worth afterwards. He built a model of why customers acquired on a promotion might behave differently from everyone else, 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 large:
“a 35% acquisition discount results in customers with about one-half the long-term value of non-promotionally acquired customers.” Same
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: a discount lowers the bar for trying the product, so it brings in customers who are less sure they want it. Plenty of them find out they don’t.
What it means
A discount isn’t only a price. It’s 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.
It’s not a law of nature. 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 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, not by its sign-ups: what did each month’s new customers return, by the offer they came in on?