E commerce, from Discounts to Loyalty

Discounts, regularly benefiting the average shopper since Amazon and Flipkart got at war. Most have been offering discounts at their own expense to train consumer behaviour through positive reinforcement. The humane version of the technique used to train lab rats. Although others including HR and consumer brands have deployed such techniques, none paid off their own pockets. These discounts financed by VC money are termed as customer acquisition costs and written off as expenses.

Advertisement real estate is expensive and cost more than presidential suites at Waldorf Astoria while acquisition rates equate to dinner at the finest Michelin star restaurants. Hence, overtime companies shift their focus on customer retention instead. This leads to adoption of loyalty programmes, most successful of which is used by airlines as frequent flier programme; with rewards in form of air miles and upgrades along with statuses ranging from the Maharaja to Senator.

Loyalty programmes reduce acquisition costs by encouraging customers to return by offering enhanced experience at tangible and intangible fronts. They are designed to reduce infidelity by reminding of the lifetime value and can be equated to relationships. Whereas discounts only consider the commercial aspect, which is direct and works well to entice old as well as new customers. They can be considered similar to flings; quick, simple and easily forgettable.

Airlines opted for loyalty programmes to protect their market share from new entrants and disruptors like Ryann Air whereas, ecommerce companies resorted to discounts to simultaneously acquire and sustain customers. The former is a mature market where expenses incurred are in form of lost revenues or lesser savings. While, the latter has been the modern day robin hood, benefitting the average shopper through discounts bankrolled by investors.

Although these expenses are incurred towards developing an intangible asset ‘brand value’, they have been conventionally classified as marketing expenses. Only recently, the Indian Income Tax Department mandated its shift from operational to capital expenses, to be depreciated over time. As operational expenses, these contributed directly to loses and up to a certain extent, helped the companies avoid income tax.

Now the ecommerce giants have developed consumer base and their market shares are stabilising. Hence, they are shifting focus from customer acquisition to retention and have start rolling out loyalty programmes such as Amazon Prime, Uber VIP, MMT Black and so on. Also, over time the product managers have defined customer experience, which is a pre-requisite to provide experience enhancements under loyalty programmes. For instance, Amazon Prime offers 48 hours delivery while Uber VIP assigns 4+ rated chauffeurs.

Much similar to airlines, ecommerce is an interdependent market – Oligopoly, where actions of one affects the actions of others. If one airline offers seasonal sale, others will soon follow, or new airline offering unusually cheap introductory fares; sounds similar, right?

Earlier the airlines were improving upon the experience through gourmet food and comfy seats while recently we witnessed their increasing curt with crammed rows and passengers forcibly dragged off overbooked flights. Much to your surprise, despite the widespread social media outcry, the airline ended up posting better figures that particular quarter. As their market shares are fairly stable and their managements have mastered the art of prisoners dilemma for aggressive advertising and price wars; they have realised their potential as an organised mafia. Similarly, once ecommerce matures and companies master the art of prisoners dilemma along with unwritten industry ground rules, gone would be the days of discounts and customer service beyond market standards.

*Disclaimer: The analogy used in the first paragraph is by no means meant to belittle, but to show the extent of similarity and simplicity in the psyche of creatures miles apart on the intellect scale.

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