Why is it that every time the topic of offering a discount for a longer engagement comes up, the CEO, CFO, CMO, Director of Marketing, and Member Services Manager get agitated?
“Discounts cheapen our brand. We are a premium product and shouldn’t be discounting. We aren’t like [name the mobile phone, cable or satellite provider you love to hate].” —CEO
“We can’t afford the hit to our revenue!” —CFO
“Discounts just make the renewal process more complicated.” or “I don’t have the money in my budget to afford a discount offer.” —CMO or Director of Marketing
“If you offer a discount, I will have other people complaining about why they didn’t get offered a discount.” —Customer Services Manager
Sound familiar? Perhaps you have even thought or said these same phrases.
Of course, every one of those arguments has some validity to it—and yet, we believe there is a strong case for a continuity pricing strategy that utilizes discounts in both acquisition and retention. Today we will discuss retention discounts in the form of multi-year commitments.
Retention Marketing Econometrics
For this exercise, let’s examine a group of higher tenure members—100 people who have all been members for five or more years.
Assume you can tell from doing some retention rate reporting by tenure (you do that, don’t you?) that this cohort has an average retention rate of 85%. That seems pretty good. But what does that really mean?
At the next renewal, 15 of those 100 will not renew.
Down to 85
A year after that 13 people won’t renew.
Down to 72.
After three years we have dwindled that 100 person cohort down to 61 people.
In three years, we’ve collected $10,900 in dues (based on a notional $50 dues point) or an average of $109 per person in that original cohort.
Now, let’s offer people a choice instead. They can renew for one year at $50 or three years at $150. And assume that there are folks who will accept that choice—with no 3-year discount—purely for the convenience. We will be very generous and assume that 10% of the cohort will accept the offer for three years.
Year 0 – 100 people
Year 1 – 90 people renew at 85% and 10 people renew at 100% (3-year offer):
76 + 10 = 86
Year 2 – 76 people renew at 85% plus the 10 people who chose the 3 year offer, so “renew” at 100%: 64 + 10 = 74
Year 3 – 64 people renew at 85% plus those 10 people who are still with us because they chose the 3 year option : 54 + 10 = 64
The 3-Year Offer Impact On Your Marketing Efforts
How do multi-year discounts impact our member census?
In our original case, we ended up with 61 people. With our no-discount 3-year offer case—we ended up with 64. Great, we’re already ahead!
And in those three years, we collected $11,200 in dues for an average dues per original person of $112. We finished with three more people and $300 more in dues by offering that 3-year renewal. We could stop there.
“But wait … there’s more!”
That original uptake rate of 10% may have been too optimistic given that there was no discount incentive and you are asking people to pre-pay $150.
What if we were to offer a discount? How much should we consider? You are asking people to lay out significantly more cash to pay for three years in advance. What if we offered a 10% discount?
“Renew today for three years and save 10%. Just $135 for three years.”
And by offering a discount, assume that we can move the needle just five points. Now the take rate for our discounted 3-year offer is 15% instead of 10%.
Let’s run the math.
We have two more members at the end of three years compared to the no-discount offer and five more members than our base case. Not too shabby. But how did we do on revenue?
This is a little more complicated. First, our 3-year offers. 15 * $135 = $2,025.
And then we add $9200 from our annual renewers for a total of $11,225.
That is $325 more than our base case (and five more members on the property.)
And it is even $25 more than our no-discount offer—which isn’t much. But we still have two more members at the end of three years compared to the no-discount offer which will mean more revenue and members into the future.
All that by actually offering a DISCOUNT!
Remember previously we said that a 10% take rate when no discount is offered was optimistic? What if we couldn’t even get 10% with no discount. Assume instead that the no-discount take rate was only 5%.
Leaving the demonstration as an exercise for the reader, we get to the answers of 62 people remaining at $11,000 in revenue. (If you don’t want to do the calculations yourself—get our worksheet that shows all of the math.)
Less people and less dollars than our discount case!
Lessons Learned Around the Power of Multi-Year Engagements and Why This Matters to Your Long-Term Growth
First, multi-year memberships will improve revenue and retention overall. This improvement may come with internal complications — IT department challenges; membership department training; print collateral modifications and possibly others. But it is probably worth it overall, unless you have very complicated systems and highly rigid people.
Second, multi-year discount amounts and offer take rates are very sensitive in this type of analysis. Small movements result in large changes.
Remember our 15% take rate on a 10% 3-year discount? What if that had been 20%? Or what if the discount had only been 6.6% ($10) and a take rate of 12%?
You can find all of these illustrations in our downloadable worksheet. It even includes a calculator that will let you substitute your own dues, renewal rates, forecasted take rates and discounts.
If you have nimble marketing and flexible systems, our advice is to test your way into a discount to optimize the minimum amount of discount for the maximum revenue or retained members (or both).
Aim for the highest take rate with the fewest dollars sacrificed in discounts. But if you aren’t nimble or just don’t have the time, start with 10% for a 3-year offer. See what your initial take rate looks like and run the numbers yourself. You don’t have to wait three years. All you need is the initial take rate to calculate your ROI and decide whether you are better off continuing the discount, changing the discount or not even offering a 3-year offer.
What Those Other People Say About Multi-Year Discounts (or maybe you, too)
Now— let’s address some of those comments from your co-workers (or yourself) from the beginning.
“Discounts cheapen the brand.”
We agree that unfair or poorly conceived retention tactics cheapen your brand. Cell phone providers, cable companies and satellite TV providers are all famous for their “low introductory rates.” And then they stick it to you after your initial term expires. The difference for you is that you likely do not have a competitor that your customer or member can easily “jump ship” to. Your multi-year discount is a fair and equitable offer that is made to all members at any time. (Before you say it—acquisition discounts are another topic.)
“We will lose revenue by offering a multi-year discount.”
As already demonstrated in this article, a best-practice, multi-year offer will not result in lost revenue over time. Of course, too deep of a discount or not monitoring the effective take-rate of an offer could result in revenue loss. But in general, a well-executed, multi-year discount will result in more people retained (future revenue and retention cost avoidance) and more cash in the door than would be the case with no multi-year discount.
“I don’t have the money in my budget.”
If you are “charged” for the cost of a discount within your retention operating budget, you can see where this argument comes from. But we would also argue that this is a case of “inter-company transfer.” Yes, you are realizing an “expense” in your marketing budget from the discount, but whoever owns the Dues Income P&L is realizing a revenue increase from the enhanced retention.
It is, at worst, a “wash” for the company and more likely a net revenue gain for the organization (remember, you won’t have the cost of renewal notices for the additional years, either). Further, the future-year discounts and current cash flow should both be placed in the deferred income pool (unrecognized revenue or expense) until the subsequent years under GAAP (Generally Accepted Accounting Practices.)
Being charged the full $15 discount now as selling expense for future revenue is unfair, bad accounting and most importantly, hiding the potential gain.
“If you offer a discount, people will complain that they didn’t get the discount.”
If you have a standing multi-year offer, there really should be no cause for complaint. The most likely case is that someone just renewed and feels slighted because they didn’t get the offer. We call this a “probletunity.” Member Service representatives can simply say:
“No problem. We would be happy to offer you the same discount. We will apply your 1-year renewal as a credit towards a 3-year purchase. You simply owe the difference of $85 today and your new expiration will be in two years and 10 months.”
We hope that this illustration and discussion has encouraged you to consider a multi-year discount offer or, if you already offer one, to examine your discount level (or lack of) and consider testing for optimization. Either way, we think you will be glad you did!
Don’t forget our worksheet.