When it comes to attracting customers, business owners have two ways- cashback and discounts. Each of them has its own use and is effective in their own way. Cashback gives a reward after the purchase, whereas a discount cuts down the cost beforehand. Choosing the appropriate one for your business can influence customer engagement, your profit margins, and even brand loyalty. In this article, we’ll compare the pros and cons of each to help you determine which may work well with your business strategy.
Understanding Cashback and Discounts:
Cashback is a form of reward where customers get back a percentage of their spending back, either immediately or at a later date. For example, a customer has bought something for SGD 100, receiving 5% cash back. They will get the SGD 5 back after the purchase.
Discounts provide a price reduction at the time of sale. If the same SGD 100 product had a 5% discount, the customer would pay only SGD 95 at the point of sale. Discounts give immediate savings, making the product more affordable.
Advantages of cashback-
- Builds Customer Loyalty- Cashback encourages customers to come back. By receiving a percentage of their spendings, customers have an incentive to continue shopping with your business, hence loyalty and repeat sales.
- Increases Higher Spending- Most of the customers are willing to pay more as long as they get cashback. For example, a cashback app study showed that customers spend around 40% more when they know they are earning cashback on their purchase.
- Build Brand Value- Offering cashback can help position your brand as one that values its customers. This can further result in positive word-of-mouth and strengthening your reputation in a competitive marketplace.
- Encourages Full-Price Sales- While discounts directly cut off some portion of the product’s price, cashback does not. This can serve as a very effective strategy to encourage full-price sales while still giving customers a sense of reward.
Disadvantages of offering cashback-
- Delayed Gratification- Customers don’t feel the benefit of cashback immediately, which can reduce the appeal. For an individual who wants their money saved right now, the cashback is less appealing compared to a direct discount readily available now.
- Complex Redemption Process- Some cashback programs require customers to complete additional steps to redeem rewards, like using a mobile app. This can discourage the customer if the process is too complex.
Advantages of Discount-
- Immediate Savings- Discounts save customers money on the spot. It is quite effective for budget-conscious shoppers or those seeking instant gratification.
- Simple and Direct Appeal- It is easy to understand and calculate for consumers as well as retailers. Customers clearly know what they are saving without any additional steps or waiting periods.
- Attracts New Customers- For first-time buyers, a discount might work as an encouraging factor to give the brand a try. Discounts can make the company reach more clients as they reduce the price of the products from the very beginning.
Drawbacks of discount-
- Can Harm Profit Margins- Discounts reduce the selling price. It creates a negative impact on profit margins. If the discounts are misused, it would adversely affect the growth of revenue in the long run.
- Might Attract Bargain-Only Shoppers- Discounts often attract price-sensitive customers who may only buy when items are on sale. This might start a cycle where every time the customer expects a discount, which could reduce the perceived value of your brand.
How to Decide: Cashback or Discounts?
- Consider Your Customer Base- If your target market is looking for instant savings, then discounts may be better. If they’re likely to return and appreciate longer-term rewards, cashback could be the way to go.
- Analyze Profit Margins- Discounts are an excellent tool in case your business can handle slightly lower margins in exchange for increased volume. For high margin businesses, cashback will help maintain the brand value.
- Align with Business Goals- Cash back will be effective if the company’s business model is centered on loyalty building and customer retention, particularly in a scenario where customers would be returning for more purchases. Discounts will be better for generating immediate sales, especially when dealing with first-time buyers or a seasonal promotion.
- Hybrid Approach- Many businesses, in fact, profit through both of these strategies simultaneously. A good example is when you use a discount during peak sales seasons and cash back for loyalty programs. This would mean a new customer can be lured in with a discount, and cashback rewards will encourage repeat purchases.
Conclusion:
Both cashback and discount have unique benefits. Choosing the right method depends on your business goals, profit margins, and target audience. Consider which one best suits your business needs and don’t shy away from experimenting.
