In today’s competitive market, companies are always looking for new methods to win over and retain customers. Among the most popular pricing techniques by companies are discounts and cashback. Both of them promote sales, but they operate in different ways and influence customer behaviour differently. As an entrepreneur, you should know the differences between cashback and discounts so that you can select the best approach to increase profit and customer satisfaction.
Understanding Cashback and Discounts
Before deciding which strategy works best, let’s define cashback and discounts:
Cashback: A cashback offer gives customers a percentage of their purchase amount back, often as store credit, a direct refund, or wallet balance that can be used for future transactions.
Discounts: A discount reduces the price of an item at the time of buying. This makes the product or service directly cheaper. Discounts may be percentage discounts, fixed reductions, or special offers like “Buy One, Get One Free.”
Let’s discuss the advantages and disadvantages of each strategy from a business’s point of view.
Advantages of Cashback-
- Triggers Repeat Shopping
Cashback forms a customer retention cycle since customers must come back to spend the cashback balance. This improves customer lifetime value and loyalty.
- Perceived As A Reward, Not A Discount
Discounts reduce the perceived value of a product. On the other hand, cashback can be thought of as a reward for buying, which makes customers feel they are getting added value.
- Increases Brand Engagement
If cashback is provided through an app or a loyalty program, it makes the customer engage more with the brand.
- Lower Impact On Profit Margins
Cashbacks are easier on the business as they are often credited for future use, so that businesses do not lose money instantly. Some customers might even forget to redeem which reduces the effective cost.
Disadvantages of Cashback
- Delayed Gratification for Customers
Others might value instant savings over cashback so it might result in lower conversion than discounts.
- Needs A Good Redemption Process
Cashback programs can cause confusion to customers who are expecting redemption to be effortless if not handled well.
- Cash Flow Issues
Providing cashback means you need to set aside some cash for future redemptions, which can hurt the cash flow management.
The Advantages and Disadvantages of Discounts
Advantages of Discounts
- Produces Instant Sales
Discounts cause a sense of urgency which encourages the customer to ‘buy now’. It is especially good for seasonal offers or new product launches.
- Easy And Straightforward to Use
The customer sees the reduced price instantly. It simplifies their decision to buy. Discounts have no extra step as compared to cashback which makes it easier for customers.
- Suitable for All Customers
Discounts work for both new and repeat customers, as they give instant savings without any conditions.
- Boosts Short-Term Revenue
When your company wants to boost sales in the short term, discounts can achieve targets sooner compared to cashback.
Disadvantages of Discounts
- Lowers Perceived Value of Products
When you put in regular discounts, it can condition customers into thinking they must always get low prices. It can negatively impact brand image and reduce profitability over the long term.
- Attracts Bargain Shoppers
Discounts attract customers who buy only during sales. This makes it more difficult to create a customer base that stays loyal.
- Reduced Profit Margins
When compared to cashback, where some value comes back to the company, discounts directly reduce profits and can be impractical in the long term.
- Risk Of Price Wars
If others also begin offering discounts, companies can get into a price war, resulting in loss of income and brand differentiation.
Which Strategy Works Best Or Your Business?
Picking between discounts and cashback comes down to some basic considerations like your business model, customer target audience, and cash objectives.
When To Select Cashback?
- If keeping customers and increasing repeat transactions is what you want to achieve.
- If you want to develop a healthy loyalty scheme and brand association.
- If you want to provide incentives without immediately cutting revenue.
When To Select Discounts?
- If you need instant sales and increased conversion rates.
- If you’re dealing with price-conscious consumers.
- If you’re selling leftover inventory.
- If your company is in a highly competitive industry where price is a primary factor.
Conclusion:
Both cashback and discounts are valuable to plan marketing strategies for a business. Discounts increase short-term sales and cashback helps in customer retention and maintaining long-term relationships. Depending on the needs of your business and consumer behavior, you can select a good strategy or even utilize both for the most effective outcome.
