Tuesday, August 16, 2022

Why are retailers increasingly betting on cashback offers?

The digital form of cashback is an increasingly big deal for online retailers. It’s a means of luring in customers, presenting them with options, and retaining their loyalty long into the future. But exactly how effectively does it do these things, and why are so many coming to offer it? Let’s examine the issue.

What is a cashback offer?

A cashback offer is, in many respects, similar to a discount for loyal customers. Rather than having a portion of the purchase price taken away, however, the customer is instead given cash back (hence the name).

The amount of cashback given out will depend on the business. It might vary from day to day, incentivising customers to come in at a time that might suit the business. You might offer cashback to certain kinds of customers: for example, a carer’s cashback card might be offered only to carers.

Often, cashback is handled by a third-party organisation, which might work with a range of different businesses to provide cashback to customers.

Why are more businesses offering cashback?

The main reason that retailers are leaning into cashback is that it’s been proven to boost the lifetime value of a customer. This is a metric that retailers use to estimate how much they’ll get from a customer over the extreme long term.

Customers who are given cash back are likely to feel warmly toward the retailer handing out the rewards. They’re therefore more likely to come back for more, and less likely to visit a rival. Given that the internet offers customers a quick and easy means of looking for a better deal, anything that can be done to bolster loyalty is something well worth doing.

Cashback tends to be more affordable than many of the other ways of fostering loyalty. Suppose that you’re offering a free coffee for every tenth purchase at your café. This is effectively a cashback rate of ten percent – which is far more generous than most cashback offers.

So, what is it that makes cashback preferable to a traditional discount? From a rational perspective, there isn’t one: but we must remember that customers are not always rational actors. Sometimes it can feel better to be given something rather than having to give away slightly less of something you already have.

Loyalty vouchers and cards are often presented as an alternative to a cashback scheme. The vouchers have the advantage of only being redeemable at a particular retailer – but as a consequence, their value to the customer is limited. By offering cashback instead, you can get away with being that little bit less generous – you can also be sure that the customer will end up getting utility out of the money that you’re giving them, rather than having a voucher lurking for months in their wallets, unspent and forgotten.

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