Every argument about discounting ends in anecdotes. Someone remembers the promotion that brought in a wave of customers who never came back. Someone else remembers the launch discount that built the brand. Two field studies, run on real customers over years, show why both memories can be true.

Study one: the discount recruits the uncertain

Michael Lewis, a marketing professor, published “Customer Acquisition Promotions and Customer Asset Value” in the Journal of Marketing Research in 2006. He had customer-level records from two businesses: a newspaper that sold subscriptions at different introductory discounts, and an online grocer.

In both, the deeper the discount that won a customer, the less often that customer bought again and the less they were worth over time. His summary is blunt: a 35% acquisition discount produced customers with about half the long-term value of customers acquired without a promotion.

His explanation is uncertainty. Some prospects aren’t sure the product is for them. At full price they don’t try it. A deep discount lowers the cost of finding out, so they try it, and many find out it isn’t for them. The discount didn’t make those customers worse. It let in people who would have correctly stayed out.

Study two: the discount teaches a good price

Eric Anderson and Duncan Simester ran three large field experiments at a catalog retailer of durable goods, with between 56,466 and 297,405 customers each, and tracked purchases for 22 to 28 months. Some customers got deeper discounts than others, at random. The results, published in Marketing Science in 2004, split cleanly by who the customer was:

So a deep first discount can build a better customer, and the same discount shown to an existing customer can make a worse one. The second half of that finding is the one most brands ignore: every sitewide sale that reaches your established customers is teaching them to wait.

Why both are right

Put the two studies next to each other and the difference is what the customer was unsure about.

• Unsure about the product. Will this newspaper suit me? Will I actually cook these groceries? A discount admits people whose honest answer is no, and they leave. That’s Lewis.
• Unsure about the store. Is this catalog good value? Is it worth checking every time it arrives? A good first price answers yes, and the customer keeps checking. That’s Anderson and Simester.

For most DTC brands, the stranger’s uncertainty is about the product. Will it fit, will the shade match, will it work on my skin, is it worth this much. That’s Lewis territory, and it’s why deep discounts so often produce the wave that never comes back. Where the uncertainty is about value in a category the buyer already understands, like pet food, coffee or razors, a strong introductory price behaves more like Anderson and Simester’s catalog.

A discount answers a question. Make sure it’s the question your customer is asking.

A third study: how the customer arrived

Utpal Dholakia, also in the Journal of Marketing Research in 2006, followed customers of a service business and separated those who joined on their own initiative from those who were induced to join. The self-starters behaved more like relationship customers, and they reacted badly to reminder coupons, which read to them as pressure. Rewards that recognized them, like automatic enrollment in a rewards program, did the opposite.

That matters for the second offer. A customer who found you and paid full price didn’t need a coupon to come in, and sending one may be the thing that teaches them to need it (chapter 17).

What this means for your first offer

1. Name the stranger’s uncertaintyIf it’s about fit or results, answer it with proof, samples, sizing or a guarantee before you answer it with price. A discount will convert people who then find out the hard way.
2. If you discount, make the next price no surpriseAnderson and Simester’s first-time customers kept buying because later prices matched what the first one taught. A 40% first order followed by full-price reorders teaches the opposite.
3. Keep introductory offers introductoryNew-customer discounts go to new customers. Exclude everyone who has ordered, from the popup to the paid social audience.
4. Measure the cohort, not the conversionThe only way to know which study your brand lives in is to compare second-order rates by first offer. The tool below does the arithmetic.

Run your own version

Put in what you know, or best guesses, for a full-price first offer and a discounted one. The tool follows both cohorts for twelve months and tells you what repeat rate the discounted cohort would need to break even.

Do this

• Run the split in the plate above on last year’s customers, with counts beside every rate.
• Write down what your stranger is unsure about: the product, or your prices. That one line decides how hard your first offer should lean on price.