Target Cuts Its Discount In Half And Customers Buy More. What A Country!

Written by Evan Schuman
June 10th, 2010

It’s unusual for a major chain to publicly discuss how a change of tender method will impact revenue, so when the 1,740-store Target chain did so Thursday (June 3), it’s worthy of note. In this case, the program—a 5 percent instant price cut when customers use the chain’s branded payment card—delivered not merely lower costs but a material revenue boost. And when something is material for a $65 billion company, that’s really worth noting.

Target tested the program in Kansas City beginning in October 2009 and, the chain said, “guest response has been overwhelmingly favorable, leading to meaningful incremental sales and profits. The response has been particularly strong among our existing better and best retail guests.”

The idea of directly incentivizing (a nice word for bribe) customers to use one card over another is classic psychology, and it’s an approach that should be used more often. But it’s hard to justify for merely a slight drop in interchange costs. What made the Target trial so fascinating is that the financial benefits went go beyond cost savings.

“Sales lifts have been relatively consistent across merchandise categories and stable throughout the test period,” Target said, and “the program is expected to add between one and two percentage points to Target’s comparable-store sales and to be accretive to consolidated earnings in 2011. This program is expected to increase the portion of Target’s sales made on Target credit and debit cards.”

That last line is almost anticlimactic. The point is that this program didn’t merely shift sales from Visa or Amex to Target. It actually increased how much people spend at Target and, on top of that, boosted profits yet further by moving those sales to the in-store card.

This effort replaced an earlier rewards program where cardholders were given 10 percent off, but the savings could only be used for a subsequent shopping trip. In short, when the discounts were cut in half—from 10 percent to five percent—purchases sharply increased. That’s how powerful a difference there exists in consumers’ minds between “give it to me now” and “give it to me later.”

There’s also a question how much of a motivator the 10-percent-off-later coupons were. Did consumers remember them or did they lose them in a drawer, along with gift cards received for a birthday?


4 Comments | Read Target Cuts Its Discount In Half And Customers Buy More. What A Country!

  1. Robert Martell Says:

    Surely this could have been anticipated?
    Who wouldn’t rather have 5% off THIS purchase rather than have to go back and buy MORE stuff to get a 10% discount? On already over-priced merchandise, most likely?
    More likely, customers were annoyed by the 10% Later discounts!

  2. BetterRetail Says:

    While I’m really happy to see a retailer experiment I do agree with Robert’s comment.

  3. Carsten Kraus, Says:

    In almost all experiments immediate benefits win over much larger delayed benefits. So I think it is no wonder. But of course it is always easy to explain _afterwards_ ;-)
    What might add to the positive effect here is that in fact only the _nominal_ discount is halved – while the effective discount is the same: When you buy now, and you get 10 percent off your _next_ purchase, and assuming that next purchase is as large as the current one, you get 10 percent off 200 percent basket value, i.e. 5 percent off in total.

  4. Lee Says:

    Excellent point, Carsten – I hadn’t thought of it that way!

    Somewhat relatedly – I’m far more inclined to take the customer survey encouraged on the receipt if I get an immediate or guaranteed reward (e.g. 15% off next purchase which JCP does) vs the ‘chance to win $1000’. In the later case I only respond if I’m pissed. In the former case, they get all the good experiences as well.


StorefrontBacktalk delivers the latest retail technology news & analysis. Join more than 60,000 retail IT leaders who subscribe to our free weekly email. Sign up today!

Most Recent Comments

Why Did Gonzales Hackers Like European Cards So Much Better?

I am still unclear about the core point here-- why higher value of European cards. Supply and demand, yes, makes sense. But the fact that the cards were chip and pin (EMV) should make them less valuable because that demonstrably reduces the ability to use them fraudulently. Did the author mean that the chip and pin cards could be used in a country where EMV is not implemented--the US--and this mis-match make it easier to us them since the issuing banks may not have as robust anti-fraud controls as non-EMV banks because they assumed EMV would do the fraud prevention for them Read more...
Two possible reasons that I can think of and have seen in the past - 1) Cards issued by European banks when used online cross border don't usually support AVS checks. So, when a European card is used with a billing address that's in the US, an ecom merchant wouldn't necessarily know that the shipping zip code doesn't match the billing code. 2) Also, in offline chip countries the card determines whether or not a transaction is approved, not the issuer. In my experience, European issuers haven't developed the same checks on authorization requests as US issuers. So, these cards might be more valuable because they are more likely to get approved. Read more...
A smart card slot in terminals doesn't mean there is a reader or that the reader is activated. Then, activated reader or not, the U.S. processors don't have apps certified or ready to load into those terminals to accept and process smart card transactions just yet. Don't get your card(t) before the terminal (horse). Read more...
The marketplace does speak. More fraud capacity translates to higher value for the stolen data. Because nearly 100% of all US transactions are authorized online in real time, we have less fraud regardless of whether the card is Magstripe only or chip and PIn. Hence, $10 prices for US cards vs $25 for the European counterparts. Read more...
@David True. The European cards have both an EMV chip AND a mag stripe. Europeans may generally use the chip for their transactions, but the insecure stripe remains vulnerable to skimming, whether it be from a false front on an ATM or a dishonest waiter with a handheld skimmer. If their stripe is skimmed, the track data can still be cloned and used fraudulently in the United States. If European banks only detect fraud from 9-5 GMT, that might explain why American criminals prefer them over American bank issued cards, who have fraud detection in place 24x7. Read more...

Our apologies. Due to legal and security copyright issues, we can't facilitate the printing of Premium Content. If you absolutely need a hard copy, please contact customer service.