Are cashbacks promotional or loyalty tools?
By: Pedro Ramalhete
Tags: Promotion, Loyalty, Discount, Retail, Cashback

Recently, cashbacks have become one of the most popular incentive tools used by companies from different industries. Most companies around the world are using it and Brazil is no exception.

Cashbacks are an incentive tool that aims to stimulate incremental sales by returning to the buyer a percentage of the purchase in cash. The goal is similar to other promotional tools like discounts and coupons.

There is a growing number of companies creating cashback platforms funded by affiliate marketing. In Brazil, the biggest platform had, in the last quarter of 2020, 5.3 million monthly accesses on its website, generating a revenue of 110 million reais for the full year (around 20 million dolars).

Banks and retail companies use cashbacks as a reward for transacting with the brand credit card, wallets are giving cashbacks for payments on their platforms, apparel companies use it as a reward for buying cloths, telecom companies reward customers when buying internet bundles.

Statista, a market data platform, says that in 2018, 55% of US consumers and 52% of UK consumers got cashback from a purchase.

In Brazil, in 2020, the revenue of discount and cashback programs as a percentage of total e-commerce revenue was 6,92%.

But what are the benefits of cashback?

Attract customers. Promotions with cashback are effective in attracting customers to try the product or the platform. Companies use quick promotions with high cashbacks, sometimes higher that 20%, to gain incremental sales.

Customers receive an instant benefit that can be used to buy products of the same brand or cash out to other benefits. Some customer segments are attracted to these incentives.

Repurchase effect. The 2020 Global Cashback Report shows that cashback is a powerful incentive for consumers to return, often within a week of receiving their cashback rewards, to spend more on their favorite online shopping sites. Cashback promotions create a 3.4 times lift in conversion rate and an average order value increase of 46% (from $76 to $106) according to research.

According to a paper published by Marketing Science Institute, Prasad Vana, Anja Lambrecht, and Marco Bertini, 9.6% of the money paid out in cashbacks is spent again through the cashback company.

Easy to implement. Most brands can implement it using proprietary systems or create affiliate marketing programs. The company can create a wallet to credit the cashback or credit it in a bank account.

Reduce payment costs and stimulate usage. Some companies are building their own wallets to credit cashbacks, when the cash is used to repurchase products there will be no fees to acquirer companies. Program economics will benefit and will stimulate the use of the company wallet.

Flexible parameters. Companies can cap costs by implementing expiry dates or limit the cashback to repurchases on their own products or platform. However, these tactics can have a downside effect which is frustrating customers and decrease engagement.

Whats is the best tool? Cashbacks or Discounts?

Discounts are effective promotional tools that decrease entry barriers and stimulate incremental sales. Depending on the case discounts can be more or less effective than cashbacks.

In a product company or retailer, if cashback is considered a discount for tax purposes, a 10% discount and a 10% cashback will have the exact same cost.

However, a differentiated tax treatment will favour discounts because taxes will be calculated on a lower tax base which will reduce the discount cost.

This effect can be offset if the company puts in place caps that limit the customer usage of the cashback and expands the percentage of customers that will not use it, in this sense cashback is a more flexible tool.

One-off discounts have a short-term effect because they don’t have the repurchase effect or stimulate usage like a cashback.

Long term discounts have a more pronounced impact. In a previous role in a telecom company, we used successfully 6 months discounts as a tool to attract customers to higher value price plans. SAS companies use this often as an entry strategy.

As short-term discounts, cashbacks seem to impact strongly price-seekers and low income segments than those with greater income.

Is cash back a loyalty tool?

Some authors define loyalty as a customer decision to use a brand on a preferential basis over time. Clearly cashbacks produce two incentives: i) a short-term incentive to buy a product and ii) repurchase incentive to make another buy. Doesn’t seem to solve issues that drive long term loyalty, like customer experience.

In addition, more brands use cashbacks as a promotional tool which increases competition and costs and reduces any kind of advantage that a company might have.

This effect is more pronounced when using this incentive through platforms where the cashbacks can be used in competing products and companies with higher market share are likely to have an advantage with a higher probability of a repurchase.

Cashback and loyalty programs

Rewards programs that offer a redeemable value in the future are harder and expensive to manage but offer a much more differentiated value proposition.

Successful and well-designed programs are customer centric which means that have they have a precise target segment or segments and use different types of benefits and incentives in order to increase customer experience and customer life time value.

Cashbacks will be one more benefit that such programs can use to increase program value but not a substitute.

In short, cashbacks are a strong and easy to implement incentive in attracting lower income and price seeking customers and to stimulate repurchase, but not sufficient to drive long term loyalty or to substitute well designed loyalty programs.