Target Cuts Its Discount In Half And Customers Buy <i>More</i>. What A Country!

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?