🛍 How to make new-member discounts work

Clever customer acquisition strategies from Uber and HelloFresh

Earlier this year, a personal finance startup called Personal Capital offered users a $20 gift card if they invited a friend who made an account; the friend would get $20 too.

So, predictably, many people set up accounts, invited a bunch of friends, took the money, and never touched Personal Capital again. The people they invited probably deleted the app the moment they got their gift cards, too.

Throwing bushels of free money at people is a great way to get attention, but chances are that this campaign didn’t translate to many new users.

So how do you design a new-member discount that actually earns you loyal customers?

🥑 HelloFresh’s five-part discount

The meal kit delivery service HelloFresh provides a good example. Neel signed up for an account this week and learned he would get $80 off. But check out how they offered it: it was split over 5 meals instead of being one lump-sum discount.

Weaning you off gently

By splitting the discount over five orders, HelloFresh tempts new users to order five times instead of once — enough to make ordering from HelloFresh a habit.

But there’s a reason why HelloFresh didn’t just offer five $16 discounts, instead opting for this diminishing schedule of $30–$20–$10–$10–$10. Brand-new customers need the most encouragement, which takes the form of a higher discount. By their fifth order, customers understand HelloFresh’s value proposition and need less incentive to keep ordering.

This method also avoids the onboarding cliff. If customers got five $16 discounts and then $0 off their sixth order, many of them would abruptly quit after the fifth as their discount fell off. But by weaning customers off gradually, HelloFresh ensures there’s a gentle transition from discount-land to no-discount-land, and thus a lot less customer drop-off. It’s like the boiling frog joke.

Product managers tend to take a pretty naive view of customer acquisition: throw money at people and hope they stick around. HelloFresh’s strategy, though, shows that you have to hold new users’ hands until they’re ready to become loyal.

The magic 3:1

An interesting aside: the $80 customer acquisition cost (CAC) shows that HelloFresh thinks its customer lifetime value (LTV) is above $80. Any less and they wouldn’t offer this discount. But we also know that most startups try to get a LTV:CAC ratio of at least 3:1 (the “magic number”), so HelloFresh’s LTV is probably north of $240.

That’s pretty solid — so offering this $80 discount is a way for HelloFresh to flex its financial success to investors, in addition to luring customers.

🚗 Uber’s choose-your-own-adventure

Uber’s new member discounts throw in another fascinating twist. They let you choose your own savings schedule:

Tradeoffs

First, Uber doesn’t offer a huge discount on a single ride in the Personal Capital mold. If they did, you can bet that a bunch of Lyft loyalists would sign up for Uber, snag a free ride, and quit immediately.

More interestingly, note the tradeoff: you can get more savings per ride but save less money overall ($5 * 3), or save less per ride but get more money back overall ($2.50 * 10). Uber would prefer that you do the latter, since someone who uses the service 10 times is a lot more likely to become a loyal (and profitable) customer than someone who uses it just 5 times. The higher $25 reward steers people toward the most “habit-forming” onboarding option.

Plus, the smaller the discount, the less steep the onboarding cliff. You might notice when your $5-per-ride discount ends, but you probably would pay little attention to your $2.50-per-ride discount wearing off. Again, the gentler the handoff from “incentivized new user” to “loyal customer,” the better.

The evolution of Uber’s discounts

Back in the day, Uber’s new-member discount was a lot less sophisticated: you’d just get $20 off your first ride. If it was a cheap enough trip, it would be completely free.

Throwing easy money at people without demanding any loyalty in return might have been necessary when Uber was less famous, but the fact that this promotion is no longer around shows that it wasn’t the most effective move in the long term.

Uber has clearly learned how to craft effective new-member discount strategies, so keep an eye on them to see how the field advances.

♻️ The power of ESG (sponsored)

When evaluating startups, most people look at stats like annual recurring revenue (ARR) or average revenue per user (ARPU). But there’s an underrated factor that’s rapidly growing in popularity: “Environmental, Social, and Governance,” or ESG.

ESG are a trio of non-financial factors that investors use to analyze businesses. Mutual funds and pro investors alike have started making ESG a centerpiece of their portfolios, to the tune of $30 trillion in investment. Analysts predict that the ESG market could grow to $50 trillion in the next twenty years.

Why all this growth? Companies that do well on ESG are long-term thinkers and thus better able to deliver consistent, low-risk returns for decades to come. Plus, ethics, sustainability, and transparency are becoming increasingly important to people who invest in these funds.

A good case study of an ESG-centric business is FaceDrive ($FDVRF). This “people and planet first” unicorn offers sustainability-focused food delivery, healthcare, clothing, ridesharing, and e-commerce products. What’s more, all these ESG-powered verticals launched in just one year.

Unlike companies that tack ESG onto their business model, FaceDrive made ESG the core of their strategy — and the company’s rapid expansion shows how successful this can be. Read more about ESG and FaceDrive here.

All investment strategies and investments involve risk of loss. Nothing contained in this email, including this sponsored message, should be construed as investment advice. Any reference to an investment's past or potential performance is not, and should not be construed as, a recommendation or as a guarantee of any specific outcome or profit.

🗳 Bonus post-election reading

Now that the chaos of the American election is (mostly) behind us, it might be helpful to unpack the logic behind politicians’ often-bizarre actions. Curl up with this series that Neel wrote, applying concepts from data science, economics, and statistics to break down campaign strategy:

  1. Persuasion vs. Get-Out-The-Vote

  2. Elasticity

  3. Undecideds in Polls

  4. Brittle Gerrymandering

  5. High-Variance Plays

A lot of what you’ll read is applicable to general strategy problems, too.

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—Parth, Adi, and Neel