Companies often assume that the best way to cement loyalty is to give the biggest discounts to the heaviest spenders, but the economics run the opposite direction. When a firm offers deep price cuts to its core base, it creates a reference point that lowers the perceived value of the entire offering, making it easier for a newcomer to undercut on price and win over price‑sensitive segments.

The discount also dilutes the margin contribution of the customers who already generate the highest lifetime value, forcing the business to lean on lower‑margin sales to stay afloat. A coffee chain that introduced a “buy nine get one free” stamp card for its most frequent patrons found that the card’s allure attracted occasional drinkers, but the reduced price on each cup eroded the profit cushion that previously funded premium locations and exclusive blends.

As the margin gap widened, the chain’s ability to invest in store ambience and barista training—key differentiators that competitors could not easily replicate—diminished, and a discount‑focused rival quickly captured market share by offering a slightly higher‑priced but consistently higher‑quality experience. The lesson is that protecting a moat requires protecting the economics that fund it, not simply rewarding the volume.