Building A Winning Ecommerce Discount Strategy
by Kathleen Booth, on Nov 11, 2021 9:00:00 AM
Discount and coupon campaigns have long been a powerful marketing tool for retailers, and the practice has carried over into the online ecosystem.
Attracting new customers can be difficult, but digital tools can make it easy to reach an ever-increasing number of online customers.
The trick to a successful strategy is knowing how much to discount which products - something you’ll learn by tracking customer activity and deciding what your overall goals are.
In this article, we’ll break these steps down, as well as offer some ideas on which strategies may work best for your business.
Knowing How Much To Discount
If you want to run a successful and profitable discount strategy, you need to calculate the discount against what your gross profit margin is, how much you usually mark up your prices, and your breakeven figures to see what’s needed in order to turn a profit.
Gross profit margin (GPM) is typically calculated as your revenue subtracted by the cost of goods sold (COGS), then divided by your revenue.
With this, if your regular GPM is 20% and you decide to run a 5% discount, you would need a 33.3% boost in sales in order to still make the same overall profit.
Here’s a quick table that shows the sales increase needed to counter the effect of discounts on your gross margin.
Of course, there is no guarantee that discounts will lead to an increase in sales. As is the case for most marketing strategies, you need to view lost revenue as an investment in the long-term growth of your business.
Knowing Which Products To Discount
Now that you have a comfortable idea of how much you should discount your products, the next step is understanding what products should be the focus of your discount campaign.
This will change depending on these factors:
1) What is the goal of your discount?
Whether you’re trying to move old inventory, promote new products, or gain new customers should change your approach to discounting.
For example, it’s unlikely you will attract new customers by discounting old products that did not sell as well as you hoped. Conversely, offering loyal customers discounts on popular products will needlessly harm your revenue.
In short, finding the right combination of factors to achieve your sales objectives will be key to a winning strategy
2) Who is your customer and how do they interact with your business?
Using your site metrics to track how customers engage with your brand will provide valuable information on your customers’ behaviors.
How do new customers come to your site? What does a repeat customer purchase vs. what first-time buyer? How does someone's age or location determine their purchase?
Segmenting these behaviors will help you create more personalized strategies that will be more effective than broadly targeted discounts, and inform you about which products will benefit the most from discounting.
3) What value is your discount adding to the business?
It’s important to remember that discounting too often can harm your brand’s reputation in the eyes of your customers. It will also lower customer lifetime value (LTV), and increase your cost to acquire customers (CAC).
Make sure the long-term goals of your discount strategy are focused on bringing in new business and improving your revenue. Picking the right strategy will be crucial to accomplishing this
Choosing a Discount Strategy
Once you’ve identified the products to be discounted and set your goals, picking a strategy is the next step. Below are a number of tactics you can use to structure a discount campaign, each capable of accomplishing slightly different objectives.
1) Bundled Discounts
With bundled discounts, you offer shoppers a lower price on a group of items rather than lowering each price individually.
The benefits of this approach include:
- Increasing the total number of products sold: Customers love a good deal and are likely to convert on items that offer more bang for their buck. This means you can increase your average order value and move more products by enticing customers to increase their cart size with a discounted rate on bundled products. It may seem like bundled discounts run the risk of causing revenue loss, but the boost in sales will quickly make up for sales lost to discounted prices.
- Move unpopular products by bundling them with popular ones: This strategy is ideal if you’re having trouble moving out-of-season products. By attaching unpopular products to your bestselling ones at a discounted price, you can move out old inventory, increase your AOV, as well as...
- Get customers to try your other products: Getting customers out of their comfort zone can be difficult and frustrating, especially when you know they will enjoy a product that isn’t naturally on their radar.
Putting items you want customers to try together with ones they already want is a great way to grab their interest, especially when offering the item at a discounted price.
A helpful hint when setting up a bundled discount is to look at the items your customers often buy together. It can make sense to sell unrelated items together in order to move inventory or have customers try something new, but the most effective bundling will be with items that complement each other.
This way, you can add value to the bundle by discounting products customers want to buy together anyway.
2) Volume Discounts
With a volume discount, you offer customers a discount on an item that is being sold in bulk. Volume discounting can benefit your business by increasing your average order value (AOV) while also quickly moving inventory to make space for new products.
This is a common tactic for essential household goods, like soap, shampoo, and paper towels, that customers need to constantly refill.
3) Event/Seasonal Discounts
Black Friday, Labor Day, and Christmas sales are just as familiar to shoppers as the holidays themselves.
Because of this, many shoppers go into those holidays ready to make purchases, and you can take advantage of that by offering discounts.
Because these events happen around the same time every year, you can plan on using these days to move out old inventory and prepare for the next season.
One drawback to these seasonal events is that you may attract bargain hunters that are less likely to become repeat customers. You can counter this by requiring user email addresses in exchange for discount codes so you can directly retarget them in the future with email or audience match ad campaigns.
4) Free Shipping
Customers love free shipping. It is the backbone of the Amazon empire, and unexpected shipping fees are consistently ranked as the number one reason for cart abandonment. Offering free shipping is one of the most effective ways to increase conversion rates on your online store.
There are a couple of ways to implement a free shipping discount. Offering free shipping across all items for a day can give a quick boost to your sales, but you can also try having a regular policy for free shipping when customers reach a certain order value.
This way, you can regularly push customers to increase their average order value, thereby making up for the costs of shipping their items.
5) Buy One/Get One Free
Buy One/Get One Free—or BOGO— promotions are one of the most common and familiar ways to discount items and move inventory.
With Buy One/Get One Free, you can grab the attention of casual customers who may be interested in trying your product. Remember that you don't have to offer two of the same product, but can also pair items together in a way that can be appealing to your customers.
6) Exclusive Discounts
Exclusive discounts are a great way to push customers to sign up for your loyalty program or a premium subscription option.
By creating exclusive discounts for shoppers that have become part of a “member’s only” group, you add clear value and incentives to joining such a program, while benefiting from the first-party data (email addresses, etc.) that shoppers share with you as part of their application to join.
It’s important to make sure that membership fees and discount rates actually end up saving users money, or they will quickly turn away from joining. Long-term customer loyalty will always payout better than trying to manipulate shoppers into spending more, only to have them never return to your business.
7) Milestone Discounts
Milestone discounts are when you offer customers bonuses and discount rates after they have completed a certain amount of purchases in a set time frame.
This is one of the most effective ways to attract repeat business, as the sense of urgency tied to earning a deal on your products motivates customers to continue to shop on your online store.
Loyalty points are one of the most common ways of implementing this strategy. This is when users earn points on purchases and can then redeem them for a “free” or discounted product or service down the line.
8) Win-Back Discounts
Cart abandonment is one of the most common and frustrating obstacles online retailers face.
A great way to minimize it is through email marketing and win-back campaigns. If you use a customer relationship management (CRM) or marketing automation platform, you can create automatic email campaigns that target shoppers who have abandoned their carts before making a purchase.
In these emails, you can offer them discounts on the product that was in their cart (or similar products) in order to attract them back to your site.
9) Mobile/In-App Discounts
Mobile shopping continues to be the fastest-growing form of online shopping.
Optimizing your website for mobile can be tricky, and because of this many shoppers prefer to use an app (rather than a webpage) when shopping on their phones.
If you’re looking to expand your mobile base, you can offer shoppers that download your app discounts on products and services.
Pros and Cons Of Discounting
Coupon and discount strategies are some of the most common and useful ways businesses attract new customers and drive revenue. But that doesn’t mean they are without their risks.
Here's a quick list of how discounting can help your business, and how it may also leave you vulnerable:
- Reward customer loyalty
- Move out of season products
- Target new customers
- Increase cart values
- Retarget abandoned purchases
- Track the performance of different marketing channels or tactics
- Can lower perceived brand value
- Lower margins can lead to lost profit
- Attracts bargain hunters and more price-sensitive shoppers
- Can train customers to expect discounts with every purchase, lowering lifetime value
- Puts you at risk for coupon fraud
Offering too many discounts can not only damage your margins, but it can also hurt your brand reputation as well. Customers may start to associate your discount with the quality of your brand, and this may lead them to avoid your products.
Also, many of your discounted conversions may end up being bargain hunters with no intention of becoming repeat customers. These shoppers might help you move out of season inventory, but are unlikely to become a part of any loyalty program or contribute to your long-term marketing goals.