Who doesn’t love getting a discount? I do and I’m sure you do as well. You see, that’s the problem though. We all LOVE discounts and we love them a little too much. Too much for who you ask? Too much for DTC ecommerce merchants to achieve the levels of profitability that they need!
Ecommerce merchants are turning into Dr. Frankenstein and intelligent consumers have become Frankenstein’s monster. DTC ecommerce growth has absolutely exploded in the past year, reaching almost $18B in 2020. That’s fantastic, and we love to see it. However, a significant amount of that growth has been fueled by the discount machine: merchants using sales and discounts as a crutch to win profitless revenue. Some merchants are hooked on offering discounts. Now that they’re hooked, it will be extremely difficult for them to revert to the straight and narrow.
They’re just discounts, what’s the big deal?
The problem isn’t offering a discount. The issue comes with offering discounts too often and in the wrong amounts. What this has done is conditioned savvy customers to game the system. We now have created a consumer culture where customers will intentionally abandon carts of their favorite items and wait for their 20% off coupon as a reward for returning to their cart and completing the purchase.
The feeling must be extremely satisfying when you’re able to game a merchant’s discount system like clockwork. However, I know that the feeling is not mutual. Discounts that are applied in this fashion are DESTROYING margins.
Sometimes the abuse of discounts isn’t as cut and dry as my previous example. Sometimes they are just overused in general. For example, let’s consider a merchant that sells face masks. Some of their customers use their products on a daily basis, some weekly, and some on a monthly basis.
A week passes and purchasers of the face masks are already receiving SMS and emails offering them 20% off their next purchase. They do this every week until the customer comes back. See the problem here? What if a customer used their face masks less frequently than other customers? They didn’t need a discount to convert. They were going to come back anyways, as soon as they ran out of face masks. But they were sent a 20% off promo code, so now they EXPECT it when they do want to come back and purchase again.
What’s the big deal?
Now, some might read my little scenario here and say, “Hey, wait a minute, the person converted! Why is that such a bad thing?” My point was not whether or not discounts are effective drivers of conversions, but rather that they are often used excessively to solve a problem that usually does not exist. Sometimes customers need a little push in order to get them back onto your store and purchasing more items, but sometimes they just need time.
When a discount is pushed at an inappropriate time, it teaches shoppers to expect it, whether or not they convert with that discount or a future one. As a result, it kills bottom-line profit. I will not argue with its effectiveness to drive quick conversions – it often does, as shoppers may believe that the opportunity to buy for less is temporary. Yet, if you send every shopper a promo code every week, it won’t take long for people to realize that your brand is always on discount.
For some VC-backed DTCs who have cash to burn, they might put profitability on the back burner and want to drive hyper growth for a few years. Other DTCs are simply not in that financial position. Regardless, eventually the day will come for every single business where they need to be concerned about profitability. So when that day comes, what happens to your sweet, sweet discounts?
Living in a Post-Discount World
Will we ever see the day where discounts, sales, and promos aren’t a part of ecommerce? No chance! However, merchants need to be more selective and careful about when and how they discount. Discount too much, and there may be no coming back from the hole we’ve dug ourselves where shoppers expect, or even demand, discounts on a frequent basis.
Alter your discount strategy without frustrating customers
Once you’ve come to the realization that a change needs to be made, it can be scary. Some questions arise. Will this make me uncompetitive? Will my conversions fall? Will my customers be angry? If done correctly, the answer is: no. Here are a few strategies, tips, and ideas for weaning an ecommerce store off the overuse of discounts, sales, and promos.
1. Your timing is off
What do they say? Timing is everything? Well, it's true. Discount timing means two different things. The first is what I was discussing earlier in this blog post. People shop differently and in their own time. People consume products at different rates. Be careful when considering how much time is enough time to pass before it is safe to say that someone either forgot about your store or had a problem with your prices and needs a little push to come back for more. Merchants are all too often quick to jump on the opportunity to blast out discounts and promo codes to customers who don’t need them yet. Be patient!
Second, timing your discounts also refers to seasonality. This is something that might take some merchants years and years to figure out and perfect, but the best time to start is the present! Of course, you have to offer Black Friday and Cyber Monday sales because that is when customers are expecting sales.
However, most merchants have no clue when else they should be offering sales. Summer sale? Winter sale? Spring Sale? New Years sale? Could there possibly be others! It all depends on what your shopper and sales data is telling you.
The BFCM Paradox
Like any business divisions, there are tradeoffs that come when offering sales during the expected times (ie BFCM) as opposed to offering them at unconventional times. Customers have come to expect BFCM sales and the beauty in offering them is that merchants can anticipate the surge. You know that it's coming, and you can prepare for it. This is why inventory forecasting is so incredibly important for BFCM and the rest of the year as well. Click here to read all about inventory forecasting in an earlier blog post I wrote.
While being able to prepare for the seasonal sales surges is great, it comes with some downside risk. When inventory forecasts are poor, it is very easy to overstock and be stuck with a lot of extra inventory. It is also very easy to understock and miss out on millions of dollars in sales. I’ll leave it to you to decide which is worse. The reason why inventory planners can be so off the mark during BFCM is because there are so many external factors involved that merchants simply cannot control. The most obvious one is that while you’re running your BFCM sales, everyone else is too, and customers know it. They are overwhelmed by the number of deals to be had that are just out there on the internet waiting for them. Often, this leads to customers getting distracted and often not making it to every store that they would have liked to, leaving some merchants high and dry.
Beyond the Holiday Sales Cycle
So, we’ve established that sometimes it just makes sense to follow the trend of BFCM. However, most merchants don’t realize that there might be other times during the year that are suitable for running a sale. What’s even better is that these times might not be optimal for competitors or they simply might be unaware of these opportunities because they don’t conform to the typical seasonal sales cycles.
Finding these hidden opportunities
This is easier said than done. A great way to start is to offer your largest sales during the “off season” (meaning not during BFCM). This conditions your audience to look out for your sales during unconventional times. Even if customers aren’t looking out for sales, running sales during unconventional times increases the likelihood that you’ll be able to catch their attention. You won’t be fighting for eyeballs in ultra competitive digital ad markets. This process might take several years, but the lessons that you’ll learn from running unconventional (and sometimes even random) sales will set you apart from the pack and help you discover that BCFM is not the only time to cash in on running a sale.
Alternatively, you could use Pricestack’s Predictive Ecommerce Analytics to see sales calendar insights that are modeled based on your historical sales data. Pricestack uses advanced forecasting techniques and AI to determine when the best time is to run a sale. In addition, Pricestack also models sales at different percentages so that our users can run the right sale, at the right time.
2. You’re giving away too much or too little
Above, I stated that some of the worst things a merchant can do are to run too many discounts or run discounts at the wrong times. However, there is something even worse: offering excessively large discounts!
Finding a happy medium
Over discounting doesn't just mean that you offer too many discounts. It also means that you’re offering discounts and promos that are too large. Face it, when setting discount percentages, you’re probably guessing. You’re probably looking at your cost of goods, your margins, and maybe even what kinds of discounts your competitors are offering. But what you’re not looking at is what’s right in front of you: your own sales data.
Optimizing discounts is something that can be done through a series of testing techniques. Sophisticated merchants can set up tests where they offer varying discounts to similar customers and see how the varying amounts impacted conversion rates. This is a slow process and it doesn’t have laser accuracy, but it can drastically improve a merchant’s understanding of how off-the-mark their old discount strategy was.
The truth is, not everyone needs that standard 30% off discount. Maybe, most of your customers don’t! Sometimes, customers only need a 20% or 15% off discount to convert, but when you give them a larger discount than they needed to convert, they’re of course going to take it. Why would they not? I would and so would any other sane person. Who doesn’t like saving money? And they’ll learn to expect it next time, too.
To be fair, there are some people who never use discounts and promos. They want what they want. If they like it, they buy it. However, a majority of people will use a 30% off promo code even if they only needed 10% off to entice them to buy that product that they’ve been eyeing for a few days. This is KILLING margins, and what’s even worse is that merchant’s are learning very little about customer behavior when they merely offer everyone the same large, generalized discounts.
Occasionally, you run into the problem where you are not discounting enough. Some ecommerce merchants might have read some content about this topic and said to themselves, “Well that’s it! We’re slashing our discounts down to only 10%!” That might get you into some trouble as well. One, anytime you’re asking people to pay more, expect to see some recourse. Sales will probably drop in the short run and you might get a few angry customers. More importantly long-term, you’re probably missing out on a lot of conversions.
What if someone only needed another 5% off and they would have decided to convert? What if they needed another 10%? Is it worth sticking to that “10% off and not a penny more” mentality and missing out on a ton of sales?
3. Your discounts aren’t personalized
Some merchants send standard discounts to everyone. It’s the same email with the same number, call it 20% off, and every single one of their customers receives it. Some merchants are getting a little more sophisticated with this and setting triggers to send people discounts and promotions of various amounts depending on whether or not they set off the triggers. Most of the time, these triggers are some types of behavior.
These methods are getting closer to optimal, but there is a long way to go. Merchants are still not getting personal enough. Like I said above, people’s willingness to pay and value threshold varies greatly. Some customers will pay list prices, some need 10% off, some 20%, and some just don’t like the product enough to buy it. That originality is what makes us all human, and there is nothing wrong with that. Originality should be celebrated! However, this puts ecommerce merchants in a tricky situation.
Regardless of how ecommerce merchants are segmenting customers or setting triggers to send discounts, people are still being grouped. By grouping people, you make the assumption that the people in the group are statistically the same. This is tricky to do correctly and often doesn’t work as well as it truly should. It’s time for discounts to be personalized and sent on an individual basis.
Building and maintaining tens of email flows isn’t enjoyable or accurate.
The Future of Discounting + Closing Thoughts
The future of discounting looks bright – very bright! In fact, Pricestack is conducting invite-only beta testing of a solution to automatically send personalized discounts using AI. We think it’s time that merchants can finally send the right discount, in the right amount, at the right time, to the right person. That last part is key. Not everyone needs a discount and not everyone needs the same discount.
However, in some cases, discounting isn’t even the best option. Sometimes, your pricing strategy is just suboptimal and some of your products need a price adjustment. Click here to read about price optimization!
Connect with your customers, improve customer loyalty and best of all, increase customer lifetime value by offering personalized discounts.