Merchandisers and traders are all too aware of the pitfalls on margin and profits however as a marketer, it’s even more important to understand the strategic impact of discounting.
Following recent conversations with start-up e-retailers I pulled together a list of discounting strategies and their uses. However, what I felt was more important than the strategies themselves, were the positive and negative ways in which promotions can be used.
I’ve known online retailers to use tactical discounting as a way of driving forward demand, pulling share of business away from competitors and to increase total sales.
The strategy works well until you need to hit increasingly difficult revenue targets.
Where next? Product innovation or diversity? Use discounting long enough and you may soon end up in a wheel-spin of perpetual discounting, like many sofa retailers.
If sales are so frequent, why would customers ever buy at ‘full’ price?
Consumers are wily folk. Why should consumers pay more than they need to? It becomes a game of cat and mouse. See who gives in first: the retailer (supply) or consumer (demand).
How many of you wait until the sales after Christmas to grab a bargain? Or know that if you book your holiday last minute you’ll grab a better deal?
Discounting can erode your product and brand
A number of articles discuss discounting as a way of slowly killing your business. You might drop product quality to retain profit. Or suffer as competitors crush your margins. Or reduce confidence in the quality of your product.
It is often seen as a negative method of attracting sales and taking away focus on providing value, reducing attrition and using persuasion to generate sales.
If discounting is so bad, how do retailers continue to survive when discounting is so commonplace?
Beware: the extreme consumer
I’m no longer as astounded as I was a few years back in hearing how far consumers go to find discounts.
Some consumers will change their habits to foster savings such as eating and hoarding foods they’d not normally eat, or buying clothes or items for their house which clash or feel out of place.
This is an example of an extreme consumers hell-bent on finding discounts. For some consumers however, grabbing a discount or bargain becomes an addiction.
How do you maintain market share and profitability when it is so easy to search for discounts online?
If your competitor is discounting, can you afford not to? If your competitors are not discounting, do you steal a march and discount? Can you hit the right price point and avoid discounting?
Discounting is big business
A Google UK search for ‘voucher code’ shows 50.4m results. “Discount code” returns 1.29bn results.
The 2013 British Retail Consortium (BRC) figures state there were 189k retail outlets in the UK with £91bn spent specifically online in the same year – that figure is expected to reach £107bn in the UK in 2014. There are clearly a lot of websites discussing or offering discounts chasing a cut of an ever-increasing spend.
The following graph shows the trend in Google UK searches for both “discount code” (red) and “voucher code” (blue).
Clearly consumers are well versed in searching for discount codes. The uplift in searches correlates with the uplift in ecommerce sales over the last five years. Does this mean a retailer needs to ensure they’re discounting?
Your business should discount… intelligently
There’s an insightful write-up (albeit a software focus) via Price Intelligently discussing the downsides of discounting. An interesting point in their write-up is testing price elasticity.
Broad discounting to all your customers in the digital age is a ‘caveman’s approach to discounting’ but are we yet able to move to a more intelligent discounting strategy?
Discounts and promotions often help bring demand forward but this can also become dangerous. Retailers can bring sales forward to hit end of quarter targets for example, which then cause the next quarter to start from a lower sales base.
But then what do you do next? You discount at the end of that quarter too. So you’ve gained market share in the previous quarter but you’re down in the next. And so it goes.
Test your discount strategy
Having tested discounts and promotions on various product categories to measure impact on Average Transaction Value (ATV) I’ve found that there is no silver bullet in understanding what is going to work well for retailers.
The impact of discounting varies based on many factors, including seasonal demand, active above the line (ATL) marketing, existing stacked promotions (like free delivery thresholds) and niche/demand.
However you absolutely can and must test your pricing strategy alongside discounts and promotions to hit the sweet spot between generating sales and profitability, whilst protecting your brand and product image.
For example, if you set free delivery at £50 (or whatever fits your brand) and have an existing ATV of £55, could you discount down to reduce this to below £50 and push a cross-sell item to increase the basket size?
From a marketing view you’re creating additional value to the consumer by adding more items into their basket for a similar cost.
However, if you cross-sell high margin, low priced items to push the order value over the free delivery tipping point, the wider implications on profitability outweigh the cost of discounting.
Hit the blind spot when creating discounts
There are a number of ways to discount, with some methods creating a psychological blindspot as to the actual value of the offer.
Crafty? Yes. Ethical? That’s your call. Fact is, consumers are not as good with complex numbers as they think.
Is 33% more coffee the same value as 33% off the price of the same coffee? Research carried out asked this exact question. The correct answer is no.
Yet most of us are comparing the two numbers and not the fact that the application of the two percentage figures is applied to different metrics.
The final word: protect your brand and product image
Discounting can damage a brand’s image and impact the perceived value and quality of a product. So my question is this; what if you have no brand? And your product is unknown?
The fact is, for a new product to cut-through, regardless of how novel it seems, you either need a large marketing budget to create an artificial buzz or use other methods such as growth hacking or guerrilla marketing tactics.
If your product has a lot of clear value then that’s great. If, however, you need to sell the product in order to generate further demand, using discounting intelligently can help provide the push you need.
Data-driven discounting and promotions is where retailers should be aiming their activity. Email, website personalisation, channel targeting. They’re all mediums into which targeted discount strategies can be aimed to ensure you’re maximising your profits and revenue.
This, for a retailer of any size, start-up or not, is a sure-fire way to success. The counter-argument to targeted discounting is consumers paying varying amounts for the same product. Fact is, each option has a pro and con.
Another approach is adaptive pricing. This is more relevant for established products where you create lower priced spin-offs of your main brand.
Again there is a big risk in your marketing strategy in pulling sales from your main product. But it can work. Think Toyota and Lexus. Or the Premium and Basic versions of various software programmes.
Not all discounting strategies have to result in doom and gloom for your business.
I wouldn’t advocate discounting to simply drive sales, but to be part of your marketing strategy.
Think of the long-term impact of your discounts and promotions. Is is sustainable? Can you grow your business without discounting? One-size doesn’t fit all with discounting strategies and you should test and learn to maximise profitability and revenue.
But do so with one eye on the perception and future growth of your business. And don’t leave money on the table.