The reason why discounts work is because price is a massive issue for consumers. In research we undertook into shopper’s attitudes, 35% of feedback from consumers was price related: 14% specifically about high prices and 8% about discounts.

The popularity of discounts is also clearly illustrated by the uptake of deals sites, with 60% of web shoppers subscribing to one or other of the services and spending a total of $3.6bn dollars via them in 2012 (BIA/Kelsey).

Discounts can also make sense on a financial basis. Rising traffic costs means that the cost of discounts can be balanced against the cost of traffic.

For example, in the average travel purchase a visitor may make around five visits before converting. Many of these visits may be from paid channels such as PPC, therefore it may make financial sense to offer a discount early on in the purchase cycle to avoid the subsequent marketing costs. 

Mobile will only make discounts more important. Increased mobile purchasing behaviour combined with the growing importance of local search will all combine to open a new discount market in time-sensitive, geographically based offers served via mobile.

The challenge for retailers is trying to use the value of the discount options on offer whilst maximising the margin opportunity from each customer.  

There are some situations where discounting is a no brainer. For example when you have excess stock in a hotel or from the latest fashion range, or when you’re trying to drive customer loyalty by securing that first time purchase.  

However, you don’t want to scatter gun your margin offers. In an ideal world, you only want to be discounting to those people that it will make a difference to and, each time, by the exact amount that will make that user convert.  

Discounts can have an immediate positive impact on your revenue but, if this comes at an unacceptably high margin cost, then the model falls down.

This balancing act is one of the hardest for a retailer to pull off, and there can be risks in trying to play the discounts game.

For example, deal affiliates such as the major voucher sites can often be the ‘last click’ in a purchase cycle, as bargain-savvy shoppers research a product and then purchase using a voucher as their last act.

This can lead retailers to undervalue earlier channels in the purchase process and thus overestimate the value of discounts as a sales driver. This anomaly graphically demonstrates the value of good attribution modelling and highlights the skewing nature of discounts.

The fact is that discounts should always be seen as the last resort, and ecommerce businesses should try and find smart ways to improve conversions without giving away margin via a deal.

For example:

  • Changes in customer experience to increase the sense of urgency (e.g. only two rooms left!)..
  • Target messaging (e.g. giving new visitors a sense of your business’ USPs).
  • Offer enhanced product information (e.g. sizing guides, rich product imagery etc).
  • Promote conversion driving content (e.g. reviews, ratings, live chat etc). 

There’s no doubt that discounts are a powerful tool, but they should be seen as the nuclear option, to be used only when the business logic is sound and the alternatives exhausted.

Instead, businesses should focus on understanding their customers and giving them the personalised service, content and tools that they need to convert.

Some of this might be discounts, but it should be offered in a way that doesn’t de-value the brand or reduce margin for short term revenue gain.