John Stevens, CEO, Hosting Facts
If you run an ecommerce site, you are most likely going to have to discount at a point. In fact, the following statistics show just how effective discounting can be:
- Discounting is the single most important factor that consumers consider when doing holiday shopping—with 71 percent of holiday shoppers preferring discounts to every other factor.
- Being offered a price discount is the most effective way to get 95 percent of holiday shoppers to shop with a new retailer.
- While more than half of shoppers do not want to share personal information with retailers, being offered promotions and discounts will make a whopping 61 percent share personal information.
There is a right way to discount, however.
If done right, discounting can rapidly grow your brand and result in a significant sales boost. If done wrong, however, discounting can rapidly dilute your brand and possibly kill your business.
If you run an ecommerce business and want to discount, you don’t want to make the following mistakes:
1. Not Having a Discount Strategy
Running your ecommerce business based on the assumption that regular discounts boost sales—and thereby introducing a discount at every opportunity—will quickly backfire. While there might appear to be an initial sales boost, regular discounting (without a strategy) will attract discount-seeking customers who only buy when there is a discount. It will also train your customers to always expect discounts and as a result make them less likely to make a purchase unless there is a sale.
Apple rarely discounts, yet it is the world’s most profitable public company. JCPenney, on the other hand, recently announced plans to close down 27 stores this year. Its woes can be attributed in part to discounting done the wrong way. After building a brand largely dependent on discounts, and realizing that this is negatively impacting its profits, J.C. Penney decided to pursue a “no-discounts” approach. In the 13 months following J.C. Penney’s decision to pursue a no-discounts approach, its sales and shares dropped rapidly—prompting the company to revert back to discounting.
While discounting once in a while can be good to attract customers or get rid of inventory, doing so at every opportunity can backfire—it is difficult for a business to thrive if customers will only buy when there is a discount.
2. Discounting without really paying attention to your margins
On its own, discounting alone rarely works as a sales strategy; at least that is what many ecommerce businesses have discovered. Major retailers such as Ralph Lauren, Michael Kors, and Coach have begun to cut down on discounting after realizing that it isn’t helpful for their bottom line and that it is negatively affecting their brand’s perception among consumers. In 2018, Ralph Lauren publicly disclosed that discounting was threatening its profit margins. Gap, on the other hand, had one of its worst years in 2018; despite heavy discounting, that negatively affected its profit margins, sales were down for most of the year.
When discounting, it is important not to discount just for the sake of it; discounting on its own rarely works as a sales strategy, particularly when the goal is to get long-term customers, so it is important to avoid discounting in a way that can negatively affect your margin.
3. Not considering how discounting impacts your brand image and perception
Apple is a luxury brand. This is why Apple can easily demand (and have users pay!) two to three times or more for a product similar to that of its competitors. Why is this possible? Because Apple has strategically built a brand image and perception that makes users want to pay a premium for its products.
By contrast, Ralph Lauren, also a luxury brand, tried to pursue aggressive expansion by selling its products at a discount in department stores and outlets; this had a negative impact on its brand image, significantly devaluing its brand. Realizing this, Ralph Lauren decided to cut down on the discounts, and its decision is already paying off. Stores such as Michael Kors and Gap are also cutting down on discounts in order to protect their brand image.
The point of all this: before pursuing a discount strategy, carefully consider how it impacts how people perceive your brand. Regular discounting rarely pays off for luxury brands, but other types of business might be able to use smart discounting to boost their user base.
4. Showing the same discount offers to everybody
One of the biggest mistakes you can make when it comes to discounting is not targeting your offers. When everybody sees the same discount offers, your conversions not only suffer but you could also alienate some of your customers.
For example, if a customer ordered a product for $40 on your ecommerce store a few weeks to a discount event and then suddenly gets an offer for the same product at $20, a 50 percent discount, besides the fact that the offer was sent to the wrong person, the customer is likely to feel insulted and cheated and less likely to trust your brand in the future.
To discount effectively, make sure you do not show the same discount offers to everybody; discount offers should be targeted to people based on their personal information and activities on your website, and discounts promoting a product should not be sent to people who already purchased the product.
5. Not using discounts to encourage and reward brand loyalty
Many major brands that have employed a discount strategy have seen it backfire and dilute their brands. If done right, discounting can actually strengthen your brand.
A good way to use discounting to strengthen your brand is by employing discounts in a way that encourages and rewards customers for being loyal to your brand; for example, customers who have been with your brand for three years can get a discount on their three-year anniversary. Customers who have purchased a certain number of items from, or who have spent a certain amount with, your ecommerce business can get a particular “reward discount.” These reward discounts aren’t available to every Tom, Dick, and Harry, but are only available to loyal customers of your brand; as a result, instead of diluting your brand value, they strengthen it.
In Conclusion
Use discounts sparingly. If you really have to discount, however, it is important to avoid making the above five mistakes to prevent your discounting efforts from backfiring.
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