One of the most common strategies for an ecommerce store (or physical store for that matter) to drum up business is to offer a discount.
It makes sense.
As shoppers, we like to save money where possible, and discounts help give the perception that we’re saving money.
If we take a quick look at our email inbox, a lot of the subject lines we see from marketing emails are offering a discount, coupon code, or some kind of monetary incentive to attract customers.
A quick lookup on Google Trends will reveal that the number of searches for terms like “discount code”, “coupon”, and “online sale” have been steadily increasing, revealing that savvy online shoppers are hunting for deals to save money.
On top of that, according to Social Annex, 70% of people have reported opening brand emails purely looking for coupons. With this desire among shoppers to save, brands have applied frequent discounting tactics to compete for the wallets of prospective customers.
At face value, this may seem like a prudent strategy, especially since every company seems to be employing this tactic. Your business promotes a sale, customers come to your site and sales are generated.
However, the reality of discounting can set your business on the course of a downward spiral, as the “race to the bottom” has proven to be an unsuccessful long-term business model.
In this article, we’ll cover why discounting can be a bad sales strategy and offer alternative solutions to attract customer engagement.
Why offer a discount?
So if discounting is a path to doom, why offer discounts at all?
The simplest answer is that discounts work.
People love saving money and will hunt for bargains whichever way they can. From a business perspective, discounting can be a way to jumpstart sales when orders are slumping. This is because you can potentially attract new customers to your brand with an incentive to transact right away.
Discounts are also great for re-engaging lapsed customers that haven’t transacted in a while, as the monetary savings might just be enough to bring them back into the fold.
Discounting is essentially a short-term solution to attract, incentivize or revive sales, but they start being bad for business when they become too frequent, to the point they become predictable.
The discount seems Beneficial now, harmful in the long run
- Recently, many eCommerce brands have adopted an unrealistic pricing option to sell their goods and to draw a large customer base. This is actually hurting the sale of the retailers who are putting their money and not achieving their sales targets.
- Flipkart, an Indian eCommerce brand offered unrealistic discounts on Flipkart’s Big Billion Day sale and achieved the business of Rs. 600 crores on that day.
- Snapdeal additionally announced the same sale. These sorts of unrealistic offers at heavy discounts draw a large group of people and thereby contribute to the revenue generation of the organization.
- The unrealistic pricing is benefitting the brand and the shopper who get the products at a very low price due to big discounts. However, when the entire system is considered, it is eating up the cash flow into the Indian physical market.
Problems that come with discounting
You might be thinking, if discounts work and people buy, what’s the harm?
Although there may be a boost in short-term sales, the long-term strategy of offering constant discounts is a flawed one.
The problem with discounting starts to appear when your customers start to predict a pattern of when sales incentives are being offered. Savvy shoppers that have interacted with a brand long enough may pick up on these patterns, for example:
- Waiting long enough during the abandoned cart phase to receive a discount
- Letting a subscription expire to receive a renewal code
- Waiting for predictable sales periods (e.g. Easter, Mother’s Day, Christmas)
Predictable discounting can often condition your customer base into simply “waiting it out” until the next sale becomes available. If your business is known for frequent discounts, customers won’t hesitate to put a purchase on hold to save a bit of money.
It isn’t good for business when sales flat-line and only spike when a discount is made available.
Why discounting erodes customer confidence
Although consumers love to save, constant discounting, especially at increasing rates, can start to raise eyebrows. Customers will begin to grow suspicious as they begin to wonder why products are constantly on sale.
Shoppers can associate frequent or heavy discounting with poor-quality, or out-of-date products, or because the store is doing poorly.
A store doing poorly can also create doubts in the mind of the consumer about things such as warranties, or post-sale customer service.
Long-term wise, this can create issues with customer retention and maintaining customer lifetime value rates.
The downward spiral of discounting
Poor application and misuse of discounting can be like watching a boat slowly get sucked into a whirlpool. Predictable discounting can often lead to the following scenario:
- When products from our store are offered at a discount rate, our profit margins shrink.
- When our profit margins shrink, it eats into our marketing budget.
- When our marketing budget shrinks, it starts becoming harder to attract new customers.
- When we attract fewer customers, our profits shrink.
And the vicious cycle continues.
If we get desperate and offer another, even bigger sale, the cycle starts once again, and so does the downward spiral of our business.
Alternatives to predictable discounting
As we’ve discovered, predictable discounting can often lead to more harm than good for an online business. And although discounting is a powerful sales tool, there are other ways to attract and retain business from shoppers.
Focus on value associated benefits with profitable actions
Instead of simply giving away a discount to make a sale, think of ways that you can use discounts to incentivize desirable behavior. For example, rewarding customers when they refer a friend, provide a product review or share your products on social media. Rewarding desirable behavior through incentives is mutually beneficial for all parties involved.
Free shipping
According to a Return Customer survey, 93% of people prefer free shipping over a discounted item or bonus item with a purchase, assuming the value was the same.
In fact, some studies have indicated the perceived value of free shipping in a customer’s eyes is actually 2 or 3 times greater than the actual cost!
But it’s not just consumers that love free shipping, 60% of eCommerce sites cite “free shipping with conditions” as their most successful marketing tool!
When it comes to free shipping, 58% of shoppers will spend more so they can qualify for free shipping. Therefore, instead of giving away discounts on your product, look at options to provide free shipping as an incentive to engage with customers.
Free Gifts
Free gifts often present themselves as much better-perceived value from customers than a discount, and more often than not, a free give might be a cheaper alternative for your business.
By combining a free gift with a minimum spend requirement, you can potentially incentivize customers to spend a little extra to receive the gift. Double this up with free shipping and you had a killer sales combo!
Another tip is to show your customers the retail value of the gift they’ll receive. The retail value is likely not what you paid as a merchant, but from a customer’s perspective, it helps increase the desirability of the product and your generosity as a brand.
Loyalty Programs
Loyalty Programs are a great way to keep customers sticky to your brand. One popular method of implementing a loyalty program is through the issuing of points for purchases made. These points make a good incentive for return patronage, as customers will want a reason to redeem points earned.
Conclusion
Discounting can be a powerful tool to temporarily boost sales, but it should never be part of a persistent long-term strategy. The excess of everything is harmful. Although there ought to be the growth of the eCommerce sector in India as the technology advancement is high, however, this should be done in the umbrella of norms and regulations. The controlled eCommerce market will prove a boon to the economy yet an uncontrolled market may go berserk and will prove to be a bane that will hamper the growth of the country.
If your customers grow accustomed to frequent sales, they’ll end up only purchasing when a discount is on offer.
Instead, your business should focus on generating value and incentives that don’t always rely on reducing the retail price.
The problems with discounting start to appear when the frequency in which sales incentives are being offered starts to become predictable. Savvy shoppers that have interacted with your brand may even start picking up patterns on when and how discounts are made available.
What other strategies have you implemented to retain your customers? How often do you run a sale for your brand and are you experiencing sales atrophy from running your discounting promotions?
Drop us a line and share your experiences.
