eCommerce discounting: improved business results or throwing away margin?

Aran Reeks
By Aran Reeks
17 Dec 2014

Discounts, used properly, can be a powerful addition to your eCommerce toolkit. They have the capacity to make your online business significantly more profitable. But to get it right you need a bit of psychology, some sound business analysis, and ideally some smart technology.

Offering discounts might not seem the most obvious way to make your eCommerce business more profitable. And if you approach discounting without a clear plan, or the tools to evaluate whether it’s working and the wider impact on your business, you might just be foregoing margin for no benefit.

Discounting is a strategic issue for any eCommerce business and needs to be approached with the right methodical mind-set

I’m sure you don’t need me to remind you that selling online is almost always highly price-sensitive. So a clear pricing strategy that includes intelligent discounting is essential if you want to achieve anything like your potential sales and profits.

Remember your brand

But before you go and apply discounts indiscriminately across your product range to create more sales, think about the effect on your brand.  There is a well-known furniture retailer that is famous for having near perpetual sales. They are probably quite successful; but do buyers really believe they are getting a top class sofa at a bargain price? Would a brand like that ever be able to move into a more upmarket, higher margin market?

Discounting needs a lot of thought and planning - and here are some points you need to consider.

What type of discount?

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Ultimately, there are only three types of discount:

  1. A percentage discount on a product (which could be 100%)
  2. A cash amount discount on a product
  3. Get a product for a fixed, reduced price

Where the complexity - and art - comes about in setting up your discount comes is both setting up the discount’s conditions:

  • “spend £50 or more…..”
  • “buy one of these….”
  • “buy any 2 products in our seating range”
  • “enter the discount code FREESTUFF at checkout”

And determining what elements get discounted when the conditions are met:

  • … and get free delivery
  • … and get one free!
  • … and get 10% off your entire purchase

If your eCommerce platform offers you the ability to control the conditions and application of discounts - and it should - then you can start to tailor your offers in the way that produces the maximum results for your business. The most popular options used by our customers are these:

  • Free delivery - this can be as a one-off offer or triggered when you spend over a certain amount.
  • Specific cash amount discounts
  • % discounts
  • Multi-buy and volume-based discounts - which can also be linked to free delivery
  • Combination offers - buy several items together at a special price or ‘get the look’ for £50
  • BOGOF or its many variants
  • Free gifts over a certain spend

Discounts can be applied to the entire cart or individual items and they can be time-limited. You can also trigger a discounted price on an item when a related product is placed in the cart - if you have the right tools.

Do we really need so many options? Yes we do. Different products and different customers respond better or worse to different approaches. Having one discounting technique is like trying to win The Open with just a putter in your bag.

Your room for manoeuvre with eCommerce discounting is largely governed by the capabilities of your CMS. If you have to apply (and remember to remove) discounts manually, your flexibility will be very restricted. 

The most effective discounting model for a particular business may is not always intuitive or predictable, and some models have a greater appeal for particular customers. For B2B, for example, volume-based discounts are often the most effective; a business buyer can understand the logic and see how shipping multiple items in one package reduces costs - the value of the offer is clear. Volume-based discounts are also not likely to dilute a premium brand.

The more flexibility your CMS allows, the more opportunity you will have to implement the discounts that will have the most appeal and drive the behaviour you want.

Reasons for Discounting

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The value of discounting is much more sophisticated than just increasing sales volumes. Overstocking and clearing obsolete lines are common triggers for discounts. Others relate to customer service and cash-flow.

Discounting can influence a number of key business metrics. Every day that you hold an item in stock has a cost. You have to provide physical space, heat, light and staff on top of the wholesale price. When you factor in the cost of the capital you have tied up in stock, you may well make a different financial decision than if you just analyse the gross margin on each product you sell.

The difference between being a real eCommerce business and a business that sells things online often comes down to how well back-end systems work together and integrate with the online store. You need to understand how the entire business works before you can have a really intelligent pricing and discount strategy.

Take volume-based discounts as an example. If you don’t understand how much it really costs to pick, pack and ship individual items, what basis do you have for creating volume-based discounts that make financial sense? Do you just pick a number that sounds about right?

Discounting can have a direct impact on stock turn, which is another key measurement for any business with significant sales volumes.

Discounting also works well for customer re-engagement, both with abandoned carts and with existing customers who haven’t visited your site for a while.

Results with abandoned cart emails can be spectacular. If you additionally offer a discount, you can tell those customers that you really want their business and potentially negates any price comparisons they may have done since viewing the item on your site.

Exclusive discount codes for customers who haven’t returned to your site for a while can also have very high conversion rates if they are properly targeted based on sound CRM data. It’s usually effective to make these offers time-limited to create a bit of urgency. Leaving people with the option to use a discount at an unspecified later date usually means they don’t do it at all.

Why measuring is so important

I said earlier that the effects of different discount models are not always intuitive or easy to predict. We ran an email campaign with one client that offered every recipient a discount code qualifying them for free delivery on their next purchase, irrespective of the value. We split-tested this with a similar campaign that offered free delivery on their next purchase if they spent more than £50.

Which one do you think was more successful? Interestingly, the second option significantly outperformed the first. The only difference was in the condition required to qualify for the discount - enter a code, or spend a fixed amount - and exactly how this played out in individual minds is not obvious. Our belief in this case is that the target demographic behind the campaign was not comfortable or experienced using vouchers or discount codes to qualify for discounts, and were more familiar with spending an amount to qualify. This is why knowing your customer base is so important.

What it also says is that the terms of the discount have to be crystal clear to have the maximum effect on sales. It also underlines the importance of perception. Some customers may perceive free delivery to be better value than an equivalent cash discount - and some might think the opposite.

It’s not just about cutting the price

The way your eCommerce site presents discounts has a massive impact on the success of the campaign.

First off, there’s no point implementing discounts unless you make it clear. Have a look at how Brunel Engraving highlights discounts on its best-selling items:

brunel_screenshot_01

The flashes across the photos and the strike-throughs make it clear that deals are available and what they are.

The strikethrough approach is continued into the product views as you can see here:

brunel_screenshot_02

In fact it’s always a good idea to keep the discount on view right through the journey from product selection to check-out. At no point do you want the customer to be wondering whether what they are seeing is the original or the discounted price - this just causes doubt, delay and abandoned purchases.

And finally you can see how the site handles multi-buy discounts:

brunel_screenshot_03

Note how they show the percentage discount, unit price and the saving per item. The discounted price is crystal clear.

And finally, when the product is in the cart:

brunel_screenshot_04

Not only do we show the original price and discounted price against each product, but we show the overall saving achieved in the totals. Order confirmation screens and emails show the same lines.

This is another critical, underestimated element of discounting - effectively communicating to your customers the discounts that have been applied. 

If a customer expects a discount and it isn’t clear that they have been awarded it, they will often question the amounts they’ve paid. If that happens, you’ve lost out on two counts where you should only be winning: a customer questioning your prices is not as happy as one who knows that they’ve got a bargain, and your precious time is now spent investigating the order and managing the customer rather than fulfilling their order.

Measuring what works

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I’m sure you knew we’d end up here eventually. Successful eCommerce means understanding what works, which means you have to be able to measure it. Setting up goals in Analytics and measuring real-time data will tell you whether your discounts are driving the behaviour you wanted.

Similarly A/B split testing can quickly tell you which type of discount and which methods of presentation are most effective.

If your discounts are not actually increasing sales, all you are doing is throwing away margin. If that’s the case you want to recognise it and try something else as quickly as possible!

Where do people go wrong?

There are many reasons why discounting might not deliver the business results that people hoped for. Here is a brief checklist of common issues:

Showing a discount box when there are no active discounts. This potentially tells your customer that somebody else may be getting a discount that they haven’t been offered. When you have live discount codes you probably have to show the box in the check-out for all customers, but why invite resentment when there are no codes to use? 

google_search_discount

There’s also a risk that somebody will do a Google search for discount codes before completing the purchase. And once they are in the ‘land of Google’, who knows where they’ll end up.

Offering an easy to find but trivial value discount code can be a useful tactic to get around this issue.

Not keeping customers in the picture. Show them the discount they are getting and why they are getting it, right through the purchase process. This reminds them that they are getting a deal, and confirms how much they are saving when they hit the ‘buy now’ button right through to order confirmation.

Assuming one size fits all. We’ve talked about the variety of discounts and the many ways they can be employed. These have evolved for a good reason: different customers respond positively to different offers. You’ll only know what works best for your customers by experimenting and measuring.

Hopefully this has convinced you that discounting is a strategic issue for any eCommerce business and needs to be approached with the right methodical mind-set. It’s an important area where your eCommerce agency should be helping you by providing the right expertise and tools to deliver the results you need.