February 20th, 2013Posted In eCommerce

eCommerce Essential: Discounting to Profit

discounting-to-profitCan lowering your prices raise your balance sheet?

While it might seem counterintuitive, discounting to profit is an essential tool in today’s global ecommerce environment. This technique can coax tight-fisted consumers (and their dollars) through your virtual doors, straight to checkout. It’s a strategy employed by big retailers, and you can do it too — even without a team of MBAs.

Develop your strategy

The key to discounting to profit is developing a plan with specific, measurable goals. Goals that work well with strategic discounting include:

  • Increasing site traffic
  • Developing brand awareness
  • Highlighting or testing new products
  • Gauging segment behaviors

With your goals now defined, it’s time to analyze your catalog to determine which products and price points align most closely with your intended goals.

Here, it’s important to take a moment to justify your discounts. Simply discounting an item to diminish overstock is not strategic — it’s desperate. Kevin Hillstrom says, “Discounts and promotions are [...] taxes placed upon brands for being unremarkable.”

Don’t get caught offering discounts to your loyal customers who would otherwise buy products without a discount. You’ll end up conditioning your best customers to wait for an offer. Architect your promotion with the four A’s

  • Audience – Is this available to everyone or only new customers? How about something to lure old customers that haven’t made a purchase in a while?
  • Applicability – Determine what your promotion will apply to: one product, all the products in a category, or store-wide.
  • Availability – How long will the promotion last? Promotions can be a great way to increase traffic during normally slow periods. Trying to sell holiday items off-season? Discounts to the rescue!
  • Accounting – Lots of options here: free shipping, fixed percentage or dollar discounts, buy one get one free (and buy one get one half off), one-time use, stackable, etc.

Target carefully

With all the work you’ve put into planning your campaign, you’re probably hoping for some lift in your numbers. But remember: this is the Internet, and a poorly-planned discount can spiral out of control quickly.

Best Buy recently learned this lesson when they put out a 50% off coupon with poorly-worded terms that didn’t prohibit gift card purchases or restrict the deal to one per customer. You’ll want to make sure you protect yourself and your brand.

Can your offer be misconstrued or abused? What will it do to your customer service volume? Think through all the possible implications of the deal.

Recover lost profits

King Gillette is credited with inventing the disposable razor. King (his first name, not his title) had the epiphany to produce cheap razors with blades that would dull quickly. In selling the razors for next to nothing, Gillette was able to build an empire around selling high-margin replacement blades.

Another twist on this model is to discount the primary product and then mark up essential accessories.

For example, printers that need cartridges, speakers that need wires or cabinets that need file folders, etc. If a significant discount is offered, and the accessories are aggressively marketed, the actual sale can remain net-positive by the shopper’s accessory purchases.

A loss leader that spawns spending

Think: “Black Friday.” This strategy is one of the most difficult to execute on, and be forewarned: it can have disastrous effects if not done properly.

With this approach, large, eye-catching discounts are offered on a few items with wide consumer appeal. These heavily-discounted items are priced near (and sometimes below) cost, with the goal of driving a frenzy of traffic. In doing this, the hope is that the added traffic will subsidize the losses generated by your featured items and you’ll come out on top.

Measurable results

Each marketing effort is a learning experience and warrants a debriefing analysis after your campaign. Analyze the impact and carry best practices into the future. One thing to look for is the shopping behavior of the customers who used the coupon. Once shoppers have redeemed an offer, determine how to categorize them based on past and future purchases.

If you’ve been offering discounts too frequently, your results may be difficult to interpret. Try to answer this question: Are you leaving money on the table by prematurely discounting? If so, you may be training your most loyal customers that a discount is always “around the corner” and once you’ve established that pattern, reversing it can be difficult.

When discounting isn’t possible

Competing on price can sometimes be seen as a race to the bottom. If discounts aren’t an option to grow your sales, try these other perks to attract shoppers:

  • Stellar customer service can prompt glowing word of mouth on social media networks
  • Free shipping took the ecommerce industry by storm when it was first offered, but today it’s common. To stand out, consider offering free overnight and return shipping.
  • Optimize what you’ve got. Simple changes to site design, shopping cart features and content can boost your conversion rate and increase your order value.

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