Is your online store in need of a spike in sales? If you’re looking for a cash injection, you may see ecommerce discounts as the quickest and easiest way to get it.
We can’t blame you—it feels like a no-brainer, and the statistics on ecommerce discounts confirm it.
One study revealed that:
- Customers rated discounts in email as the biggest influence on their purchase decisions (at 4.15 on a scale of 1 to 7)
- The offers email subscribers want the most are percentage off discounts (35%) and free shipping (20%)
In fact, 71% of online shoppers are influenced by discounts when online shopping; the group that’s least impacted by discounts are seniors at 47%.
According to BigCommerce, sharing personal data with merchants in exchange for free shipping or discounts is not unusual. Three generations—Gen X (aged 38-53), Millennials (aged 22-37), and Gen Z (aged 18-21)—expressed they’re happy to do so.
And finally, the term ‘discount code’ has been steadily rising in popularity on Google search, with recurring peaks in November and December of every year:
Discounts are an easy and effective way to spike online sales—there’s no doubt about that.
But without analyzing its potential impact, both bad and good, on your online store—this strategy can backfire on you.
A sustainable ecommerce strategy isn’t just about selling as much as possible, but also about building a loyal customer base.
Don’t forget that:
- Acquiring a new customer is 5 to 25 times more expensive than retaining an existing one: with discounts, you’ll earn even less than usual while still spending a lot
- Loyal, returning customers spend more, and more often: if you lower your prices to attract them, it may be a challenge to build loyalty with regular prices later on
In other words, discounting product prices brings a wide range of benefits and downsides, and we’re breaking them down in this guide.
Advantages of Ecommerce Discounts
First things first: what is it that you gain by employing a discount strategy?
Increase customer acquisition
Pretty simple: by discounting your product(s), you’re more likely to sell more of them.
More specifically, you’ll attract new customers more easily. If you offer products identical or similar to a competitor, but for a slightly lower price, it will help new customers use pricing as a deciding factor.
For example, if you were shopping for a new laptop, and saw that Dell offers this 10% discount for new customers, you’d likely favor Dell over a similar laptop manufacturer that is more expensive and of similar quality:
Gain momentum for new product launch
When you’re releasing new products (or entire product lines), gaining momentum can make a huge impact on its future sales.
Think about this:
- You’re launching a new product, but no one knows about it yet
- When you release it, you share it with your existing customers and your most engaged email subscribers first, along with a discount
- A portion of them purchase the new product, tell their friends, and share it on social media
- Their friends and followers start buying and spread the word to their friends
…and so on.
A discount can create a ripple effect with a product no one knew of until a few days ago. It can have a long-term benefit to the sales of that product, even when the discount expires.
Not to forget: if you want to, you can also limit these discounts to just your existing customers to reward their loyalty. This is where email marketing or social commerce as a closed, one-to-one channel can do wonders.
Track where the sales came from
When it comes to tracking where your customers have found you, there are two benefits:
- You can understand the foundation of your new sales, revenue, and brand awareness
- You can retarget those that intended to use your discount code, but have abandoned their cart before completing the purchase
Tracking the source of your sales is essential to any successful marketing strategy. Discounts can help you ramp that up.
It’s also good to know that, according to one study, 54% of buyers will buy retargeted products if offered at a discount. In this case, discounts are a great way to nudge these undecided customers towards buying.
Leverage seasonal holidays and events
Remember the spike in searches for discount codes from an earlier graph? It comes in the season that includes Black Friday, Cyber Monday, and all the holiday shopping leading up to Christmas and New Year’s.
However, this isn’t the only time you can use discounts to drive extra sales and brand awareness.
You can also leverage highly popular days, such as St. Patrick’s Day, Mother’s Day, and even Super Bowl Sunday, as great ecommerce holiday opportunities to sell more with discounts.
These occasions provide a chance to come up with catchy discount code ideas and, if done well, they can spread like wildfire and bring you a bunch of new customers that otherwise wouldn’t find you.
Make the most of influencer marketing and referrals
If you’re partnering with influencers or offering your customers and supporters to gain benefits by promoting your products, discounts can help drive sales with an audience that might be unfamiliar with your brand and products.
Some influencers make these discount codes a staple in their overall content, like blogger Gabriella Strano has done with discount codes for Jessicurl and BounceCurl:
And MyProtein gives their customers a code they can share with friends. In return, the customer earns a fixed fee, and their friend gets 6 months of free next day delivery (both can be considered discounts):
This is a terrific way to increase the impact of an already powerful word-of-mouth marketing approach.
Disadvantages of Ecommerce Discounts
With so many great benefits of discounting your products, you’d think there’s nothing to counter them. Let’s look at the reasons you may want to steer clear from lowering the price of your products.
Profitability is reduced or completely unavailable
Should you focus on bringing as much revenue as possible, or on increasing your online store’s profit margin?
The unbeatable answer: high profit margin, always.
As folks at WooCommerce once said:
“An obsession with revenue—instead of profitability—could be harming your business.”
Focus on gross profit margin of your ecommerce store. It’s what’s left of your revenue after accounting for the cost of goods sold (COGS). It’s an indicator of how well your revenue is serving the rest of your business.
If your profit margin is low (for example, 15%), you’ll always need a buffer of cash just to stay in business and not go into debt. Profitability is unreachable, and your business becomes questionably sustainable long-term.
When you consistently offer discounts, you’re lowering your revenue per item sold, while your expenses are staying the same (or even increase if you’re promoting your discount with Facebook ads).
Profit margin is the key metric to monitor if you decide to give discounts a try.
Lower average order value
When you discount your prices, your average order value (AOV) may drop.
Initially, this may not necessarily be a bad thing. If the AOV is lower for a while, but then goes back to the usual and the new customers stick around, it was worth it.
But what if that doesn’t happen? If you offer discounts too often and without a strategy to spark recurring and higher value purchases, the consequences may be too hard to recover from.
The cost of running your business, as well as of the fulfillment and shipping of each order, will probably remain the same. Make sure you can absorb the dip in AOV with your expenses in mind.
In Yieldify’s Q1 2019 report, there’s a clear drop in traffic and conversion rates after the peak shopping season in Q4 2018. However, the AOV increased, likely because the first quarter of the year is less discount-focused compared to the Black Friday and Christmas shopping seasons.
This means it’s crucial to know the impact of more sales at a lower AOV, and vice versa.
You may attract only price-driven shoppers
This particular element will depend on your industry.
Certain industries, markets, and audience segment are extremely driven by quality, experience, even prestige. These customers look for specific value these products bring them, both direct and perceived.
Other categories of product, however, are more driven by prices and savings.
The example of the value-driven category are luxurious watches.
The example of the price-driven category are kitchen utensils.
This isn’t to say that customers won’t look for discounts on luxury watches or for quality in kitchen utensils. It’s simply a reminder that, if you offer discounts to a market segment that is always looking to save money, discounts may be hard to get rid of—further harming your profit margin.
Trust in your product is reduced
Simply put, if your potential customers see you’re starting to discount your products, they’ll feel you don’t believe in your product and your value proposition.
This lack of confidence will get them to ask themselves:
- Is this product as good as I thought since it costs lower than I was willing to pay?
- Can I trust the company that’s selling this?
- Why should I pay more for the same product in the future if the discount isn’t there?
Customers that paid full price might be offended
There was a time I paid around €70 for a full-day industry event during an early-bird sale, months ahead of the event.
Then, the full price kicked in, bringing the price up to nearly €100.
A few weeks later, to my dismay, the organizer brought the price down to below €70, explaining it as a ‘limited-time special discount’ (I’m assuming the event wasn’t selling so well after the full price announcement).
To say I was annoyed is an understatement. Early bird pricing was supposed to be a reward for early supporters of the event, but that sentiment was erased by a ridiculous discount for last-minute attendees.
I ended up going to the event, but I haven’t supported or attended it since (despite having supported it for a long time prior to this).
This is exactly what will happen if you start offering discounts left and right, especially if it seems to focus on getting any sales at all rather than rewarding loyal customers.
Should You Offer Ecommerce Discounts? Answer These Questions
There’s no universal advice around discounts that would apply to every industry, product, and target audience. Keep answers to these questions in mind when you’re working out a strategy to test out.
How will discounting impact my profit margins?
This question can be broken down into two: what is your current profit margin, and what will it be when certain products are discounted?
How long can you absorb the lower profit margin, and how it impacts the remainder of your business, is what will help you to decide on discounting versus not discounting.
Remember to consider the length of certain discounts, the upsells you can do along with discounted products, and other ways you can increase average order value to keep your profit margin as high as possible.
What does it cost me to acquire a customer (CAC) and what is the lifetime value of that customer (LTV)?
CAC and LTV add another layer to the profit margin question. The success of any marketing strategy can be well analyzed through the customer acquisition cost and customer lifetime value.
Instead of looking at individual campaigns and discounts, CAC and LTV will help you assess the long-term impact of your activities across the board.
Here are the formulas you need to calculate CAC and LTV:
- Customer acquisition cost = Marketing campaign costs / Total customers acquired
- Customer lifetime value = Average customer spend per purchase x Average purchases per year x Years in a lifetime cycle
In other words, even if the cost of newly acquired customers goes up because you offered a discount, it can pay off long-term if this customer brings you the expected lifetime value.
Will they spend as much as your existing customers per purchase? Will they buy as frequently? Will they remain your customers for the foreseeable number of years?
If the answer to any of these questions is ‘no’, it means you’ll see a lower LTV from this customer. If that becomes the majority of your customer base, your business will suffer financially.
Can I create and personalize an experience for the customer?
If you have attracted a new customer with a great price, will they return when the price is back where it was?
Or will they simply keep on looking for the lowest price, moving onto your competitor’s discounted product?
To make the most out of discounts, look into your post-purchase strategy. Are you sending value-adding emails? Are you letting your customers see what your brand stands for, or do they only see the products and nothing more?
Are you reminding them of all the ways they can use your products and make the most of them?
By doing this, you remain relevant. If you don’t, they might forget about your brand altogether, and when they need a restock of your product, they’ll look elsewhere.
Can I test what really works?
Finally, no strategy is ever truly successful if you can’t pinpoint exactly what worked and what didn’t.
More importantly, you should be able to know whether you can get the same great results in the future by using the same strategy.
No ecommerce business can be successful based on one-off luck, so make sure you diligently track your actions, such as channels, products, discounts, and timeframes you’ve implemented.
Then, collect and analyze all results, including traffic, sales, customer service requests, returns, and social media mentions, and compare them to non-discount periods.
Make a Decision on Discounts Now
If you decide to implement a discount strategy in your ecommerce store, start small and build up from that based on the results you see.
Remember: no answer is universal. It’s also not permanent.
If you find that a discount strategy didn’t work for you in summertime, test it again towards the end of the year.
If it didn’t work on one category of products, test it on another category.
Whichever route you take, always stay transparent with your existing and new customers and provide value no matter which strategy they came from.
Finally, work with your long-term profitability and sustainability in mind so that you can keep serving those customers for a long time to come.