Commerce Tips

The Death Spiral of Discounting

Death-Spiral-of-Discounting-Feature-9.png

Ever since Google first started tracking search results 2004, the number of searches made for terms like “discount code,” “coupon,” and “online sale” have been steadily increasing, showing that from the time people started shopping online customers have been trying to get the most out of every dollar they spend. In fact, 70% of people have reported opening brand emails purely looking for coupons!Death Spiral of Discounting - Google Trends Discount search This type of behavior has led merchants to go into a discounting frenzy in an effort  to attract sales, but at what cost? At a glance, this might not seem like such a bad idea. Unfortunately the reality of discounting can be far more sinister, as the perpetual race to the bottom has proven to be an absolutely disastrous  long-term business model.

Discounting 101: the death spiralDeath-Spiral-of-Discounting-Infographic

In order to understand the dangers of the discounting vortex, let’s take a look at each part of the cycle to understand the consequences.

Stage 1: the initial sale 

The first stage of the discounting spiral is the first sale you run..  This can be good for your store because it can attract new customers who might not have had any reason to try your products in the past. More people visiting your store means more opportunities for conversion and a greater chance to have more customers join your brand community

Of course, your customers also benefit. Whether they’re new or returning, this sale lets shoppers purchase your products at a discounted rate, delivering an exceptional customer experience that colors your brand in a positive light.

Stage 2: short term sales increase 

After your first sale, your store’s revenue is going to experience a quick burst of growth. This growth is not only good for you as a merchant but also for the customer – the more revenue you make, the more likely you are to reward them for doing business with you by holding another sale in the future.

Stage 3: conditioning

Unfortunately, that initial discounting has lasting negative consequences.  Now that they’ve been introduced to your products at a much lower price point, the customers you attracted to your store with that first sale are being conditioned to expect discounts with every purchase.

Rather than seeing your brand as more valuable it actually seems less valuable, since shoppers start to only buy products at the discounted rate. This discounting mentality mainly attracts deal hunters who won’t see the value of your brand, and checkout as guests instead of creating an account. Similarly, your community members begin to question the value of staying engaged, resulting in less of the regular repeat purchases that drive a large portion of your revenue.

Stage 4: sales drop

Once customers discover that discounts have stopped, your sales will dip as they take their business elsewhere.

No matter how much they like your products, your committed community members will also start to feel alienated. If they they your sales are offered purely for first-time buyers, it can cause them to lose trust in your brand and damage the relationship you’ve built with them. Whether it’s true or not, they will start to leave your brand for greener pastures.  

Stage 5: frequent, bigger sales

At this point, panic begins to sink in as you realize you need to act fast. In your desperation, you begin to offer more frequent, bigger sales that take your discounting game to a whole other level. Just like before, your sales will begin to incrementally creep upwards, offering you false hope that this trend can continue.

These additional sales will help soothe your community members that stuck around, too. Since they’re also able to take advantage of all these discounts, they’re able to get more with each purchase – all while earning rewards without having to increase their spending amount. No matter how you slice it, customers are reaping huge benefits from big discounts that create zero value for your business.

Stage 6: margins sink

Sooner than you think, you will have to acknowledge the havoc all of your discounting has caused. With so many customers buying more product at significantly lower prices, you’ve been sacrificing more profit out-of-pocket in an effort to keep up with the increased (and heavily discounted) supply and demand.   

No matter what your business looks like, the costs of continuous discounting aren’t affordable. Disenchanted customers with no true loyalty to your brand community will arrive looking for nothing but the cheapest option they can find, and your store will very quickly find itself in the red.

To add insult to injury, you will continue to bleed customers. With so many sales being offered at an increasing rate, your once dedicated community members will begin to grow suspicious as they begin to wonder why products are constantly on sale. Shoppers tend to assume products are discounted because they’re of poorer quality, out-of-date, or because a store is doing poorly.

Whatever assumption they choose to make, it’s severely damaging to your brand, threatens your customer relationships, and devalues your products exponentially.

Stage 7: long-term loss of revenue 

Short-term wins can often cloud your best judgement and leave you open to harsh repercussions that are difficult (or even impossible) to recover from. Before you know it, the cycle of discounting you started will end up being a curse rather than a blessing when you have no customers and no revenue to show for it.  

Practicing safe discounting

Despite the potential doom by discounting, it can actually be part of an overall retention and acquisition strategy in ways that are still affordable for your business. I’ve come up with a few ways to show how it can be done.

Tie benefits to profitable actions

While discounts often seem to be for the benefit of the customer, they can also work in your favor. Rewarding your customers with discounts for referring friends, providing product reviews, or sharing your products on social media are three examples of simple actions that not only boost trust in your brand but also attract new customers to your store with valuable social proof.  

Offering an incentive for completing these actions show customers the value in joining, engaging with, and sharing your brand community. When value is a two-way street it increases the likelihood that your customers will want to become members. 

Free shipping

Based on the fact that 69% of shoppers are more likely to shop with online retailers who offer free shipping, you can tell this is a reward that people value and are willing to switch brands for. Free shipping provides the decrease in total purchase price that new customers are looking for without taking away from the value of your products.

This is one of the oldest discounts in the book, but still packs a powerful punch. Even ecommerce giants like Amazon use this discounting strategy, but with a twist: order thresholds. By setting a minimum purchase amount required to redeem free shipping rewards, you’re able to foster profitable shopping behaviors, increase your average order value, and reward your loyal community members all at the same time.

Free gifts

Presenting free products as a gift immediately makes it way more valuable to your customers. After all, who doesn’t like receiving gifts? It makes your customers feel special and appreciated no matter what the product is, and adds value to the transaction as opposed to subtracting in order to create value.  You can set up free gift rewards with thresholds just like free shipping, making this a double duty discounting strategy: customers have to spend more to get more.

The key to customer delight is adding value to their experience rather than taking something away to try and fabricate value.

Another small but effective tip to increase purchases with free gifts is showing your customers the retail value of the what they’ll receive for spending a certain amount. This is likely not what you paid as a merchant to get the product, but your customers don’t need to know that!  By displaying the cost, you’re both increasing the desirability for the customer and setting yourself up to be viewed as a valuable brand community to belong to. Everybody wins!

Reward programs make discounting valuable instead of deadly

The best part about each of these discounting methods is that they can all be easily managed with the use of a rewards program.  With the right tools you can offer rewards that  impact your long-term revenue by using them to foster a brand community built on the loyal and repeat customers that enable sustainable growth.  

A rewards program also gives you the option of using points as a purchase incentive. By issuing points to your community members, you’re able to elevate every single purchase and give them the opportunity to redeem them for the rewards that they find valuable.  These rewards can be transactional or experiential, expanding your brand’s breadth of value and reaffirming your customers’ decisions to continue to shop with you.

If you use discounting strategies intelligently, you can turn a short-term win into a long-term victory by ensuring that both you and your customers are benefitting every time.   

Remember: value can be a two-way street!  Don’t find yourself in a discounting dead end.

Want to get out of the discounting death spiral?
Start building a sustainable brand community with rewards

Join 20,000 readers devoted to making their customers smile

Get free curated emails about all things rewards, retention, and building a community.