The Death Spiral of Discounting

September 8, 2016
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It’s a fact: people like to save money.  Whether you have a little or a lot to spend most people are always on the lookout for the best deal, which makes discounting a hot topic.  Everywhere you look brands are using marketing campaigns that target this desire, promising “blowout deals” and “mega sales”.  However, even all of these slashed price promises can’t keep customers from looking for additional deals online.

discounting spiral downtrends

Since 2004, the number of searches made for terms like “discount code”, “coupon”, and “online sale” have been steadily increasing, reinforcing this notion of modern consumers as “discount hungry”.  In fact, 70% of people have reported opening brand emails purely looking for coupons and these behaviours have inspired a discounting frenzy as brands rush to compete with lower and lower prices.

At a glance, this might not seem like such a bad idea.  After all, it’s bringing new customers to your store and delivering what customers want, right?  Unfortunately the reality of discounting isn’t quite that rosy, as the perpetual “race to the bottom” has proved to be an unsuccessful long-term business model.

 

Discounting 101: The Death Spiral

discounting infographic

In order to fully display the dangers of the discounting vortex, let’s take a look at each part of the cycle and see who actually benefits.

discounting initial sale

The first stage of the discounting spiral is the first sale you run for your brand.  As I mentioned before, this can be good for your store because it often attracts new customers who might not have had any reason to try your products in the past.  More people in your store means more opportunities for conversion and a greater chance to up your repeat customer rate.

Your customers also benefit.  Whether they’re new or returning, this sale lets shoppers purchase your products at a discounted rate, increasing the value of your products and delivering an exceptional customer experience that colours your brand in a positive light.

discounting 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.

discounting death spiral

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.  This mentality encourages deal hunters as opposed to repeat customers, which is not beneficial for your business.

discounting sales drop

Once customers discover that discounts have stopped, your sales will begin to take a negative hit as they take their business elsewhere.  Your repeat customers may also begin to leave if they feel your sale was offered purely for first-time buyers.  Whether it’s true or not, your loyal customers may feel alienated and under-appreciated, prompting them to lose trust in your brand no matter how much they like your products.  This means you’re not only losing revenue but also a key customer demographic.

discounting frequent bigger sales

At this point, panic begins to sink in and 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.

Customers are also still able to take advantage of this discounting.  With each purchase, they’re able to get more product for less money – all without having to increase their purchase frequency.  No matter how you slice it, they’re the clear winners in this scenario.

discounting margins shrink

Sooner rather than later, you 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 supply and demand.  The costs of continuous discounting aren’t affordable for any business and with disenchanted customers looking for nothing but the cheapest option, 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, customers 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, are out-of-date, or because a store is doing poorly.  Whatever assumption they choose to make, it’s severely damaging to your brand and devalues your products exponentially.

discounting long term loss

I’m hoping this rundown makes the danger of discounting clearer.  Short-term wins can often cloud your best judgement and leave you open to harsh repercussions that are difficult to recover from.  Forbes has even reported that many larger brands are offering fewer promotions to improve profit margins, choosing to focus on customer experience instead.

That being said, there are smart ways to offer your customers additional value without hurting your business.  Discounting has become a standard feature of both the online and offline commerce markets and can be issued in ways that benefit both you and your customers.

 

Practicing Safe Discounting

I’ve come up with a few ways to make discounting an affordable retention and acquisition strategy for your business.

1. Tie Benefits to Profitable Actions

discounting rewardable actions

While discounts often seem to be for the benefit of the customer, they can also work in your favour.  Rewarding your customers for referring friends, providing product reviews, or sharing your products on social media are only three examples of actions that can boost trust in your brand and bring new customers to your store.  Offering an incentive for completing these actions makes it a two-way street for value, increasing the likelihood that your customers will participate.

discounting linking benefits

2. Free Shipping

This is one of the oldest discounts in the book, but still packs a powerful punch.  Even ecommerce giants like Amazon use this discounting ploy, but with a twist: order thresholds.  By setting a minimum cart amount required for free shipping, you’re able to foster profitable shopping behaviours and increase your average order value at the same time.  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.

discounting free shipping

3. Free Gifts

Presenting free products as gifts immediately makes it way more valuable to your customers.  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.

Another small but effective tip to increase buying incentive is showing your customers the retail value of the gift they’ll receive for spending a certain amount.  This retail value is likely not what you as a merchant paid 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 generous brand.  Everybody wins!

discounting free gifts

 

Loyalty Programs: The Discounting Hub

The best part about each of these discounting methods is that they can all be easily managed with the use of a loyalty program.  While you can offer these rewards to any customer, you can truly impact your long-term revenue by using them to foster more loyal and repeat customers.  

A loyalty program also gives you the option of using points as a purchase incentive.  By issuing points to your customers, you’re able to elevate every single purchase and give them the opportunity to redeem them for a discount that truly adds value to their lifestyle.  These rewards could be both transactional and experiential, expanding your brand’s breadth of value and reaffirming your customers’ decisions to shop with you.

 

Doubling the Value of Discounting

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.