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Think Tank: The Truth About Site-wide Discounts

Arthur Zaczkiewicz and Jonathan Treiber

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We’ve all walked by giant posters on the windows of a retailer promoting their largest discounts to every single potential shopper that walks by and cringed at the sight of their unsophisticated tactics. The reality is, your brand is likely doing the same thing but digitally. Would you seriously consider giving someone a discount if you knew they would buy your products without one? If yes, please stop reading now.

If not, then allow me to fill you in on why every brand needs to end their generic site-wide offer. It’s all predicated on three crucial factors: margin pressure facing e-commerce businesses; training customers to look for deals; and the erosion of brand equity.

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First, most e-commerce businesses today are way too promotional. When combined with high customer acquisition costs and increasing logistical costs associated with speedy delivery and returns, retailers are facing margin pressure unlike anything they’ve faced in the past. The race to the bottom with discounting, couponing and promotional activity is hurting profitability. Organizations need to start by fixing internal incentives. Many e-commerce businesses are starting to align incentives between marketing and the rest of the business around gross margin, which is a great start.

Historically, a marketing team with goals based on top-line revenue would only care about the deepest discount necessary to drive revenue, regardless of profitability. With internal incentives aligned for more and more organizations, now is the time to look at promotional strategy to improve gross margin, not just protect it.

Delivering the same offers to every customer who visits your web site is a very inefficient way to grow gross margin.

It’s a much smarter strategy to figure out what the lowest viable discount offer is for each customer and deliver them discreetly via web site banners, e-mails or even direct mail. The two missing pieces for almost all organizations is data and technology. For many others, expertise is also lacking to implement and manage this strategy. Propensity scoring and predictive analytics for discount sensitivity among shoppers is actually a thing, yet not widespread up until this point.

Similarly, an Offer Management Platform, or OMP, is the technology to execute and manage this dynamic discounting strategy. OMPs usually have staff that specializes in effective and targeted discount strategies, so if your org needs help there, you should be covered. When combined, these solutions can deliver a way to decide and deliver personalized discounts to site visitors in lieu of the “30 percent for everybody” that is just plain stupid for the business’ bottom line. There’s simply a better way. Predictive analytics and an OMP.

Retailers must take responsibility for creating a customer-culture that’s over-reliant on discounts. Some organizations lament this unintended consequence of their promotional tactics over time. Once cemented (Lord & Taylor, Bed Bath & Beyond, Macy’s, J.C. Penney, and many others), it’s nearly impossible to rip the bandage off for the entire customer base. Instead, it is possible to reduce discounting activities among groups of customers. Some customers will simply leave you if you stop discounting to them. This becomes a business decision. Would you rather keep low-margin customers to maintain sales volume or would you rather increase profits even if top-line suffers from that customer segment? Consider this. Would you pass on a new potential customer if you knew that he would only buy discounted items and have a below-average Lifetime value? Psychologically, the risk of losing top-line revenue is often far scarier than the thought of not acquiring top-line revenue.

The strategy for reducing — not eliminating — your customer discount culture is to focus on the customers who would likely buy with a lower discount or no discount at all. Every business has them. Imagine converting 10 percent, 20 percent, even 50 percent of discounted sales into higher-margin sales. It’s possible. Keep the deal-hungry customers at bay by providing discounts to them at same or slightly lower levels — reduce gradually over time. This is the group that will scream bloody murder if you take away their coupons. So, tread lightly.

The other groups of customers are either slightly or moderately discount sensitive. That means that some customers would likely pay full price but are using a discount code because that’s what you are putting right in their face when they hit your site. Other customers would likely purchase with a lower discount. Giving a customer a 40 percent discount code when she would be happy with 20 percent is no longer crystal ball theory. Using data science and an Offer Management Platform can help e-commerce businesses surface the optimal discount value for each customer, while ensuring the offers can’t get scraped and go viral across the Internet.

Lastly, the extent of a brand’s promotional and discount activity is highly correlated to the brand equity of the business. The more frequently and deeply a brand discounts, the less value the consumer places in the brand over time. In practical terms, businesses that discount uniformly via site-wide offers are likely to see customer perception of value decline over time. For those customers, price and the discount are all that matters, and product or service quality takes a back seat.

To succeed over time, a business should have few or none of these types of customers. Therefore, it’s important for brand managers to think about how to execute dynamic discount strategies to ensure that portions of the (usually more profitable) customer base are receiving the lowest discount possible — even zero discount. Protecting brand equity by holding value for most of the customer base is a business imperative these days to avoid joining the increasingly crowded race to the bottom.

Killing the site-wide offer is no easy feat. The hurdles are often organizational within the company, not technological. The business case for moving beyond the site-wide offer and adopting a more targeted customer-centric discount strategy is compelling for even the most skeptical c-level executive. Moving away from site-wide universal discount offers to a world where each customer receives an optimized discount value will yield more profitable sales and enhanced brand equity. Results are never overnight. It’s not about the end of customer discounts. It’s about replacing the outdated — did it ever work? — tactic with progressive strategies to ensure that your business is positioned to thrive for years to come.

Jonathan Treiber is cofounder and ceo at RevTrax.

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