OPINION: The dangers of heavy-handed discounting

Pini Yakuel, CEO of customer relationship marketing hub Optimove, explores how retailers can avoid the pitfalls of discounting and use the strategy to their advantage.

The post-Christmas reports this January revealed a mixed bag of results for top UK retailers. Towards the end of the year, the retail landscape has been changing rapidly, with price reductions in much higher use before Christmas and in November following the rise of extreme discounting around Black Friday and Cyber Monday.

Against growing competition, retailers are under pressure to discount heavily before Christmas. Many small and independent retailers are feeling the temptation to match larger competitors. And these big discount days certainly bring in sales.

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Transactions in November have shot up over the years as Black Friday discounts become more widespread. Our research into online shopping patterns this holiday season found that order amounts in November were 21% higher than in December – the month retailers usually rely on for the boost to their revenue.

It would be easy to look at this data and decide that these big discount days attract more customers, and therefore more revenue. But it pays to look a bit closer. November figures have got bigger, but December has, in turn, got smaller – with 10% lower total orders this Christmas than the year before.

Don’t discount when you don’t need to
Whilst large discounts might bring in sales in the short term, it is important to think about the longer-term impact – not just upon sales, but upon revenue and, more importantly, customer retention. The choice to cut into a profit margin by discounting needs to be made with key aims in mind. There’s no reason to discount an item for a customer who would happily buy it at full price. But there is value in discounting something a customer wouldn’t buy at full price, but would buy at a lower price.

It appears that instead of bringing in more shoppers, big discounts in November are simply encouraging customers to buy earlier, spending less on products that they would usually have bought at their original price for Christmas. Discounting strategies may be cannibalising sales just at the key part of the year when most revenue comes in. Many retailers are, in a sense, discounting products in November which they could have sold at full price in December.

The best reason to discount an item, however, is when that discount will encourage a customer to buy full price products alongside that reduced item – not just during that sale, but further on into the future. Black Friday and Cyber Monday see dramatic levels of foot and web traffic to retailers each year – so much so that websites often crash and fights even break out in stores. And if this dramatic discounting continues every Black Friday, it will continue to bring that amount of traffic.

But only as long as those sales last. Once those heavy discounts stop, customers attracted by them will stop coming – unless discounting is used in a strategic way to start and maintain an ongoing relationship with the customer.

Size, and timing, matter
Discounting can be a great way to open up a conversation with a customer. But retailers often see discounting as a one-size-fits-all approach, when in fact the level of discount and target customer is crucially important. When a customer’s first purchase is discounted, we’ve found that those who purchased something discounted by 5 to 20% are likely to return to the brand in the future, charmed by the promotion into a longer-term relationship with
the brand.

But larger discounts, of 30% or more, tend to bring in what we call ‘cherry pickers’ – customers who will shop around for discounts, but won’t be persuaded by those reductions to return for anything undiscounted. So these large discounts may lead to a one-off sale, but they are less likely to provide a source of longer-term revenue. The key is to approach discounts with an eye to the longer-term effect on the customer and their relationship with the brand.

The Christmas season, for instance, is not the best time to invest in attracting new customers. Someone who makes their first purchase from a brand over the holidays is 19% less likely to return to make a second purchase later on than someone who buys at any other time in the year. So it is very important to spend time focusing on existing customers, upselling to those who buy a little, and encouraging those at risk of turning their back on you to return.

Discounting isn’t the only way
Of course this depends on the customer as well, and not all consumers are the same. Some individuals may be more receptive to discounts at Christmas than any other time. And for others, discounts might not work at all. Certain shoppers, especially for independent or premium brands, can be discouraged by discounts, seeing them as a sign that products aren’t top quality or from the newest range. To these customers, retailers can offer different rewards, such as early access to new collections.

While discounts are a valuable tool in the retailer’s box, they are not the only way to optimise relationships with customers, and they do not have to be used on each customer in the same way. Special promotions should be targeted where they will have the most effect. Some customers who regularly shop with you will feel rewarded by discounts to mark their loyalty, after the anniversary of their first purchase, for example. Others will appreciate a birthday reward, and be drawn to shop more with the brand after receiving one.

To create a real sense of value and relationship for the customer, discounts should be adapted to their taste. There’s no use offering a discount on something someone does not want in the first place, and this can actually alienate an individual by making them feel like the retailer doesn’t understand their preferences. But many customers will respond well to recommendations which match a customer’s taste based on what they’ve previously bought.

In a modern age of data analytics and personalised services, the discounts you offer should be tailored to your customers as individuals. The science of this data can be combined with the art of marketing, to create relationships with customers that don’t just follow the discounting crowd, but offer personal value at every step.

Optimove is the science-first relationship marketing hub, used by more than 250 customer-centric businesses to drive measurable growth by scaling customer engagement. Optimove combines the art of marketing with the science of data to autonomously generate actionable insight, empowering marketers to deliver highly-effective personalised customer marketing campaigns across multiple channels. More information is available at www.optimove.com.

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