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Discounts and promotions are powerful tools that businesses can leverage to attract new customers, encourage repeat purchases, and influence consumer behavior. When thoughtfully integrated into a broader marketing strategy, discounts allow for pricing flexibility without altering the core pricing structure. However, to maximize their benefits and avoid common pitfalls, businesses must develop a well-planned discount strategy tailored to their unique products and customer base.
Understanding the purpose of discounts and promotions
- Attract new, price-sensitive customers. Discounts and promotions can lower the barrier to entry, making your products more accessible to first-time buyers who might otherwise overlook your brand.
- Encourage larger orders through volume or bundle discounts. Motivate customers to increase their purchase size by providing incentives such as discounts on bulk purchases or special pricing on product bundles.
- Drive repeat purchases by re-engaging previous buyers. Targeted discounts can remind previous buyers of your brand and encourage them to return, turning one-time shoppers into loyal, repeat customers.
- Respond to shifts in demand due to seasonality or competition. Timely promotions can help maintain steady sales, even when external factors impact consumer behavior.
- Clear excess or soon-to-expire inventory efficiently. Markdowns can help you quickly move inventory that might otherwise go to waste, thus improving your cash flow.
When are discounts right for your business?
Not all products benefit equally from discounting. Luxury goods, such as high-end designer handbags, and commodities like salt, typically do not respond well to price promotions. However, for most everyday “normal” goods, a discount strategy can be a valuable sales driver.
If your products have a short shelf life, discounts become an essential tool for managing inventory before expiration dates. Similarly, if your products are easy to bundle or complement each other, discounts can encourage customers to add more items to their carts. The diversity of your customer base also plays a role; when selling to a heterogeneous group with varying price sensitivities, discounts help reach segments that might be unreachable at higher prices. Finally, businesses experiencing seasonal demand spikes can use discounts strategically to boost sales during off-peak times.
Tailoring discounts to different buyer segments
Understanding how different types of buyers respond to price reductions is crucial. New customers tend to be more price sensitive since they have not yet developed brand loyalty and often compare multiple options. Offering introductory discounts can be an effective way to convert these shoppers.
Repeat buyers, on the other hand, are generally less sensitive to price but can be encouraged to stay engaged through loyalty rewards or personalized promotions. Volume buyers, who purchase multiple items at once, often require incentives such as bulk discounts to increase their order size. These discounts can also benefit sellers by reducing average fulfillment costs.
Choosing the right timing for discounts and promotions
The optimal frequency for promotions and discounts depends on their type. Promotions should be used sparingly and unpredictably to avoid training customers to wait for deals. Simon-Kucher recommends spacing promotions at least four weeks apart to ensure each one has maximum impact and maintains the perceived value of your products.
In contrast, some discounts can be ongoing. Volume discounts, for instance, are typically available at all times to encourage larger orders whenever customers meet set quantity thresholds. Similarly, discounts for abandoned carts are often offered continuously, as they target shoppers who are already close to making a purchase and represent a prime opportunity for conversion.
Finding the optimal discount levels
An analysis of over 28,000 eCommerce SMS messages and push notifications revealed that discounts in the 15–20% range are the most effective. Specifically, a 15% discount leads to the highest conversion rates, while a 20% discount further increases customer engagement, such as clicks and likes. These results align with Etsy’s recommendation for sellers to offer at least a 20% discount to boost order volume.
Risks to consider when offering discounts
While discounts can boost sales, they come with risks if not managed carefully. Frequent or deep discounts can erode profit margins, making it difficult to cover costs and invest in growth. Over time, customers may begin to expect discounts as the norm, devaluing your brand and reducing their willingness to pay full price.
Discounting can also trigger price wars with competitors, leading to a downward spiral in prices that harms the entire market. Additionally, promotions often attract deal-seekers who may not become loyal customers, increasing customer acquisition costs without delivering long-term value.
Four principles for a successful discount strategy
- Know your customer. Understand your customers’ price sensitivity, shopping motivations and purchase journey. This will help you tailor discounts that resonate.
- Have a consistent price strategy. A consistent price strategy sets the right expectations both for your customers and your competitors. When a company starts offering uncontrolled discounts, it can erode profit margins, damage the brand image, delay purchases and initiate a price war.
- Personalize discounts. Tailor offers to individual customers using their purchase history and motivations. For example, provide discounts on related products after a purchase, or offer cart abandonment incentives to encourage checkout.
- Monitor and optimize. Regularly track metrics like conversion rates, average order value and cart abandonment rates. Use this data to refine your discount strategy and maximize its effectiveness.
