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Drive and Convert (Ep. 040): The Downside of Discounting (And What To Do Instead)

Many brands default to discounting as the "easy button" for juicing their online sales, but this can put you on a sales treadmill that is increasingly hard to get off of. In this episode, Ryan and Jon talk about what to do instead of discounting.

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About This Episode:

Many brands default to discounting as the “easy button” for juicing their online sales, but doing this too often can put you on a price-cutting hamster wheel that is increasingly difficult to get off of.

In this episode, Ryan and Jon talk about the psychology behind discounts, why they are so attractive to consumers, and how you can achieve similar results with alternative strategies that don’t undermine the value of your products or position you as a “bargain brand.”

Listen to the full episode if you want to learn:

  1. Why discounts are so compelling for consumers
  2. The downsides of habitual discounting for your brand
  3. When discounts are the correct pricing strategy to use
  4. Alternatives to discounting that work just as well
  5. How to assess and improve your current pricing strategy

If you have questions, ideas, or feedback to share, hit us up on Twitter. We’re @jonmacdonald and @ryangarrow.

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Episode Transcript:

[00:00:00] Jon MacDonald: You’re listening to drive and convert a podcast about helping online brands to build a better e-commerce growth engine with John McDonald and Ryan Garrow.

[00:00:17] Ryan Garrow: Last episode, we went into some of the data around what’s happening in the e-commerce world in 2020. And volume down costs are up and marketing businesses are chewing each other up from a marketing perspective. One of the point that’s come up more than a few times with our clients and similar partners.

[00:00:36] Yeah. You know, when do you start discounting and how do you use those discounts and my, because I’ve done this with you and we’ve had multiple conversations, including my brand around, you know, discounts like no don’t ever do, just don’t do it. Don’t do it. Uh, if you’d want to, we got to talk to John. And so I thought, okay, because this is going to be something that people are thinking about, like whether that’s old inventory or I just need to move product and prices an easy one for me to change.

[00:01:03] I’m just going to change price. Move product. Let’s talk about this and let’s put some, some data and I know you have a lot of psychology around just discounts and how and why, and why not all of these things. And so I want you to refresh in my mind, cause I’ve had this conversation with you multiple times, but also let’s let the public in, into some of the.

[00:01:29] John Ryan conversations around area. I really want to discount. John helped me. Uh, it’s my, my easy button for revenue juice. Um, I say it makes my conversion rates look fancy when

[00:01:43] Jon MacDonald: I do. Yeah, probably not. Right. Yeah.

[00:01:45] Ryan Garrow: So I guess Joe, let’s, let’s start with, you know, wider brands. W what’s going through their man or what are they thinking about when they decide discounts?

[00:01:54] What I need to be doing?

[00:01:55] Jon MacDonald: Well, I think, unfortunately you said it earlier that a lot of brands use it as the easy button. Right. And so a lot of e-commerce businesses and just retail businesses as well. Lean. Yeah. Heavy discount pricing to help carry their brand through maybe difficult. Yeah. Economic times like pandemics, maybe they get the vast majority of their sales during holiday seasons.

[00:02:19] So they feel they need to do like a mid yeah. Year discount or just even to drive conversions. I mean, I, I know you’ve heard me say this before, but discounting is not conversion optimization. It’s margin driven. Right. And so going back to the Corona virus example, you know, according to a recent study done by McKinsey and company, 40% of consumers are more mindful of where they spend their money.

[00:02:42] In 32% say they’re going to be moving to use less expensive brands or products to save money coming out of the pandemic. So, you know, there’s a huge segment of the population in the United States that was severely impacted financially, right? Brands are trying to appeal to them through discounting, but you know, competing with lower price products is just, it’s really hard as well.

[00:03:07] Right? So a lot of retailers will turn to discounts to be able to compete with those brands that are selling at a lower price point. And on the surface, I get it. That feels like the right thing to do, especially when 60% of consumers say discounts are important to them. Right. It’s really just an issue.

[00:03:27] So when employed strategically discounting pricing can obviously give a healthy sales boost. I can’t disagree with that, but when handled incorrectly, it’s going to devalue and detract from your bottom line and make your online sales less sustainable. Well, I

[00:03:43] Ryan Garrow: think a lot of us maybe in the back of our mind have kind of like the real estate mantra that your house will sell.

[00:03:52] It just depends on the price. You know, somebody is going to, if it’s priced at a hundred thousand, it might, it might be worth 80 and someone’s going to come pay you 80 for it. And so you’re thinking like, okay, if I priced my product at $20, it might only be worth 18. Ah, what if I needed a 10% discount to get people over the hump so I can see.

[00:04:10] Yeah. They fall into that trap a lot, but then you also see, you know, recently we had prime day, that’s Amazon trying to flatten the revenue line. So it’s not like 90% of our revenue comes between cyber Monday and Christmas, which a lot of brands do. I mean, there’s countless friends and family sales that happen during the summer trying to drive those users back into the store.

[00:04:33] Jon MacDonald: Well, I think that’s all true, but I really want to be clear on, on my stance here. Right? You should never employ discount if your brand is going to suffer in the longterm. So is it a quick fix for that mid-year slump? Yeah, maybe, but you know, if sales are so bad that you’re being forced to turn to discounting prices, your problems are much, much deeper than your pricing strategy.

[00:04:56] And so usually when I see brands doing. Heavy discounting or any discounting it’s it’s because they have other unanswered issues that really should be starting to get resolved. I think that, you know, the problem becomes the discounting pricing often handled incorrectly, but when it is handled incorrectly, it leads to the devaluation of your products and your consumer’s eyes.

[00:05:19] And it just teaches them to wait for the next sale. And I see this all the time. I, you know, we’ve talked about this for. Your wife goes to craft stores and she knows she’s going to get a coupon. So why even, you know, buy without the coupon. Cause you know, one’s coming soon. I can wait a week. Right. It doesn’t create urgency.

[00:05:38] It really just creates the opposite. I think that it’s just a big challenge that a lot of brands are teaching their consumers, that their products aren’t worth what it’s listed for. It’s worth that discounted price. And that is going to be unsustainable for the longterm.

[00:05:55] Ryan Garrow: Okay. So generally, if we’re talking about generally discounting bad, but when are the opportunities to maybe leverage it in a good way?

[00:06:05] Are there situations, it makes sense for some brands that they should at least. Well, I

[00:06:09] Jon MacDonald: think so. And that’s what makes it essential to really understand the fundamentals of pricing strategies, right? Including the advantages and the disadvantages we’ve talked about. I mean, you know, there’s a lots of types of discounts that brands should be thinking.

[00:06:25] Right. So, okay. Let’s just list off a few of those right. There’s discount codes, right? Knee often you can use these to just give people a dollar or a percentage off, which is something I’m not a huge fan of, but if you tag it around a specific event, like prime day, right. Where it’s limited time, you could give it to influencers to share with their audience.

[00:06:48] So to help stoke some action, right. And, or promote maybe yes, very specific lineup. You want to maybe a new products or clear out some, some old product without saying it’s on clearance or that it’s an old product. These are all things that can be really, really helpful. You know, there’s abandoned cart discounts, right?

[00:07:08] So, you know, the average abandoned cart rate is almost 70 bucks. So 70% of customers are going to abandon their cart and walk away from your store. It’s a high number, right? Especially when you spent all this money to get them there, but you can lore those people back in pretty easily with the promise of money off.

[00:07:26] Most, I will say based on our research, most of the people are abandoning for two reasons. They, they want to abandon or wait for that email, with that discount because they’ve been trained or two. They’re abandoning it because they’re going to look for a coupon elsewhere on the internet, and then they can’t find one.

[00:07:44] They’ve spent 10 minutes looking for it. Now they’re get frustrated and they say, oh, I’m done. Right. I’m just not going to bus. Probably a large percentage of posts. There you go. See, I could see it in your eyes, right? This kind of shopper. Yes.

[00:07:57] Ryan Garrow: I’ve done that many times.

[00:07:59] Jon MacDonald: Yeah. There’s also flashes. Right. So there’s those big shopping events.

[00:08:04] We talked about prime day, but a lot of parents do it around cyber Monday and things of that sort. So putting it to a limited timeframe can be valuable and not really hurt your brand as much. And it can increase urgency is as long as you’re not doing it on a regular basis. Right. That’s the key, don’t say every month I’m going to do a week where things are on sale.

[00:08:26] Consumers are just going to know to come back during that week. Right. But if you do it once a year or twice a year, or even just say, Hey, for the next six hours, we’re doing this special, something of that sort, it could work pretty well. One of my favorites is when you start thinking more on the promotion side, less on the discount side.

[00:08:44] So do things like free gifts. When you get something for free, it feels really good typically. And you know, this isn’t so much about the discount, but you know, really just sweetening the deal. And, um, it’s really good for, for things like first-time customers, right? So after your first order, you get something that’s complimentary to your products or.

[00:09:06] You know, maybe you get a sample of another product that they is complimentary and they may like, you know, I see a lot of these types of things happening, uh, lately, which over COVID was, was great. So I think that’s something that, that, you know, brands really could look into, you know, free shipping. If you spend over X dollars, this is a great way to also increase your average order value.

[00:09:28] Right? So nine out of 10 consumers say free shipping is the top incentive for them to buy them. You want to pay the price of the product. You’re happy to do that. Uh, it’s the same. You pay at retail, but you don’t want to pay to get it to your door. For some reason, consumers feel like that’s a separate, you know, that’s not my fault.

[00:09:46] I’m buying online in the brain has to get it to me, getting me to the product. That’s, you know, that’s should be part of the deal. So 93% of customers will buy more free shipping options, service. And I think that’s, that’s just an incredible number.

[00:10:02] Ryan Garrow: And I think that includes, there’s probably a lot of testing and measuring around that too, on what that number could or should be, because you can probably start with an arbitrary one, but then you want to see AOV is 45.

[00:10:13] Maybe you don’t want to make your free shipping threshold.

[00:10:15] Jon MacDonald: 90. Exactly. Exactly. What I recommend brands do is they look at what their current AOV is and take that average order value and set your free shipping just above that. And encourage people to spend a little bit more. So I think that’s something that can go really long way for brands and in offering free shipping.

[00:10:39] You know, what you can also do then is say, send it to my email list and you get free shipping on your first order. And no matter what the value is, right? So, you know, now you’re offering an incentive to sign up. That is not a discount, right? It doesn’t feel the same as a discount to them. And there’s a lot of stuff you can do for these first-time customers that to get them up on your email list.

[00:11:01] So, so really be thinking about that does not have to be a discount. It’s really, really common these days. And that’s part of the challenge. The e-commerce industry has created their own problem here, where they’ve trained brands. It’s kind of like Amazon, you know, it gets the blame for making it so that everybody expects the package to be at their door in two days and eat every other DTC.

[00:11:25] Econ brand has to put up with that and has to figure out how to make it happen without having the warehouses all over the country. So, um, it’s where great places like ShipBob come in, right. That help you do that.

[00:11:37] Ryan Garrow: So you’re welcome, Casey.

[00:11:42] Jon MacDonald: Not not, this is not a paid commercial brands use them. Right. So it’s something where, you know, one of the value propositions of working with a three PL is indeed two-day shipping. So, you know, the last one to really be thinking about here is kind of a tiered model, right? So the more you spend, the more you save, I actually kinda liked this a little.

[00:12:02] Because it’s the mindset that’s behind these tier discounts where, you know, percentages increase on with the customer’s cart total. And I just really liked that approach because now you’re incentivized incentivizing. You’re not just discounting. So instead of just saying, Hey, it’s a flat discount, you know, to just get them to purchase.

[00:12:19] Now you’re saying, Hey, you were likely already going to purchase, but I’ll just help you spend more. And I think that can work out extremely well. Now, have you

[00:12:27] Ryan Garrow: seen any. App or plugin for that. Cause having some Shopify and big commerce sites, I can see that being one of the biggest pains in my existence online, trying to figure out how to put that tier

[00:12:39] Jon MacDonald: in place.

[00:12:39] Yeah. Yeah. I’ve seen a lot of people use loyalty programs for this and hack those loyalty program apps. Yeah. Like the

[00:12:47] Ryan Garrow: lifetime value spend, not necessarily to spend in that order.

[00:12:51] Jon MacDonald: Well, you can adjust it so that they can cash. You know, when they earn them. So instead of banking them for future sales or future conversions, you’re saying, Hey, you’re going to earn 500 points on this and that’s worth $5 off today.

[00:13:07] Right. So you get to basically apply the points, the purchase that you’ve worked on to earn the monitor so you can apply, earn them and use them at the same time. If that makes sense. Nope, that’s really good. Well, it becomes like a. That’s right. You’re going to have to make the purchase to get the, get the, the thing off on the coupon.

[00:13:25] Uh, but now you’re just saying, Hey, you’re signed up for my loyalty program. Right? You were going to earn points on this exact purchase, but you can also apply those points to this purchase. Starbucks does a good job with that in their app. They let you earn points right away, but you can also then turn around and use those.

[00:13:41] Right. Right then as well. So yeah,

[00:13:43] Ryan Garrow: no, I fully agree with skis. You can get more people in your loyalty program. You know, do it. I mean, I would like to hand out dollar bills. If I could get people to, I started in my loyalty programs, he had permission to communicate with them and those people are gonna spend more money so you can gain.

[00:13:59] Purchase,

[00:14:02] Jon MacDonald: you’re listening to driving convert the podcast focused on e-commerce growth. Your hosts are John McDonald’s founder of the good, a conversion rate optimization agency that works with e-commerce brands to help convert more of their visitors to buyers, Ryan Guerro of logical position, digital marketing agency offering pay-per-click management search engine optimization and website design services to brands of all sizes.

[00:14:28] If you find this podcast helpful, please help us out by leaving a review on apple podcasts and sharing it with a friend or colleague. Thank you.

[00:14:39] We want, we could spend time on the, on the psychological principles behind this a little bit too.

[00:14:43] Ryan Garrow: Yeah, I think that would help because it’s not just as simple as here’s a discount use it or not type thing, but there are, there’s also a lot of science behind. Why and how to give discounts that I think is important for a lot of brands to understand if they decide to start dabbling in some of these discount spaces.

[00:15:02] Jon MacDonald: For sure. And I think, you know, you start thinking about things. Just conditioning, right? If you start offering these discounts too frequently, you’re just training that audience to wait for the promotions. And so you really need to be thinking about just conditioning right off the top. How are you going to offer these deals and how often?

[00:15:24] And I think that if a little bit of planning in this goes a long way, and as we said, A lot of people are just hitting the easy button. I’ll just third discounts out. I’ll just do dollar percentage off, but then you’re really are ruining yourself in the future. There’s also that issue of quality. Like there’s a lot of brands you’ll never see on sale, and there’s a reason it’s because you know, somebody typically would buy that luxury brand because they know there’s a perception of quality there for others.

[00:15:54] Right. So, you know, if you buy a really nice watch, you want other people to see that on you, for instance, right. Even if you were to put two products next to each other, and one is $200 less, most people that you would survey would say, one is inferior to the other in some way must be because there’s $200.

[00:16:13] All right. So discounting can lower the perceived quality of your goods. So always want to keep that in mind. And then there’s the principle of scarcity, right? So when you tie your discount to urgency, it’s going to be more effective. So you could always say something like, you know, by now or lose the opportunity or something of that sort that, that kind of helps them to place the, the order immediately.

[00:16:36] So only a few left in stock, if that’s true, right. Can be a really good motivator and especially, you know, without having to do it. Yeah. Now, what

[00:16:45] Ryan Garrow: about specific on scarcity, the authenticity behind some of these scarcity test sticks? Like obviously we hate Reelio, you know, you guys are probably nice, it made it, but the actual app itself spend.

[00:16:57] And when I don’t like, but then there’s the other Shopify plugin. It talks about all of these people buying these products as, as I’m browsing site. And, um, many of them, I know for a fact they’re fake because the site only gets like 10 visitors a month. So how could a hundred people have bought while I’ve been on here?

[00:17:13] Like Susie in Atlanta? Sorry, Susie. You did not buy that. Right?

[00:17:17] Jon MacDonald: Exactly. It’s true.

[00:17:18] Ryan Garrow: I have to imagine maybe it causes subconscious scarcity, but it all. Yeah. If you’re somebody like me, it just pisses me off that you’re lying to me and other

[00:17:26] Jon MacDonald: people. Yeah. Well, I mean, the reality here is a lot of that is created to just have social influence.

[00:17:32] Right. Which is what you’re going. Another principle, I think, you know, most people like to brag about getting a good deal, but they also want to be influenced by what other people got. It goes back to what I was using with the watch example earlier. Right. So I think that that’s something where, you know, you want to know how are people reviewed this in the past, but also.

[00:17:52] Are other people buying this. I want to be part of that group. I don’t want to be left out. I think those influencing factors can work when they’re authentic. But the tool that you mentioned, which blew up across the internet a handful of years ago, and you rarely see anymore, pop-up coming up out of the corner or slide in that that says, you know, Susie in Atlanta bought this product 55 minutes ago and you’re like, you know, you and I both know, cause we get the chance to look at all this data that a lot of those R and D not accurate or true.

[00:18:22] But the reality is they’re trying to stoke that social influence. And I guess with all of this, if your option comes down between offering a discount or lying to your consumers, offer the deal. Just do it because you obviously can’t think of anything better. So you’re going to lie to your consumers. I would rather, you don’t do that.

[00:18:40] That’s stupid below a discount, uh, which in my book is pretty low already, so yeah, not a huge fan. So yeah, I think, you know, the reality is here that you really need to justify your discounts and always have a reason for doing them and make sure there’s someone specifically there, which is the last point that I would touch on.

[00:19:03] Psychology. If you do that, then your customers will always think of, you know, not necessarily your brand being discounted, but they’re getting something because of an event, right? So otherwise your customers just are going to start to think that your profit margins are so high. You can afford to discount everything all the time, which you and I both know is not accurate.

[00:19:26] Ryan Garrow: Hmm. Well, I think Apple’s a phenomenal example of not discounting. They have phenomenal margins. They smoke every other phone maker out there as far as their margins are concerned. Yeah. And if you’re in the business world, you’ve probably seen their earnings and you know, their margin so gross, but I still pay for it.

[00:19:44] I still buy a thousand dollar phone, even though I know it’s there just, I know that it’s not going to go on sale. Like if I want the new phones yeah. Pay retail, but they did a phenomenal job at creating. Or of quality, not every brand is going to have the opportunity to do that. So, but kind of look at them as an example.

[00:20:03] I think of what you can do and create a massive global brand. But one thing I didn’t hear from you, which I’ve, I like it’s difficult, but it’s the discount around bundling and maybe that’s kind of in tears or something, or does that fall under one of the things you talked through already, but

[00:20:18] Jon MacDonald: yeah, bundling is a great option.

[00:20:21] Um, because then what you do is you say, okay, Three $10 products and sell them for $25. And so the consumer is going to inherently save some money because they bought more. So that’s a similar to a tiered approach, but the reality is it doesn’t feel like a discount to them. It feels like they’re buying more.

[00:20:40] So they should. Some type of break for doing that. And so again, it’s just a psychological principle. That’s a little bit different there. They’re not having to go hunt for code. They’re not having to, you know, say they have a coupon or discount code or join a loyalty program or do any of these things.

[00:20:57] You’re just saying buy more and you pay a little. And I think that really can add up for brands pretty quickly. It’s one of the first things we like to implement with brands who aren’t doing it because they’ll see their average order value go up pretty dramatically. Uh, if you get the bundles, correct.

[00:21:15] Ryan Garrow: It’s not the easiest to implement. On a site have there’s so many problems that come into play with certain types of bundles, but we have some auto parts clients that you have map pricing on certain things you can get around map by bundling some things together in a different price, because technically a different skew, but it takes a lot more creativity.

[00:21:38] So if you’re the easy button discounted, it’s probably just going to make you angry. But I think the benefits are pretty massive. If you can figure out. And my favorites then mix and match, but that also breaks a lot of websites with variants where you’re able to pick what things you want in there.

[00:21:55] Jon MacDonald: Yeah.

[00:21:56] Yeah. And that’s the thing. I mean, you have to weigh the complexity of implementation on these. A lot of them are going to be really difficult to implement and you need to pay attention to that. And you know, if you can’t afford to do that for one reason or another, I still challenge you to not hit the easy button and immediately go to.

[00:22:17] Just a dollar or percentage off.

[00:22:19] Ryan Garrow: Got it. Okay. So punchline and e-commerce discount pricing. Is, is it a good idea or a bad idea?

[00:22:25] Jon MacDonald: Well, I think incentivizing customers can seem like the right thing to do. And adding a discount code is just the easy button has, we’ve talked about the default way of doing that, but, well, it might boost your sales numbers.

[00:22:37] I think it comes with serious trade offs. And that’s typically why I don’t recommend that. You know, I hear all the time, but everybody is discounting. Right. I mean, I’ve heard that from you too well. Oh, sure. Because they are just hitting that easy, but not trying to find the. Best way to boost their sales numbers or increase revenue or instill brand loyalty.

[00:22:57] All of those things are, are really important. And again, I don’t want to say you should never offer discounts. I’m simply saying that there’s better ways to incentivize purchase. Okay. Increase the value your customer receives rather than slashing your prices. And I think you’ll. That you’ll really avoid a lot of the detrimental long-term effects of discounting.

[00:23:20] You know, those really drained margins that lower customer lifetime value, the, the high churn, or even attracting those less than ideal customers that are really just going to be a customer service nightmare. And in the end, it cost you way more to serve. So there’s a lot of things to be thinking about here, all in all.

[00:23:39] Is it bad if I have to hop off one side of the fence, I’m going to say bad, but I understand why brands do it at the same time. Yeah. And I would

[00:23:47] Ryan Garrow: say that if your products are priced higher than your competition, and you use that to justify discounts to get down to their price, you’re probably going to be better off just matching them.

[00:23:59] Yeah, and it’s going to help from a Google shopping perspective and discoverability when you’re just on par, I forget who I was talking to earlier in the week, but I said, you know, that I will get companies that still to this day tell me that they charge more for their products because they have a very educated workforce that have more experience than all their competitors.

[00:24:19] I was like, well, that’s awesome. And you should have that if you can. But at the same time, if nobody’s bought from me before, they have no idea that that’s behind the scenes. Yeah. And so if I see your shop at 20% premium and somebody else that’s at a 10% premium and everything else looks the same, I’m going to take the one.

[00:24:35] That’s not as expensive. Like if they’ve got reviews and they look legit, I’m not going to pay extra because I want to be nice. And I am a nice guy, but I’m still not gonna pay

[00:24:46] Jon MacDonald: extra. I feel like, I mean, I understand that. I think. Is a huge challenge for brands. And instead of doing the research and understanding where they should be priced, if you.

[00:24:57] Offering a discount. Again, you have a big problem. So usually discounting comes from the root of a different issue that has yet to be resolved. So highly recommend taking that step back first, really evaluating if a discount campaign should be used on your brand or your site. And if you’re thinking, yes, it should then.

[00:25:18] Have some really good understanding about why you’re doing that. And maybe what, what is the systemic issue that could be fixed?

[00:25:25] Ryan Garrow: Yeah. And I challenged some companies that would come to us for trying to level their revenue stream by doing sales in the middle of the year. Maybe you need to diversify your product line.

[00:25:35] Maybe that’s a better answer than just discounting all the stuff that generally sells in the winter. Maybe you need something that sells in summary. Maybe you need to do. Pool toys or sunscreen or something to help flatten out or go in the other hemisphere during the summer, if you’re in winter stuff.

[00:25:51] So lots of options, but it’s definitely more complicated and challenging than discounting, but probably more valuable.

[00:25:58] Jon MacDonald: Yes. Uh, like most things in business, the easy way is, is likely that what’s going to get you the initial gains, but not long-term. Yeah,

[00:26:06] Ryan Garrow: nobody wants to buy a business for premium when you’re all you’ve done is discount ticket sales.

[00:26:10] There you go. Boom. Anything else, John?

[00:26:14] Jon MacDonald: Parting words. I think we should end on that note.

[00:26:18] Ryan Garrow: All right.

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About the Author

James Sowers

James Sowers is the Director of Marketing at The Good. He has more than a decade of experience helping software and ecommerce companies accelerate their growth and improve their customer experience.