Employed strategically, discounted pricing can give sales a healthy boost; handled incorrectly, they can devalue and detract from the bottom line.
Right now, many ecommerce businesses are leaning heavily on discounts to help carry their brand through the difficult economic times ahead.
While discounted pricing can certainly boost your conversion rate, it lowers returns on each conversion, lowers average order values, and can end up causing real revenue to decline.
I know how you feel – darned if you do, and darned if you don’t.
There are times when discount pricing can pay off, and there are times when it can hurt you a whole lot more than it helps. In this guide, I’m going to show you how to decide when and how strategic discount pricing can make sense, and when it doesn’t.
We’ll cover the types of discount pricing, the psychology behind discount pricing, how to develop a winning discount pricing strategy, advantages and disadvantages, and show you some examples of discount pricing in action.
After that, we’ll talk about how to compete (and win) against a competitor’s discount pricing campaign. In other words, this is a full-spectrum guide ecommerce managers can use to know when, how, and why to pull discount pricing out of the tool box.
What is a discount pricing strategy?
Discount pricing is a strategy often used to generate more sales – typically by dropping the prices you ask for your goods or services. However, discounting too much or too often can eat into your bottom line revenue and do major damage to your brand.
That’s why it’s essential to understand the fundamentals of discount pricing strategies, including the advantages and disadvantages that accompany them.
Why is discount pricing important?
Strategic discount pricing can spearhead an upsurge in ROI. On the other hand, when executed poorly, it can cannibalize your profits.
1. The seven most common types of discount pricing (and when to use them)
Discount pricing typically falls into one of seven basic categories. Understanding these categories can help you determine whether a discount campaign is appropriate for your situation at any given time.
- Volume discounts: The more you buy, the less it costs. Quantity discounts can convince customers to purchase in bulk. Loyalty cards that give a free item after a certain number of items are purchased can be another way to approach volume discounts.
- Seasonal discounts: These are an excellent way to jumpstart sales at the beginning of peak seasons or reward customers who purchase during dormant times. Seasonal discounts can not only generate excitement, but can help you clear out the previous season’s inventory to prepare for the coming season.
- Promotional discounts: Keep them short-term and aimed at driving a special sale. This is the type of discount you don’t want to leverage recklessly. Promotions that occur too frequently can signal your customers not to order from you until there’s another promotion. Consumers expect holiday sales, so don’t be afraid to jump on that bandwagon… just be careful about making promotions a major part of your sales strategy.
- Loss leaders: Exceptional discounts can get more visitors to your ecommerce store. The hope is that they’ll also purchase more profitable products while they’re there (or come back soon to load up the cart). Loss leaders should be familiar items that are used frequently. Vary them to keep customers returning to look for your next amazing offer.
- BOGO sales: You’ll want to check local laws on this one. BOGO offers (buy one get one) often claim the second item is “free.” If you must buy something to get something, though, you’re really getting a 50 percent discount, not a “free” item. Be sure to describe the BOGO accurately and either spell out the real savings or make them easy to calculate.
- Loyalty discounts: This can be an amazingly effective way to build the bond between you and your best customers. Be clear on the terms and make sure the discount really is ONLY for those who qualify – whether by being a repeat customer, a longtime customer, a membership customer, or other status definer. Make your customers feel special, and they’ll make sure you stay in business.
- Membership discounts: These can be reserved for card-holding members of your private club (Amazon Prime members, for example), for members of someone else’s club (AARP), or for those who qualify by being a military veteran, a senior citizen, or some other designator. Just as with loyalty discounts, showing appreciation for your customers is always a good idea.
Marketers have long realized there are psychological principles at work in the buying and selling process. Most have heard of Dr. Robert Cialdini’s book, “Influence: The Psychology of Persuasion,” but Cialdini didn’t invent the ideas covered there. He simply collected and codified them. Discount pricing comes with its own set of psychological touchpoints:
- Classical Conditioning: Offering promotional discounts too frequently can train your audience to wait for promotions before they’ll buy from you.
- Perception of Quality: One of the reasons people buy a luxury product is to get better quality (or at least the perception of quality). A product that costs $399 looks ‘inferior’ to the similar product priced at $600. Discounting can lower the perceived quality of your goods.
- Scarcity: Discounts tied to urgency are usually more effective. When the consumer is faced with “Buy now or lose the opportunity,” the decision is often swayed towards placing the order immediately.
- Social Influence: Most people like to brag about getting a “good deal.” Those who get a generous discount on something feel smarter than the neighbor who paid full price and won’t be shy about letting others know about the transaction.
- Perception of Savings: Comparisons help make your case. Don’t just list something at a 25 percent discount. Give the “normal” price, slash through it, and state the current price. If you’re going to discount something, make it dramatic!
- Be careful about how you display the discount. A rule of thumb (for instance) is that buyers respond better to percentage discounts (e.g. “20 percent off”) for items priced under $100 but prefer seeing absolute value discounts (e.g. “Save $20) when the item is over $100. Being sure to show the original price, stricken out, with the new discounted price next to it, can also be helpful.
- Exclusivity: Justify your discounts. Always have a reason. Whether it’s the end of summer, you’re passing on a special price you arranged from the manufacturer, or today is your dog’s birthday… make sure to announce WHY you’re discounting. Otherwise, your customers may think you build so much profit into your prices you can afford to discount everything all of the time.
Here’s a major consideration: Do you primarily compete on price or on quality? If your business deals in commodity items where price wars are common, frequent discounts probably won’t hurt you (assuming you follow the tips already given).
Most companies carry products in each category. If that’s you, apply your discount strategies and tactics on an item-by-item basis, not on your entire inventory. Remember: focusing on building value is almost always more ROI-effective than lowering prices.
Discounts can command attention and draw traffic fast. In a way, discount pricing offers the best of both worlds: shoppers save money and stores get more sales.
Let’s break the advantages down just a little bit further:
- Discounts not only appeal to current customers but attract new customers. If you’ve computed the lifetime value each new person adds to your business, it’s easy to see where giving up a chunk of your profit (or even losing money) for one sale is worth it in the long run.
- Discounts present the perfect opportunity to offer cross-sells and upsells that can more than make up for the money you forfeited by providing the discount.
- Discount pricing promotes brand recognition for great prices delivered. If you develop a reputation as not only being the place to find a great selection of tents and sleeping bags – but also the place where shoppers can find great prices – you’ve tapped into some word-of-mouth magic.
One more time: if you discount too frequently, you can train customers to buy from you only when the price is reduced. You’ll end up looking like the store that’s been holding a “Going out of business” sale for years. Eventually, you’ll lose credibility. Customers will stop feeling a sense of urgency. They’ll quickly figure out that all they have to do is wait for the next discount. They’ll begin to think that everything is always marked down.
Discounts can also be the starting point of a downward pricing spiral that may eventually damage your ability to sell the product at full price.
The disadvantages of discounting are serious enough that any ecommerce manager considering launching a discount campaign should think well on the idea before proceeding. Once your company’s reputation moves from quality and service to low price leader, you’ll be drawing a whole new crowd and experiencing a whole different set of problems.
Let’s look at some of the ways discount pricing is used in ecommerce today. For each example given below, ask yourself how effective the strategy demonstrated seems to be and how frequently an ecommerce manager could employ it without drawing unintended consequences.
The online training website, Udemy, has many courses priced at $200 or more, but the site regularly runs offers that reduce prices drastically (see the screenshot above
That strategy has been in play for several years now and “Blowout” sales show up on a regular basis. How many Udemy customers do you think actually pay full price for a course? At some point, will they only buy when a sale is going on?
You can offer seasonal discounts to all customers. No special reason (beyond the calendar) is needed. Seasonal discounts are an excellent way to move old inventory or kick off a new line of merchandise.
Where possible, draw a clear connection between the season and the products on sale, though. In the Macy’s ad above, visitors have to fill in the blanks themselves. Why should I need new items for my home just because it’s summer? Oh, yeah… time to eat fresh fruits and vegetables. Let’s get festive!
Father’s Day, Mother’s Day, Memorial Day, Christmas – there’s no lack of special reasons to celebrate.
Home Depot (see the graphic above) wastes no time pointing out that Father’s Day could be the perfect time to get Dad that new power tool.
One question, though:
What if I want to spend more than a hundred bucks on my father? Do I need to go to Lowes?
No single promotion-based discount pricing strategy works best in every situation. The approach you employ rises from the particular product – especially its relevance to the market and its sales history.
One reason for offering a promotional discount is to tie the introduction of a new product to a certain event. Make the discount offer good for either a limited time or for a limited number of customers. You can ignite attention to a new product by offering a steep discount – but only to those who respond quickest.
Companies often get unwittingly pulled into a price war with the competition. Perhaps management doesn’t really want to discount, they just see no other way of responding to the advertised price cuts by others.
Here’s how to hold your ground:
- Highlight your value proposition. What differentiates you? Why is buying from you the best choice – price aside? When others lowball to gain business, your best bet may be to hold your ground and point out the obvious: low price seldom means the best value.
- Focus on providing a better customer experience. Be more helpful than competitors. Provide better service. Let your audience know you’re in it for the long run, not to make a quick buck.
- Use the foundational principles of conversion rate optimization to increase sales. Discount pricing is just one way to obtain customers, and it’s usually not the best way. CRO can shore up your sales without resorting to dropping your prices.
If you choose to employ discount pricing strategies and tactics, make sure your decision comes from a reasonable plan of action. Much of the time, discounting is based on reaction to the path others have chosen. Let the competition price itself right out of business. Just don’t follow them.
Ecommerce Discount Pricing – Bad Idea or Good Idea?
Discount pricing, handled incorrectly, can lead to the devaluation of your products in your customers’ eyes and teach buyers to wait for the next sale before purchasing from your ecommerce website. Discount pricing, done right, can help you launch special events and give sales a healthy boost. The difference is all in the planning. Before discounting, read back through this guide to check your motives. Look beyond the immediate impact of the tactics you’re about to employ to the potential after-effects.
Never employ discounts if your brand will suffer in the long term. When sales are so bad you feel forced to turn to discounting prices in order to stay afloat, your problems are much deeper than your pricing strategy.