Once, sales periods were limited to the time after Christmas when retailers had a lot of stock leftover from the festive period, needing to sell off any leftovers before the new season began.
The introduction of big sales days like Black Friday and Cyber Monday are the most obvious examples of the growing pressure to discount, but increasingly, discounting is happening throughout the year. It has become seen as a way for retailers to not only shift some stock, but also as a strategy to acquire new customers.
Before applying a discount, it is important to think about what you are trying to achieve with it. Of course, reducing the price of a product will make it easier to sell. But it will also mean you make less profit on that item. This isn’t necessarily a bad thing. Loss leader pricing, for instance, may not result in a profit on that product, but retailers hope to draw people into the store (or onto the website) and establish an ongoing relationship with them, selling more products which do generate revenue.
Discounting is often used as a key strategy for acquiring new shoppers. If these new customers can be persuaded to keep returning throughout the year, this strategy offers a serious opportunity to boost revenue. But if customers only buy once, at a discounted rate, this has proved a costly exercise for the retailer. Retailers need to think about the longer term effects of their discounting strategy.
Looking at the results of ecommerce companies we have worked with, it was discovered that customers whose first purchase is discounted by 5-30% tend to be ‘charmed’ by the reduction, and are likely to come back and make a second purchase from the brand later. These relatively small discounts have a real positive customer acquisition impact that extends beyond one purchase, encouraging the customer to come back to buy more, offering a greater chance of high customer lifetime value.
But more dramatic discounts, which are becoming common on big sales days like Black Friday in the US and UK, or Single’s Day in China, have a different effect. Reductions of 30% and over attract ‘cherry picking’ customers, who make a habit of buying specific discounted products, but do not necessarily return to purchase anything else unless it is similarly discounted.
Although one-off sales do boost revenue, this is only at a relatively small margin. A lot of work goes into selling to a new customer once, drawing them from other shops or websites to your own one. On the other hand, it is much easier to sell to someone you’ve already sold to before. Attracting a group of customers who will keep purchasing your products is much more important than making a single sale to every potential customer once.
This may seem obvious, but most retailers tend to focus more on acquiring new customers than retaining their existing ones. As an industry benchmark, only 37% of a retail brand’s buyers are returning customers. That means 63% of customers don’t come back to make another purchase again, and this amounts to a huge lost opportunity.
To make the most of their hard work, retailers should focus on retaining their customers, and attracting the kinds of customers who will return. Using discounts to draw in customers can be extremely costly, if these discounts aren’t applied effectively. But if they are applied with a mind to the longer-term effects, discounts can be a valuable tool to develop a more solid relationship with the customer, to keep them coming back.
And there are many more strategies available to retailers to attract and retain customers than blanket discounting. A discount doesn’t have to be all things to all people, and it doesn’t have to be tied to a special season. Getting the most out of discounting as a strategy could involve personalising what you offer to customers. Discounts don’t have to be offered to everyone, and they can be applied with time restrictions, or in combined promotions, depending on what appeals to each customer and brings in more sales. You can also reward customers for their loyalty with special, individualised offers, or early access to new products.
The great advantage of marketing to existing customers is that retailers have a wealth of data about them, and this can be used to find out what appeals to them. By tracking which strategies generate the most revenue from each customer, retailers can hone in on which discounts and promotions work best for each customer.
As competition from online and brick-and-mortar retailers increases, there will be a growing pressure on retailers to slash prices in competition for the best sales numbers. But while large reductions may improve sales figures, retailers need to take a step back and think about what they want to achieve. Discounting is a great way to attract and retain customers, but it needs to be used carefully and creatively, in combination with a variety of other promotional tools, informed by customer data. By applying different discounting and promotional strategies to different customers, retailers can work out the perfect approach to attract customers who will come back and add long-term value.