Everyone loves a good bargain. Getting the best product for a great price is a nice feeling. And in today’s digital age, it’s easier than ever for consumers to shop around to find that option.
A quick query online can turn up scads of businesses offering the exact same or very similar products, and the consumer is free to comparison shop. Not only that, but the internet eliminates geography as a barrier.
In the good old days, consumers had to drive to a store to purchase their item; they wouldn’t drive hundreds of miles out of their way for a comparatively small discount! But now, they can purchase from businesses around the country or globe without having to get up from their couch.
Businesses know that consumers are shopping around, and so at your organization, your impulse might be to start offering discounts. Slash prices and pull out ahead of the competition—it’s that simple, right?
Not exactly. When you get too promotion-heavy, you erode brand loyalty. And while you may see positive short-term results by offering discounts, it can be problematic in the long run. In this article, we’ll take a look at why discounting is dead and introduce an alternative way to structure your pricing that can ensure the long-term health of your business.
Discount-Happy Brands Hurt Themselves
How many Bed Bath & Beyond coupons have you received in your lifetime? Most people find these coupons cropping up in their mailboxes regularly. People joke about having stacks of them in their cars or desk drawers, and the coupons come so fast and furious that you could shop there regularly and still always use one.
At face value, coupons sound like a great idea: Entice customers into the store with lower prices. Bed Bath & Beyond was hoping that by offering discounts, they’d become people’s go-to for all their home goods needs.
Unfortunately, it hasn’t worked out like that. Bed Bath & Beyond’s revenue growth has been falling since 2014, and there are now several private equity firms looking to purchase various assets.
The problem with becoming the discount brand is that it shapes your identity. You haven’t differentiated your business on any other factors or defined your value proposition, and so when competitors offer slightly better pricing, your customers abandon you in favor of them.
Being the discount brand means you have no brand loyalty. Your customers will drop you in a second when a better offer comes along.
Should We Ever Offer Discounts?
Bed Bath & Beyond certainly acts as a cautionary tale, but that doesn’t mean you should never offer promotional pricing. There are legitimate reasons why a business might offer a promotion, and there are ways to structure these discounts effectively.
The key to creating successful promotions is to do it intentionally and in a targeted manner. Is there out-of-date inventory you need to move? Yes, by all means, discount!
Otherwise, tread strategically when considering your discounting strategy. Bed Bath & Beyond’s major mistake is that they sent the same coupons, over and over again, to anyone with a mailing address.
Discounting worked well in the old world of direct mail and brick and mortar to drive that impulse purchase. Now that digital media and e-commerce are mainstream, promotional strategies need to be updated to reflect modern buying decision patterns. Using data to understand your customers can help you build strong promotional offers that boost revenues while maintaining brand loyalty.
Start by Understanding Your Customers
If you’re going to offer effective promotions, you need to understand your customers’ wants and needs first. The best place to start is with your whales—your best customers.
Take a look at the data you have on your whales. What products do they gravitate towards? What are their purchasing behaviors? How do they interact with your brand online?
Understanding what your best customers want can help you design the most effective promotional offers. For example, let’s say there’s a beauty store that is trying to move a particular type of moisturizer. They see that their whales regularly buy a face mask by the same brand, and so they create a bundle promotion where the moisturizer and face mask are sold together at a slight discount. It’s likely to entice whales, who are already big fans of the face mask, because they’ll be more likely to give the moisturizer a try if it comes with a product they already love and is offered at a discount.
In their paper on understanding trends for promotional targeting, Lennart Baardman and his coauthors outline the importance of using data not just to understand customers themselves, but to track their relationship to others online. They posit that purchasing trends are influenced by those in our social circles, and so when brands understand how their best customers interact with their personal connections, brands can create offers that are targeted to the needs, interests, and desires of that specific population. They found their approach to be successful, generating a three to 11 percent increase in revenues in their tests.
Identify Other Forces at Work
Once you’ve evaluated how your customers and their social networks behave, you must also consider outside forces as you think about structuring your promotions. In this Harvard Business Review article, for example, the authors argue for greater precision in the way businesses design promotions. They start by acknowledging the importance of understanding your customer, but also point out that these customers don’t operate in a vacuum.
They note that the effectiveness of promotions ebbs and flows throughout the year. Businesses should capitalize on the times of year, holidays, and even days of the week when customers are most likely to need or want their product or service.
You should also consider the channel for your promotion; some types of offers are more effective online, while others better serve brick and mortar businesses. Think about the products you’re promoting, as well. Rather than offering a generic promotion that covers all products, are there certain ways to capitalize on trends or caché through your offers?
Be aware that your promotions can have ripple effects. When you offer a promotion on one item, it can adversely affect the performance of another of your higher-priced offerings (otherwise known as cannibalization), or it can affect future sales (due to stocking up).
Researchers from Washington University in St. Louis found that a tuna fish brand that offered discounts saw an initial boost in revenues during the promotional period. However, the company was dismayed to find that sales dropped afterward. That’s because their loyal customers saw the promotion and stockpiled tuna cans at the discount price. They did see some activity from new customers during the promotional period, but because they weren’t brand-loyal, they disappeared after the fact, and the company was left worse off.
It’s Not One-Size-Fits-All
Once you’ve learned what you can about your customers and considered the outside forces at work, it’s time to start designing your promotions. It’s important to note that you don’t need to make a blanket offer to your entire population. Consider segmenting your audience and providing different offers to different groups.
You can segment by demographic features (geography, age, gender) or behaviors (lapsed customer, prospect, one-time customer). In this paper, Professor Jean-Pierre Dubé and his coauthors found that sending targeted discounts to movie theater patrons based on their geographic location had a positive effect on revenues during off-peak times of day.
As with any new business strategy, it’s important to continue to track results and make changes to the promotions as necessary. Dubé and his coauthors clearly did several rounds of tests to settle upon the specific parameters that made their promotions most effective. You should do the same for your business, returning to the data on a regular basis to see how things are working out.
A haphazard approach to discounting is a business killer. Sure, you’re everyone’s favorite in the short-term, but as soon as a competitor moves in with similar pricing and better differentiation, people forget about you quickly.
But not all discounts are evil. A smart, targeted approach to promotions can help you win new customers, build brand loyalty, and grow your revenues.
About the Sterling Woods Group, LLC
The Sterling Woods Group’s mission is to help clients make sense of their data to predictably grow sales. We apply data science to help you optimize your sales funnel, improve your marketing ROI, launch new products successfully, and enter new markets profitably.
We use a hypothesis-driven, data-supported methodology to discover insights that no one else is paying attention to. Then, we help you assemble the right sales strategies, marketing plans, technologies, and resources to seize this opportunity.
About the Author
Rob Ristagno, founder and CEO of the Sterling Woods Group, previously served as a senior executive at several digital media and e-commerce businesses, including as COO of America’s Test Kitchen. Starting his career at McKinsey, his focus has always been on embracing digital technology and data science to spur strategic growth.
Rob is the author of A Member is Worth a Thousand Visitors and is a regular keynote speaker at conferences around the world. He has been featured on ABC, NBC, CBS, Fox, and Digiday.
He holds degrees from the Harvard Business School and Dartmouth College and has taught at both Harvard and Boston College.
Rob lives outside Boston, MA with his wife, Kate; daughter, Leni; and black lab, Royce.