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5 reasons why discount strategies hurt businesses

Ve Global
Ve Global
Digital Revenue Optimisation
5 reasons why discount strategies hurt businesses
5 reasons why discount strategies hurt businesses

Customer demands have changed drastically since the early days of ecommerce. Today, 66% of shoppers say they want custom content, value an experience beyond the actual product, and will actively buy from the most innovative companies.

Retailers have responded to this in a number of different ways. Some have dramatically expanded their product range, while others have used social media to cultivate a clever brand and win the hearts of consumers (sometimes with memes). Others focus on simulating the in-store experience with attentive online customer service.

Another popular tactic is discounting. Many ecommerce retailers have adopted this strategy, but there are several risks attached. In fact, discounts can actually hurt your company rather than helping it. In this fast-paced age of retail automation, your more nimble rivals could easily undercut you.

In this guide, we’ll explain how discounting might be bad for business. We’ll touch on the following topics:

The death spiral of discounting

What is ecommerce discounting?

Ecommerce discounting is the practice of offering discounts (including seasonal discounts, for example at Christmas) to entice customers into parting with their hard-earned cash.

Sometimes, discounting can be turned into major consumer events. You’ll already be familiar with Black Friday and Cyber Monday, now the two all-important periods in the annual online retail calendar.  Online retail giants like Amazon, which dominate the market, cut prices dramatically. But this also forces smaller ecommerce outlets to slash their own prices, and this can cause them problems.

Chart showing the estimated gross merchandise volume on Amazon during Prime Day

Why do retailers put so much emphasis on discounts?

The online space is incredibly competitive. There are so many ecommerce retailers vying for business, it can be difficult trying to stand out from the crowd, even with tip-top social media retail marketing techniques. At first it might be the easiest way to do this is to slash prices.

As far as customer engagement strategies go, this one seems like a surefire winner, and there’s little doubt that heavy discounting, even if only for a limited time, can increase sales. This is why it’s so commonly used as a promo tactic. However, slashing prices with such a sense of urgency can raise expectations to unrealistic levels, which means that customer retention—turning first-time customers into repeat customers—may be tricky.

Ecommerce discount strategies can be counterproductive. Over-using discount pricing strategies can hurt your profit margins, provide illusory revenue boosts and give customers unrealistic expectations about the value of your products and services.

Data showing the impact of discounts

Advantages of ecommerce discount strategies

There are some potential advantages of ecommerce discounting.

Let’s take a closer look at the case for discounting as an ecommerce business model.

Strengthens customer loyalty

Loyal customers are a key pillar of success in business. Loyalty is particularly important in online retail given the sheer intensity of the competition. if you can hang on to regular customers, you’ve probably got it made.

Advocates of heavy discounting strategies argue that these can substantially strengthen customer loyalty, suggesting that big discounts give customers an incentive to return and make more purchases.

Sometimes this is done through loyalty schemes (more on that later) so the discounts are only available to loyal customers, rather than to everyone. This can reduce the risk while encouraging them to return time and time again.

Attracts new customers

Another point marketers often make is that discounting is an effective way of attracting new customers. If a retailer gets a reputation for offering different types of discounts on new products, they may build up a bigger customer base through referrals and word of mouth.

Helps to clear out old stock

Retailers may find themselves with big stockpiles of particular products which they then need to get rid of. Big discounts can help these ecommerce outlets shift products and whittle down their old stock. This can help with retail merchandising, enabling retailers to sell stocks of products that are out of season without having to simply write them off.

Boosts visibility

We mentioned earlier that standing out from the crowd of online retailers is a tough business. Everyone’s trying to come up with eye-catching offers, from percentage discounts and discount codes to vouchers, so that they can gain the edge over their competitors. Big discounts are one way of catching consumers’ attention.

Improves sales during slow periods

Any seasoned online retailer knows how sales can fluctuate at different times of the year. During slower periods, discounts can be an effective way of spurring greater sales and getting users through your online checkout.

It’s also worth noting that discounting can help to reduce shopping cart abandonment, which is a common problem for online retailers. In fact, more than two-thirds of global online shoppers abandon their carts at some point before or during the checkout process.

To counter this, some retailers send abandoned cart emails to customers containing a discount coupon, nudging them to go back and complete their purchase.

Disadvantages of ecommerce discount strategies

Now that we’ve looked at the plus points of ecommerce discounting, we need to discuss the downsides—because, contrary to what some people might tell you, they do exist. Some retailers treat discounting as if it’s a silver bullet, the answer to any and all woes. But the reality is a lot more complicated, as we’ll go on to discuss here.

Customers come to expect discounts

One of the immediate problems with overreliance on discounts is that customers can soon come to expect them. This can raise expectations to unrealistic levels, giving consumers the impression that you’re going to be offering huge discounts frequently. If you can’t meet this kind of expectation, you may find that you lose customers almost as quickly as you gain them.

Devalues your products

Heavy discounting may devalue your products in the metaphorical sense as well as the financial one. If you’re looking to attract a certain kind of clientele, you may find that slashing prices simply to get people through the door is counter-productive. Businesses trying to build a high-end customer base may find that heavy discounting gives the wrong impression.

Could trigger a price war

If you cut your prices dramatically, don’t be surprised if your competitors take similar action. There’s a good chance they’ll be thinking the same way as you: that the way to boost sales is through taking an axe to their prices. But this can set off a price war, and once you’re on that spiral it’s very hard to get off.

Unfortunately, there’s a minimum price you simply have to sell products for before you start making a loss, and if your competitors can drive you down low enough, you’ll soon run into financial issues.

Can hit your profits

Following on from our previous point, then, cutting your prices can take a toll on your profits. Too many online retailers don’t seem to realise this; they still think that slashing prices boosts sales and therefore revenue as well. But it’s not that straightforward. Excessive discounting, even if it boosts the number of items you sell, might hurt your finances overall.

Changes the perception of your brand

It’s worth emphasising again here that being too reliant on discounts can change the way people see your brand. If you’re looking to position yourself as a bargain-basement outlet, that’s not such a big problem. But if you want to put the emphasis on quality and exclusivity, discounting can undermine your appeal in important ways.

Again, look at it from the consumer’s standpoint. If you see an online retailer hammering away at discounting, are you likely to see them as a high-end brand? Probably not.

Infographic - Value can be a two-way street

How discount pricing strategies can damage your business

There’s no denying that discounting strategies are alluring to businesses. But a lot of businesses have fallen headlong into the pitfalls that can come with overreliance on discounting. We’ll look at some of these pitfalls here.

They can kick off a race to the bottom

We mentioned earlier that discounting can trigger damaging price wars, and this can have implications across your business—potentially even threatening its financial viability. Too many online retailers, looking to make a name for themselves, charge headlong into eye-catching discounting without stopping to think what implications it might have.

If you make discounting the cornerstone of your ecommerce strategy, you may soon find that you’re in over your head. You could end up dragging your competitors (or being dragged by them) into a full-blown race to the bottom, forcing you to cut corners elsewhere simply to maintain the pace of discounting.

Revenue boosts can be too good to be true

It’s true that discounting can be an easy way to deliver a quick hit of increased revenue, as well as cutting cart abandonment rates. But the danger here is that this revenue boost could be illusory. It could lead you to make demand forecasting projections which prove to be overly optimistic, because your business simply can’t deliver on them.

The trouble with making assumptions such as these is that it could give you a fundamentally misleading picture of how your ecommerce outlet is actually performing. It may give the false and potentially quite dangerous impression that a short, sharp growth burst can be projected into the future.

Infographic

Fundamental problems may go unaddressed

Because discounting can give a misleading view of how an online retail business is performing, it may also mean that problems with the business are overlooked and therefore unaddressed. All too often, discounting is used to plug holes in online retail businesses—but this can hide more problems for the future.

Being overly reliant on heavy discounting, therefore, may hinder your prospects of future success in ecommerce. You might be better off investing in tools like stock control software and retail accounting software to equip your business for future challenges, rather than going down the discounting route.

Your reputation might take a hit

Price cuts may acquire a reputation which they then find difficult to shake off. It all depends on what you’re trying to achieve; if you’re happy to be cheap and cheerful, you probably won’t be too concerned by this. But retailers aspiring to a more upmarket status may regret it.

Before embarking on discounting strategies, you should think carefully about which demographics you’re targeting and how you want to present your business to its desired customer base. Don’t just assume that everyone loves a cheap deal.

By contrast, you may find that excessive discounts put you at odds with the customers you’re trying to attract, or actively cause them to look elsewhere. You don’t want them to think your products are low-quality, cheap-to-produce tat.

Infographic - Time to ditch discounting?

Why customers are looking for more than discounts

While it’s true that a lot of consumers are looking for bargain deals, their motivations are more complicated than this. They respond positively to incentives other than low prices, and as we’ve outlined, slashing prices can sometimes send out the wrong signals. The customer experience as a whole needs to take a range of factors into account.

Consumers really do value quality, and they know a false economy when they see one. No doubt they’ve had experience of buying something that seems to be a bargain, only for it to fall to bits in short order. Customers who can afford it are often willing to pay a premium for the perception of luxury or exclusivity too.

They may be willing to pay more for a product that’s only available in limited quantities or for a limited time. This again helps to give the impression of exclusivity and makes consumers feel that bit more special. Many will be willing to pay extra for that privilege.

Uniqueness, too, is something which consumers prize a great deal. If you can demonstrate to them that your products are unlike anything else on the market, and that your competitors just can’t match them, then customers are likely to respond favourably. This is a good way of establishing yourself as a market leader and a true innovator, building up your brand.

Customers have other desires too, and if you can tap into these, your business can do incredibly well as a result. But focusing on heavy discounting may hinder your ability to take advantage.

Infographic - What consumers value

Strategies to use alongside discounting

We’re not saying that you should never offer a discount. But as we saw earlier, it’s a tactic that should be used sparingly and in conjunction with other methods. Alongside discounting, various other strategies have been proven to help pop-up retailers and established online giants alike to meet their business goals.

For example, you can use customer journey mapping to understand customer behaviours and motivations, enabling you to discover what they really want from your company. You can then target them with personalised communications to encourage sales, with less reliance on discounts—as well as improving your touchpoints for a better experience.  

Here are some other approaches you might want to consider.

Embrace giveaways

If there’s one thing the overwhelming majority of consumers love, it’s a freebie. It’s like catnip: however much the typical customer tries to resist the allure of a free gift, nine times out of 10 it gets the better of them. So perhaps you could consider chucking in a little complimentary item to go with a certain order (this is also a good way of shifting old stock).

Free shipping, too, can do much to get customers over the line, so to speak. Amazon has done this really well. Customers have increasingly come to expect this. If you’re clever and only have it available over a set amount, it can also encourage them to buy more, thereby boosting average order value. Just make sure you’re familiar with sales tax on shipping to different jurisdictions.

Prime delivery graphic

Make use of loyalty programs

Earlier, we touched on the importance of customer loyalty to long-term success in online retail. If you really want to bind customers to your business and give them a good incentive to come back regularly, why not launch a loyalty program? Give customers the opportunity to build up points and enjoy unique offers. Loyalty programs are tried and tested winners.

Be inventive with email marketing

To make email marketing work, you need a thorough understanding of your customer base so that you can communicate with them effectively. Segmentation, too, is important, as it allows you to send emails tailored to specific sections of your customer base.

Customers love personalised offers, too. For example, if you give customers the option of telling you their date of birth when they sign up for an account on your website, you can then send them an automated email on their birthday with a unique offer included. It could even be a small discount, as long as you don’t go too crazy.

Emphasise your expertise

When consumers buy a product or service from a particular company, they want reassurance that the company in question is a genuine leader in its field. They want to be sure that they’ll be getting something they simply won’t be able to obtain anywhere else.

In your messaging to customers, you should make sure you really drive this point home. Show them how you’re offering unique, specialist expertise. You’re subtly making the case for them paying full price, as your products and services will seem worth it.

Offer exceptional customer service

If consumers are confident that they can reach out to you whenever they need to—whether it’s a query about a certain product or a problem with an item they bought—they’ll be much more likely to return.

You might prefer to have your own support team, or you could outsource the operation to a business process as a service (BPaaS) provider in order to handle more interactions. Either way, great service helps to bridge the gap between online and the in-store experience, which consumers still value.

Guided selling is a good way of bridging that gap. It’s a tool that directs customers towards relevant products by asking them a few simple questions. This helps them find what they’re looking for, and even introduces them to cool products they didn’t previously know they wanted.

Infographic - What happens after poor customer experience?

Personalisation matters

Personalisation is so important. You need to remember that your customers are busy people, with a lot on their respective plates. So personalised product recommendations are very useful as they save customers avoidable time and effort, freeing them to do whatever else it is they need to do.

Ve’s Digital Assistant, meanwhile, can also provide customers with help and support, guiding them at each step of the sales funnel. It can help you understand consumer needs and preferences, while inspiring purchase decisions with personalised recommendations. It can even automate answers to frequently-asked questions. All of which can boost customer loyalty without having to slash your prices.

It’s proven to deliver measurable results, too. Smallable, a concept fashion store, saw its engagement rate increase by a massive 219% after introducing Ve’s Digital Assistant. It's conversion rate, meanwhile, grew by an impressive 28%.

Chart - Customisation and experience are more crucial to speciality shoppers

Striking the right balance

We should probably conclude with a quick clarification. Just because over-reliance on discounting is bad for business, that doesn’t necessarily mean that you should never offer a discount, ever. Of course price cuts, when used judiciously, can be good at winning new customers and giving existing customers a little reward for their loyalty.

However, proceed with some caution as over-reliance on discounts is probably not going to be good for business over a long period of time. Ecommerce is competitive and if you’re trying to make your mark, it can be tempting to try to undercut your rivals on price. The trouble is, the tactic can backfire in various ways.

There are lots of other ways to win and retain customers, and they’re more likely to work out better for your bottom line.

Getting the basics right is half the battle, as far as online retail is concerned. Things like business processing might not be as glamorous or as eye-catching as scything your prices down, but focusing on getting the fundamentals absolutely spot on is likely to do more for your company in the long run.

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