Why 2023 is not the year to move away from discounting to make your brand look better, and what it will do to your key performance metrics.
Discounting has long been a popular strategy employed by eCommerce brands to attract customers, drive sales and manage the cost of advertising. However, a recent email to one of our clients at Leaf discussing the move away from discounting has sparked a conversation about the effectiveness and sustainability of discounting vs brand perception.
In this blog post, we will delve into the current landscape of discounting strategies in the eCommerce sector and explore the risks and effects of a shift away from discounting, in a climate of acute price sensitivity and a cost of living crisis.
The challenges of moving away from discounting
Several of the brands that Leaf works with have attempted to distance themselves from the perception of being discount-focused this year.
However, their endeavours have faced significant challenges, leading them to revert to their discounting strategies after experiencing declines in conversion rates and revenues. These brands experimented with lower prices, shallower discounts, and a greater focus on brand storytelling to reduce their reliance on discounts.
Meanwhile, their competitors, including those who traditionally avoided discounting, continued to embrace this strategy due to prevailing macroeconomic conditions.
The argument was made that customers who aren’t looking for a discount are probably more brand loyal and higher value, but that’s a much longer-term strategy. If you can afford to make this move then great, test it, but expect meaningful detrimental effects on revenues in the short-medium term.
Why now is the wrong time to move away from discounting
In short, price sensitivity is the key factor that makes the current year unfavourable for abandoning discounting strategies in the eCommerce sector.
With an ongoing cost of living crisis, disposable income is reduced, leading to depressed demand. Consequently, the market is highly sensitive to price and consumers are hyper-focussed on value-for-money. A rise in bargain-hunter behaviour amongst consumers, as a way to manage expenses, has led many brands into heavier and more prolonged discounting. This has dragged a lot of brands reluctantly into a discounting war, making it difficult for an increased number of brands to maintain customer interest without attractive discounts. It also makes it harder for the industry and wider market to grow, with reduced margins leading to reduced profits and less investment back into hiring and product development.
With competitors offering lower prices or discounts, it makes it much more challenging for most brands to compete without similar strategies. This will vary from sector to sector, brand to brand; in some categories, competition is much more fierce and has a material impact on consumer loyalty. In other sectors, brand loyalty is not a factor of price, so communication of brand and product value and nurturing the customer community remains at the centre of brand strategy.
Lowering prices vs discounting
Discounts have a psychological effect on buyers, especially when combined with urgency, in influencing their purchasing decisions and lowering the barrier to purchase. It can help maintain or lower the cost per order. Sure you take a hit on margins, but if you’ve got margin to play with, and you have a decent retention strategy and the ability to upsell or cross-sell to existing customers, then the discount is the hook that can land a customer who will become profitable, if you can’t make the unit economics work to deliver a profit on the first purchase.
However, over time, the psychological effect of a discount wanes. Fatigue sets in. This is why it’s important to refresh your discount strategy, by changing the depth (amount of discount) and width (range the discount applies to), and also the mechanic (bundling, site-wide discount or discount code, for example).
Effect on key performance metrics
Discounting plays a crucial role in helping to manage key web and performance marketing metrics and, done well, can help eCommerce brands cost-effectively drive customer acquisition and establish a strong market presence, without hammering bottom-line returns.
However, for brands that have traditionally relied on discounting for customer acquisition, removing discounts will likely result in the following outcomes in the short to medium term:
Higher cost per session & less site visitors
The absence of discounts may lead to a higher cost per session as consumers become less motivated to visit the website without attractive offers. Brands may experience a decline in the number of sessions – unless they compensate by increasing their marketing spend, which in itself can actually drive up the cost per session, if not executed carefully.
Lower conversion rates & higher CPA / CAC
Without discounts, brands can suffer lower conversion rates, as customers have less incentive to buy. This generally results in a higher CAC, making it more challenging to acquire new customers, which can mean ceding market share to your competitors.
Reduced effectiveness of email marketing
A double-negative of fewer website visitors and most likely a decrease in the percentage of add-to-carts, means revenues from email marketing campaigns will most likely decline abruptly. The growth of CRM lists will slow – less traffic will probably mean fewer signups (unless the incentive is increased…conundrum!) resulting in saturation and fatigue of the existing database (unless the communication is managed accordingly), leading to a triple-negative and further reduction in the effectiveness of this channel.
Lower average order values
If you’ve been using discounting to incentivise people to buy more expensive products or bundles, this could lead to a drop in AOVs. This depends heavily on the level of discount and your product range. Sometimes offering a discount incentivises customers to purchase a higher-value item, where you could make more margin.
Reduced revenues & loss of market share
Ultimately all the above will very likely lead to a loss in revenues and market share over the short to medium term as brands lose the battle for acquiring new customers and retaining existing ones, to the competition. It could also lead to an inversion of that crucial formula – new customer acquisition vs customer churn – which could affect a contraction of your total customer base.
Transitioning away from discounts
Rather than abruptly abandoning discounts, brands should consider a gradual transition to reduce reliance on this strategy and therefore avoid the death spiral above. It is advisable to monitor the macroeconomic forecast as we approach 2024 and then make a more informed decision about the timing and extent of the transition.
Going cold turkey is risky. Gradually weaning the brand off discounts allows for a smoother adjustment and minimises potential negative impacts on sales and market position.
If, as part of this strategy you’re considering lowering your prices, then communicate this to your customers, they’ll appreciate the transparency. If, as discussed, the aim is to acquire customers who display more brand loyalty behaviours, this tactic speaks directly to that audience.
Balancing short-term sacrifice and long-term goals
If brands can afford to endure short-term setbacks for long-term gains, the potential risks mentioned earlier become secondary considerations. Transitioning away from discounting becomes a necessity for companies aiming to alter the brand’s perception, attract higher-value customers, and sell premium products in the future.
However, for brands unable to withstand short-term setbacks, the current year is not ideal for a complete departure from discounting. Instead, a gradual shift over time may be more appropriate, considering the seasonal fluctuations and the brand’s current market position.
Conclusion
Discounting strategies have been widely employed in the eCommerce sector, but a growing discussion is questioning the long-term viability of relying solely on discounts. While some brands have faced challenges when attempting to move away from discounting, the prevailing market conditions make it difficult to abandon this strategy entirely.
By considering the current economic landscape, the psychological impact of discounts, and the influence on key metrics, eCommerce brands can make informed decisions regarding their discounting strategies, balancing short-term sacrifices with long-term goals for sustainable growth and brand development.