Ditching discounts: Five winning strategies for ecommerce success
If you’re one of those brands that goes wild with discounts during sale periods, here’s a not-so-secret secret: you might be setting yourself up for disaster.
As accountants that specialise in ecommerce business models, it’s our duty to reveal that discounting is the number one killer of profitability.
Discounting is a common tactic that’s often used to acquire more customers or boost the confidence of founders in their products. Trying to grow top-line sales? Easy – knocking 10, 15 or even 20 per cent off the listed price can work wonders. Those mega Black Friday sales? Sure, they’ll send your sales charts through the roof.
But the aftermath? A red balance sheet.
While discounting can be a legitimate marketing tool if used strategically, there are other ways to entice customers to your store that won’t open up a financial sinkhole. Here’s what this run-of-the-mill approach to winning business is actually costing you – and five alternative tactics that offer greater benefits to your bottom line.
The problem with discounting
Discounts are like drugs – with each price drop, your product’s value takes a hit. Customers grow accustomed to paying less, triggering a downward spiral where their zest for full-price purchases hits rock bottom. This short-term pleasure turns into long-term pain.
The main risk of attracting new customers via discounting is that it sets a ‘low’ price anchor at the beginning of a new relationship. Once that bar is set, steering your customer’s perception back to full price is a challenge. A mere 10 per cent off becomes the new norm, and they’ll expect it time and again.
It also sets a dangerous precedent as the customer becomes trained to only buy your product when it’s on sale.
Sure, you might hear some marketers rationalise selling at lower margins in exchange for data, or the promise of future customer loyalty. But that’s assuming repeat orders and non-paid ad conversions.
But unless your business thrives on subscriptions, calculating lifetime customer value is a game of educated guessing. You have to rely on assumptions which are just that – assumptions. The truth is, you don’t actually know.
And let’s be honest, who doesn’t prefer to rake in profits with every sale?
Five alternatives to discounting
Let’s set aside the discounting playbook and explore five savvy alternatives that can amplify your business’s profitability.
1. Maximise Average Order Value (AOV)
The first card in the deck is to boost your AOV while protecting your gross profit as much as you can. Implementing ‘Spend and Save’ campaigns ensure customers hit an AOV threshold before accessing any discounts – while the spotlight might not be on top-line revenue, your overall profits will be singing a happier tune.
Another classic is the ‘Buy One, Get One’ (BOGO) gambit, a retailer’s favourite. Offering a free item with a purchase adds value without altering the price. It’s what’s called the ‘zero price effect’, where our craving for something shoots up because it’s free.
When you focus on creating value rather than playing the new-customer seduction game, you increase your product worth and cushion those precious margins.
2. Transform dormant stock into bundles
Ah, the warehouse abyss, home to aging and slow-moving stock – a challenge every business faces. These once-shining stars are now gathering dust, overshadowed by newer, shiner arrivals.
Many founders find themselves hesitant to write-off or massively discount old stock because they’re anchored to the idea that it’s still worth something in the market. The reality is your old stock is costing your business. As it sits in your warehouse taking up valuable space and collecting a thick layer of dust, it also starts to devalue each and every day.
Rather than heavy discounts or write-offs, consider campaigns that are centered around putting slow moving products together with newer versions. Begin by identifying the underperforming inventory and then seek out complementary products that are currently in demand. By strategically bundling these offerings, you can offer customers an attractive package deal that harmonises the old and the new.
This is when discounting can be used as an effective manoeuvre to clear older products, creating space for fresh inventory. The underperforming stock can find new life through discounted sales, even if it means trading profit margins for breaking even. Consider it a sunk cost to your business.
3. Harness the power of free gifts and gift cards
The allure of value extends beyond slashed prices. Free gifts can elevate a purchase experience beyond mere transactions.
Gift cards have the potential to shower new customers with value while keeping your brand’s value intact. These little gems not only set the stage for future purchases but also, from an economic standpoint, it’s a win-win.
While over 70 per cent of gift cards are redeemed within six months, their impact diminishes over time. By the one-year mark, roughly 80 per cent are redeemed, and as more time passes, there is less chance of them ever seeing the light of day.
From an economics perspective, these unclaimed gift cards are essentially cash in your pocket.
4. Prioritise customer loyalty
Here’s a secret recipe for business success: return and repeat customers. The real gold lies in nurturing those who’ve already danced with your brand. Skip the discount frenzy and instead, serenade your existing customer base with exclusive perks, tailored promos, and even a sneak peek of what’s brewing for the new year.
If you’re operating in a commoditised industry or selling low-value-high-volume products, shine a spotlight on memberships or loyalty programs.
Take retail powerhouse Costco, for example. Renowned for its rock-bottom prices on groceries, the true profit generator lies not in these sales, but rather in its membership fees.
With a solid reputation for budget-friendly offerings, Costco holds such pricing influence that customers barely glance at the price tags. A staggering 99 per cent of Costco’s net profit stems from membership fees, highlighting that it’s not just a supermarket, but a membership-driven business.
This example underscores the potential to sidestep the discount trap, and build long-term brand value with your customers. And those margins? They’ll find their way back to you through zero marginal cost revenue.
5. Embrace transparent pricing
Just as the name implies, this strategy gives your customers a panoramic view of your product pricing landscape in comparison to similar offerings.
In the fashion industry, nobody does this better than Everlane. They adopt a “radically transparent” approach to their business model, by cutting out the middlemen from traditional retail, and passing those cost savings directly onto the consumer.
Everlane uses their product page content to convince customers that their prices are already as cheap as possible. This builds brand trust from the very beginning, which automatically positions their product differently compared to other retailers.
Everlane doesn’t need to discount, because their customers are already convinced they are getting the best and fairest price.
While discounting has its purpose, it can be detrimental to your financial and long-term brand value. Once you dip below those gross profit margins, the foundation of a profitable business starts to crumble.
Remember, there are always other tools in your kit that can elevate sales and provide value for your customers.
Ultimately, the goal is to keep your customers coming back all year round. Otherwise, discounting is just buying friends to make you happy – and nobody wants that.
This article was contributed by SBO Financial, an accounting business that helps high-growth businesses ensure that growth is profitable and sustainable. We’re deeply ingrained in the business models of ecommerce companies, and can provide the tailored advice and analysis they need to succeed.
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Co-Founder & Director
Jason is a chartered accountant, founder, and business advisor to high-growth Ecommerce businesses. His accounting firm, SBO.Financial, focuses on helping high-growth businesses with their numbers, ranging from bookkeeping and financial control to profit and cash flow maximisation strategies.