Retail discounting strategy: how to slash prices not profits
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Any consumer will tell you that getting a bargain feels good.
In fact, buying an item on sale even produces a neurochemical reaction, flooding the brain with dopamine, according to scientists.
It’s no secret that retailers love sales too. A good discount strategy, using sales tactics like free shipping, pricing discounts, competitor price matching or coupon discounts, are a tried-and-true way to drive buyer conversions, free up cash, increase revenue, re-engage lapsed shoppers, attract new customers and inspire customer loyalty.
But while lowering prices might deliver short-term benefits, it’s important to have a strong retail strategy in place so s to be strategic and smart in your approach; there’s little point in sacrificing margins just to make sales.
It’s also critical to ensure that the type of discount you’re offering matches your products, customer base and objectives.
The dangers of discounting
Businesses considering launching a retail discount strategy need to weigh up the potential pitfalls of embarking on a discount pricing strategy before they start slashing prices.
Brand dilution
Discounting may seem like a straightforward way to boost sales for your retail business, but too much discounting can tarnish your brand. Constant discounting – or discounts that are too big or seem too good to be true – can undermine perceptions of your brand, the quality of your products, and your overall marketing strategy.
Training customers to wait for sales
Some brands always seem to be on sale, to the point where customers may well be waiting for the round of discount pricing to begin before purchasing. This means those retailers miss out on selling products at full price – and on bigger revenue margins.
Bringing in conditional shoppers
The ideal consumer is one who spends a lot and spends often. That’s because a customer base of loyal, regular customers means less investment in acquisition. However, sales and discounting can attract conditional shoppers, the type who are only looking for the cheapest price, rather than shoppers who are likely to become regulars and engage in long-term brand loyalty.
How to stay profitable with discount pricing
However, the first step when formulating a retail discount strategy is to understand what this type of initiative means for the business and potential profit.
Set your discount objectives
“Once you have determined the outcome you want, you can choose a retail discounting strategy that will also be healthy for the bottom line of the business,” says Jordan Sim, director of product management at e-commerce service platform BigCommerce.
Examples of discounting objectives include:
- Customer acquisition
- Increasing customer loyalty
- Increasing average order value (AOV)
- Re-engaging lapsed customers
- Testing a new product in the market
- Shifting old stock
So, for example, retailers looking to shift old stock might consider a retail discount strategy like a bundling promotion, where customers buy one product and receive a second at a significantly discounted rate.
Whereas retailers aiming to boost average order value might look at offering free shipping with a minimum spend, to encourage customers to spend more.
How Afterpay works with discounts
Sim says buy-now-pay-later solutions such as Afterpay have synergies with discounting strategies, as both look to drive up AOV. “Discounting has a psychological effect on customers where they feel they’re getting a greater deal. Offering Afterpay adds to the value the customer receives,” says Sim.
Consider your customers
“A successful loyalty discounting strategy needs to consider the products you sell, your customers’ buying cycles, their behaviour and your industry, says Rad Mitic, head of partnerships, APAC at e-commerce marketing platform Yotpo.
For example, a beauty brand which sells small products frequently might consider a discount-based point system, where a consumer is rewarded with loyalty points for spending more. “This will encourage them to increase their basket size,” says Mitic.
“Give customers more reasons to choose your brand over a competitor”
“But a kitchen appliance business with a longer purchase cycle would want to focus on immediate discounts, like a sign-up bonus for first purchases. The idea is to give customers more reasons to choose your brand over a competitor.”
Case study: Aromababy
Natural skincare company Aromababy is an example. Founder Catherine Cervasio agrees that discounting can be a great way to win new customers, but says that a targeted, brand-specific strategy is essential.
“Our customers don’t need to repurchase our products for up to two months for our wash products and for up to six months for our creams and lotions, depending on how often the customer uses the product and whether our brand is used exclusively.
“With that in mind, we don’t constantly bombard customers with marketing and special offers,” she says.
“Don’t constantly bombard customers with special offers”
Instead, Cervasio says customer loyalty is her priority. “We have been in business for almost 27 years and a second generation of customers are now buying from us. We’ve had parents bring daughters into our showroom and share their story of how they used Aromababy 20-plus years ago. Customer loyalty is hugely important for us and puts our brand in front of a new set of customers.”
As a result, instead of regular discounts, Cervasio's pricing strategy is to offer discounts to first-time customers when they sign up to Aromababy’s free e-club and place an order online.
“This encourages parents to try our products over a supermarket brand,” she says.
Choosing the right discount
All retail pricing strategies come with a different set of pros and cons and it’s important to understand what these are before deciding on the right strategy for your business.
Discounts to first-time customers
This pricing strategy is an excellent way to attract and acquire new a new consumer to your business and away from a potential competitor. As a retailer, you can also consider using discounts or a coupon to encourage shoppers to sign up for loyalty programs, such as Aromababy’s e-club or newsletter lists. These newsletters not only inform a consumer of any upcoming sales or promotions like free shipping, but also serve as part of a broader marketing and retail strategy.
Referral discounts
Happy customers are a great marketing tool. In fact, according to a Kantar survey, 93 per cent of consumers trust recommendations from friends or family over brand advertising.
Brands can consider a number of different referral strategies, says Mitic. “Think through who benefits from the discount – the referrer, the referee or both.
Offering discounts to both customer types incentivises two potential future purchases, but it also means accounting for greater profit liability,” he explains.
Special sale days
Many companies recognise the value in sale initiatives like Click Frenzy, Black Friday and Boxing Day sales. These promotions can be game-changers and an excellent retail discount strategy for increasing sales in e-commerce as they create a “fear of missing out” on bargains among shoppers.
“These promotions are used to move stock and acquire new customers,” says Jonathan Jeffries, co-founder of startup growth and scale firm Think & Grow.
If you discount too deeply on these days, customers may wait for these promotions and not buy from you at other times of the year. So think about how these days fit into your broader retail discount strategy. You may hold off discounting premium products on these days and use sales events to move old stock, for instance.
Dollar amount versus percentage discounts
The advantage of offering a dollar amount discount versus a percentage is that a defined dollar amount discount makes it clear what the savings are for both the customer and the brand. “The downside is that it’s a direct margin erosion – there’s no way to hide that,” says Sim.
Cervasio says Aromababy has tried both approaches. For instance, it has offered customers a $10 discount once they have spent a certain amount. The alternative approach is to offer, say, a 20 per cent discount if they spend a certain amount.
“The success of this strategy depends on whether our target audience is ready to make a purchase at the time we are marketing,” says Cervasio. “If they don’t need to buy – for instance, the customer may be a new parent who has been given skincare products as gifts – regardless of the offer, they won’t be purchasing.”
Loss leaders
This involves offering a deep discount on one product line to encourage customers to pay full price for other products the brand sells. This retail discounting strategy can make sense if the brand can be sure it will make up for the initial loss in future sales. This retail discount sstrategy should be used with caution because it can cheapen the brand and compromise future sales.
Offering a discount for pre-ordering a product
Advantages include up-front cash flow, generating excitement for a new product and making customers feel special by allowing them early access. The downside? If there’s an overwhelming amount of interest, brands need to be confident their supply chain is robust enough to meet a large volume of orders.
“There are no real cons to personalisation in any aspect of retail”
Personalised offers
A customer relationship management tool can help track customer profiles and spending – and allow brands to offer targeted discounts. This provides customers with a very tailored offering, with personalisation helping to drive conversion rates. “There are no real cons to personalisation in any aspect of retail,” says Sim.
Buy one, get one free (BOGOF)
This delivers added value for customers and does not necessarily need to compromise margins – particularly if the second “free” product is old season or nearly expired stock, or customers are offered brand merchandise as the added extra.
This enhances the customer’s perception of value but has a limited impact on the brand’s margins. This strategy is very popular with food brands such as Pizza Hut and Domino’s.
Limited period discounts
Creating a sense of urgency or scarcity is one way to encourage shoppers to spend. In this case, it’s about defining a specific sale period. The downside? “The promotion might be wasted if the offer reaches a customer when they’re not in a position to purchase,” says Sim.
Ultimately, the discounting strategy that will work best will depend on the brand, the products or services sold and the ideal outcome for the business. It’s also important to remember different discounting strategies may work for brands at different times. Regardless of which strategy a brand goes with, combining discounting with Afterpay only helps to enhance the offer and the perceived value for customers.
All references to any registered trademarks are the property of their respective owners. Afterpay does not endorse or recommend any one particular supplier and the information provided is for educational purposes only.
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