How to choose what discount to give during your next sale
“What twist can we use for this campaign? What will be the killer message or hook? We need something original. Something thumb-stopping!”
“Er, how about 10% off?”
“Great, Scott, you’ve cracked it! 10% off. Outstanding.”
While we joke, this discount pricing ‘strategy’ is all too common in marketing.
Be it an email campaign, prospecting ads, or partner campaigns. It’s almost too easy to stick a ‘10% off sticker’ on an exhausted campaign to give it a few more weeks of life.
But using a great discount strategy in retail can hold so much more potential than slapping a generic % markdown on it. If you understand the psychology behind the most effective discount tactics, you can turn a single tool into an entire fleet of tactics.
So I wanted to share some of the secrets of discounting with you.
Firstly, the current state of discounting in digital marketing and the techniques behind it. And then how to calculate the best sale rate you can offer. (or scroll straight to the bottom if that’s what you’re here for, I don’t mind).
Reasons to discount
Why do we give discounts? And is 10% a good discount? Identifying the goal and audience of your discount will help you decide on your discount strategies and tactics. Here are a few of the most common reasons to discount:
- Attract new customers
A (well planned) discount can help you stand out to price-conscious customers in a busy world. You can use discounts to capture attention on platforms like Tyvsio, social media adverts, and crowded marketplaces like Amazon and Etsy.
- Convert customers in the consideration stage
Customers are usually cautious of brands they haven’t used before. They aren’t sure if what they are ordering is what they will get, if it will work for their needs, or if it will even arrive. If you offer a discount, you reduce the ‘risk’ associated with the purchase and encourage someone to trial the product.
Brands target consumers in the consideration stage by offering a discount to new subscribers on their website
- Reward loyal customers
We’ve all been there. Your bank or utility company offers an enviable rate to attract new customers. But they leave their loyal users with rising costs and rubbish customer service. But this is counterintuitive when we understand the lifetime value of a customer. You can extend loyalty by rewarding existing customers and increase their lifetime value for a cost far below acquiring a new one.
- Revive lapsed customers
Along the same line as point 3, converting known customers is much easier and cheaper than attracting new ones. They already know and like your brand and may have stopped purchasing for reasons out of their control. Offering a discount to lapsed customers can bring you front-of-mind and encourage new purchases, often with a higher average order value.
- Expected sales e.g. Black Friday, January.
A common reason to discount is also to match consumer expectations. Using a seasonal discount pricing strategy for events such as Black Friday or New Year is a good idea because customers are primed for shopping and actively looking for deals. Aka, the perfect time for them to stumble across your awesome offering.
A 50% black friday sale from Ash Footwear
Challenges when deciding how much to discount
It’s easy to get discounts wrong. Here are some things to look out for:
Sales and discounts are common AF. Customers are rarely impressed by 10% off in a world of fake 90% WISH discounts and fake “one time only” bathroom sales. If the discount appears somewhere or at a time that is irrelevant to the customer, it won’t stand out.
- Devaluing your product
It can seem suspicious when you offer something typically at a higher price for a lower price with no context. This is why you rarely see luxury brands offering discounts. It can send the message that people don’t want your product at the normal price.
- Smaller profit margins
Offering a discount naturally means you won’t make as much money. This is fine if the discount matches your target customer acquisition cost. But if the deal is too heavy or goes on for too long in the pursuit of vanity metrics, you may end up cutting corners to keep yourself afloat. Which ultimately means you’ll lose customers to the new lower standards they receive.
- Attracting the wrong customers
Customers and industries each have something called ‘price elasticity’. This is how much or how little they are willing to see a price fluctuate. Some customers are just after a deal and have a low price elasticity, meaning they are unlikely to purchase after trial if they don’t receive another discount. Some businesses are built on a discounting model, but beware this customer if that isn’t what you’re going for.
So, how much discount should you give to customers?
What is the most effective discount percentage? There’s no single formula for finding a discount, unfortunately. Well, no non-maths heavy formula. But here’s the top-level sum:
(Cost of production + Cost of operations + Total customer acquisition cost for this specific campaign) / number of units expected to sell = break-even price.
Retail price – break-even price = discounting wiggle room.
Here are some additional things to consider:
- Varying cost per acquisition per channel
Not all channels are equal. Your CPA on facebook prospecting may be lower than on Pinterest prospecting. And the cost of creating organic content for your social media page may be higher. So consider multiple platforms when calculating your highest discount rate.
- Customer expectations
Depending on your industry, customer expectations might lead your sales strategy. If your sector typically discounts 50% and more, but your margins don’t allow for it. Consider improving your non-monetary add ons instead, such as being eco-friendly or positive community contribution.
Discounts of 50% and higher are common in health and fitness
- Uplift in conversion and sales from the discount
Pennies quickly become pounds when your conversion rates uplift from 1% to 3%. Consider if you can discount more as the sale proves to be working.
- Consider average order value
When customers think they are getting a good deal, they are likely to purchase more at once. This brings down your CPA and increases your AOV leading to more room for discount.
- The margin of different products
Some of your products will be cheaper to manufacture and ship than others. Each product will need it’s down ‘discount wiggle room’ calculated. Suppose some products often lead to the purchase of others. In that case, it may also be worth including the potential sales of the non-discounted complimentary item in your calculations.
Where to trial new discount strategies
Discounts help you find new customers. And so does Tyvsio. (The site you’re on right now). Our community is entirely free to join, after which we put you in front of new customers straight after they’ve purchased from the website of a complimentary site. We just take a small commission from any purchase completed. Try out that new discounting technique with Tyvsio, and contact our team today.