There’s no denying that a great discount can do wonders for conversions.
But if your discounts are too generous, too frequent, or too broad, you risk losing money—and even attracting a different crowd (e.g., deal seekers) than you originally intended. On the flip side, if you’re overly stingy with discounts, you may find that sales are few and far between.
In this post, we’ll help you to solve the riddle behind eCommerce discount strategies. Learn how to craft a discount strategy that benefits your business without cutting too deeply into your bottom line.
What is a discount pricing strategy in retail?
A discount pricing strategy is a deliberate decision to sell a product or service at a lower price than the listed or advertised price.
Discounts can be temporary (for new items) or permanent (for clearance products).
They can also take different forms (e.g., percentage off vs. free shipping). We'll get into specific pricing strategies in a minute, but first, let’s discuss a few different scenarios that are appropriate for offering discount pricing.
When should you offer a discount?
You want to motivate new customers to make a purchase
Discounts not only draw attention to your site—they can also entice customers who are unfamiliar with your brand to follow through with their first purchase. Discounting is particularly helpful if you’re selling in a crowded market or if you’re a new eCommerce small business owner with a newly minted online store.
You want to boost shopper engagement and improve customer loyalty
A competitive discount pricing strategy can be useful for incentivizing repeat purchases or organic marketing. For example, you might offer a discount as a reward when customers refer their friends and family to your brand. Or, you might choose to launch a loyalty program that offers gifts, discounts, and other incentives based on how much and how often members buy from you.
You want to clear out old inventory
If you’re looking to clear out inventory that’s taking up space in your store or warehouse, a discount can improve inventory turnover and help you make room for new products.
You want to increase sales when demand is high
Discounts can give you an edge during the holidays and other hyper-competitive selling events, like Prime Day. These types of events tend to have a “halo effect,” whereby the excitement caused by these promotions have positive ripple effects on other retailers (read: you may see a nice bump in traffic and sales even if you have no direct ties to the event).
Discounts can additionally be useful in the weeks following these periods. For instance, a retailer that sells candles might offer discounts on holiday-scented candles after the holidays have passed, or a sporting goods store might offer coupons at the end of the regular sports season.
4 key considerations behind any discount strategy
There is no one right way to set discount prices. Your strategy should be tied to your business goals and the types of products you sell. That said, there are some general guidelines that you can use when planning for a discount.
01. The timing
When does demand for your product peak and drop? Or, when do people tend to drop off during the buying process? Think about when customers are mostly likely to seek out discounts, or how you can use discounts to close the sale. Look at historical sales data for clues and peek at how your competitors are using discounts to their advantage. If you've just started a business, it might take time to collect this data so don't rush ahead with a discount strategy until you have this information.
02. The messaging
The way you present a discount may or may not motivate a sale. Jonah Berger, author and marketing professor at Wharton, advises retailers to use The Rule of 100 when advertising a discount.
“Subtle ways of framing the same information can make consumers more compelled to purchase,” writes Berger.
For instance, let's say the list price of a candle is $30, but the discounted price is $22.5. The discount can be presented as either “$7.50 off” the list price or “25% off.” The Rule of 100 says that the percentage is more enticing to consumers than the fixed amount. This remains the case until the listed price of an item exceeds $100.
A discount for higher ticket items, like a smartphone, is typically more compelling when it’s presented as a fixed fee. For example, if the sale price of an $850 phone is $595, you should present the discount in a dollar amount rather than a percentage, so $255 off and not 30% off. In both cases the customer will pay $595 for the phone, but they're much more likely to act on the discount when the deal is presented in absolute dollars saved.
03. The product
The type of product you’re selling should also inform your discount strategy. If you’re trying to build a luxury brand, avoid deep discounts that could devalue your brand or the product itself.
On the other hand, if you are reselling a popular item, you might need to offer a steeper discount to stay competitive and make it worth it to shoppers to buy from your store versus a vendor they’re more familiar with. Just make sure that you’re not breaching any MAP policies when you do so.
04. Your costs
Take into account the costs of manufacturing, shipping, and packaging your product (among other related expenses). It’s alarmingly easy to lose track of costs and lose too much money on a promotion—a problem that 20% to 30% retailers face, according to a study by the Boston Consulting Group.
According to the same study, 20% to 50% of promotions don't actually generate a noticeable lift in sales. But retailers hesitate to scale back on these campaigns because they’re not sure which ones are working and which ones are not.
8 types of discount pricing (with examples)
Granted that you’ve done your homework, discounts can be instrumental in attracting new customers or delighting existing ones. Here are eight types of discount strategies that you can bake into your eCommerce marketing strategy.
01. Quantity discount
Offer a discount when customers purchase certain quantities of your product. For example, you could offer multipacks, run buy-one-get-one (BOGO) promotions, or offer special pricing for bulk orders. The goal is to motivate customers to purchase more products than they'd originally intended.
It's the “five for $25” approach that retailers like Victoria Secret and Urban Outfitters use when selling relatively low-priced items.
02. Price breaks
A volume price break is similar to a quantity discount, but applies to a broader range of order sizes.
For example, you may require customers to purchase at least 10 items to get a 10% discount off the total order price. However, they can still get a 5% discount if they buy eight items. Each of these checkpoints come with its own price break.
03. Bundle pricing
Bundling different but related products together can increase average order value (AOV), while reducing the per-unit price of one or more items within the bundle. Bundles double-up as a great strategy for promoting gifting, especially during the holidays.
For example, if you own a beauty brand, you could create a "spring nail" package that bundles several pastel-colored nail polish with nail-care tools.
Alternatively, you could create "starter bundles" or bundles that feature products from the same collection. Take a look at this plastic-free utensil set offered by MightyNest, an eco-friendly retailer.
MightyNest offers additional discounts to customers who are part of their loyalty program—which leads us to the next discounting strategy, stackable discounts.
04. Stackable discounts
There are multiple ways to offer stackable discounts, all of which can motivate buyers to break out their credit card and complete their purchases. As with the MightyNest example above, you can offer bundles and multipacks as part of your catalog, and allow loyal customers to exercise additional benefits at checkout (e.g., in this case, MightyNest members get free shipping and an additional 15% off their purchase).
Another approach is to offer free shipping contingent upon a minimum order amount (e.g., free shipping for orders over $50). Or, let customers apply rewards, coupons, or credits to discounted items at checkout.
A stacking discount strategy can help you achieve multiple goals, including (but not limited to) increasing AOV, improving loyalty, and encouraging repeat purchases.
05. Flash sales and lightning deals
A flash sale is a discount offered for a limited time.
This type of discount encourages impulse buying. It can be the final push that customers need to hit “buy” when they’re on the fence.
Examples of flash sales include special promotions when a new product first launches, or a 24-hour discount on a hot-selling item.
A lightning deal is like a flash sale on steroids. Lightning deals offer heavily discounted prices on a single product for an extremely short time (think: Amazon Lightning deals).
They’re an effective way to drive sales when traffic is slow or when you’re trying to clear out inventory—without committing to long-term sales.
However, you’ll want to make sure you set aside enough stock to meet customer demand, otherwise your sale could backfire and cause you to oversell. This, in turn, could leave a bad taste in customers’ mouths.
06. Loyalty discounts
This type of discount is often offered as a reward for repeat purchases or membership in a loyalty program. For example, you might offer 10% off to customers who have purchased from your store three or more times within the past year.
Or, you could offer free shipping to newsletter subscribers or members of your VIP club.
Loyalty discounts can also be awarded to customers who refer friends and family to your store (e.g., earn $10 off your next purchase for referring a friend).
07. New customer discount
A new customer discount is offered to first-time buyers to get them to take a chance on your brand and/or return for a future purchase. For instance, you might offer 10% off a shopper's first order or include a free “welcome” gift for new customers.
As with any special offer, you’ll want to make sure that your offer is clearly communicated and easy to redeem so that customers walk away with a good impression of your brand.
08. Personalized discounts
A personalized discount is a discount that's tailored to the individual shopper based on his or her purchase history, browsing behavior, or other triggers. For example, you could offer a 10% discount to shoppers who visit your site frequently or have searched for specific items.
Personalized discounts can additionally be used to encourage certain behaviors, such as completing a purchase within 24 hours of adding an item to the cart.
Currently, Less than 30% of small businesses use website analytics when making promo codes. They offer universal 10-40% promo codes but have no formula for how they got to that number. In doing so, they’re overspending on discounts, over rewarding the wrong people and cutting into their profit margins.
With Veeper's Smart Discounts™, you can apply the smallest discount that gets each customer to buy more. Why offer 25% off SUMMERSALE promo code if the same shopper would still purchase with a 13% discount?
Smart Discounts™ have increased our partnered stores' average order value on average by net 14%.
