Tips and tricks for discounts
We love discounts here at Promi. In fact, we love them so much our team has spent most of the last decade running discount and pricing teams at Uber, Google, and Walmart (plus we have an economist from Harvard who loves talking about price elasticity). Over that time we’ve picked up a few frameworks and tips we thought could benefit merchants like you. Introducing our discount strategy guide. We’ll of course have a few shameless plugs for Promi, but this guide should be valuable even if you don’t use us.
Why run discounts?
There are endless reasons merchants run discounts, but a few of the most common use cases are acquiring new customers, offering holiday sales, and liquidating inventory.
At the end of the day, it’s (usually) about the money. In many cases, the goal is profit - i.e. convince customers to place more/larger/more profitable orders such that the merchant generates more profit dollars than it would have without the discount, even with the discount eating into the profit margin.
In the other cases, merchants might be willing to lose money on discounts in the short term - e.g. to acquire more new customers or get rid of their inventory. Even in these situations where profit is secondary, merchants look to achieve these goals as profitably as possible.
Lessons in this guide will help improve the profitability of your discounts, whatever your goal is. That means reducing your customer acquisition costs, giving you more profit dollars while getting rid of your inventory, or just making you more profit overall.
How to evaluate discounts
Incremental impact is what matters. If you care about profit $s, that means looking at profit generated per user who got the discount minus profit generated per user who didn’t get the discount. This is ideally set up as an A/B test, but many merchants also look at a pre/post comparison.
If you care about acquiring users or liquidating inventory, you might also calculate the incremental acquisitions and orders. Often these types of discounts are profit negative, and you can calculate how efficient the discount was by seeing how many users you acquired per $ of profit you gave up (aka incremental acquisitions / incremental profit).
Why discounts become unprofitable + inefficient
One of the most common ways a discount becomes profit negative or very inefficient is if you give the discount on non-incremental orders. In other words, giving the discount out on orders that would have happened anyway.
Most of this guide breaks down the ways you can avoid discounting orders that would have happened anyway and improve your discount profitability. A good mental model is to consider the conversion rate of a situation without a discount when deciding how many users would have placed the order anyway. It will be more inefficient to use discounts on products, customers, even stages of the purchase funnel with higher conversion rates.
How to improve discount performance: a framework
Typically you can think of improving your discounts across three dimensions:
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How you communicate your discount
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What discount you send
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Who you send the discount to
I’ll discuss the ways you can improve the profit per user (which I refer to as ‘profitability’ or ‘efficiency’) generated from your discounts across each of these dimensions.
How you communicate your discount
Merchants often underestimate the impact of comms and UI on their discounts. In the context of communications and UI, it’s often helpful to think about the purchase funnel:
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Outside your website (top of funnel): because people aren’t on your site and are most of the time not even thinking about purchasing from you, on average the conversion rate of the group at this step is lower. That means communicating discounts to them at this stage is relatively efficient
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Website home page, collections pages, product pages (middle funnel): The average conversion rate of the group reaching this step is higher vs. those not even on your site, but lower than those with items in their cart going to checkout. That means it is slightly less efficient to advertise your discount here via banners, etc. but more efficient than advertising lower in the funnel. Many merchants still like showing discounts here because it can still be profitable for them.
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Cart and checkout (bottom of the funnel): Since the average conversion rate of customers at this stage is the highest, it is also the least efficient place to remind users that they have a discount. This can be a problem for many Shopify stores using discount codes since this is the only place Shopify allows customers to input the code and see their savings
You can use the above to understand the relative performance between code and automatic discounts on Shopify. Typically code discounts are going to be more efficient than automatic discounts, even when they have the same value and are given to the same people. That is because code discounts are usually communicated via email, push notification, etc. - falling in that top of funnel category. Automatic discounts on the other hand may also use email, push, etc., but they also show up by default at the last step: cart and checkout. That means you’re reminding more users that they have a discount at the stage where conversion is the highest. You end up giving out more discounts to customers who would have placed the order anyway.
This is also the reason Amazon uses the coupon clipping system. They advertise the discount on the product page, where you have to claim it. If you didn’t clip the coupon there, they don’t remind you that the discount is available at checkout.
The above is part of the reason we designed Promi to trigger price strikethroughs for code discounts (though it also works for automatic discounts). Customers must come through a top of funnel channel (aka use our deep links in emails, push notifications, etc.) in order to see the price updates. Customers landing on your site organically won’t see the sale, meaning your discounts are more efficient.
What discount you send
This includes the $, %, etc. value of the discount offered, but also the restrictions on it (how long is it valid, what items it applies on, how many times it can be used, etc.)
Generally higher discounts will be harder to make profitable in the short run, but they will come with larger bumps in revenue, acquired customers, etc.
When deciding which items to discount and how the discount should vary across them, there are two common factors to consider: profit $s and on-site conversion rate of the product.
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Profit $s: This one is intuitive. You’ll want to incentivize users to purchase the higher margin, higher priced items. Ignoring theories on how some items lead to more purchases of other items or future purchases, you'll likely want to use the discount to try and normalize the $s of profit you're getting across items to the extent possible. A rule of thumb could be setting the discount equal to X% of your profit margin across items
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Product conversion rate: if you're already selling a lot of an item without a discount, adding a discount means you're burning profit on all those orders that would have happened anyway. So generally merchants make more money by offering lower discounts on items with a lot of sales
Note that for many merchants, even simple approaches to varying discounts across items can drive huge improvements in their discount strategy. Companies like Uber improved their discount efficiency by 40% just from varying discounts across merchants on Uber Eats.
We focused on this category from the start with Promi because of how impactful it is. Shopify by default doesn’t have the functionality to create discount codes with different values across different items. Promi will allow you to create codes with different values at the variant granularity.
Who you send your discount to
In general it will be more efficient to send discounts to customers who have a lower intent to purchase. These are your low-conversion customers who need the extra boost to close the sale. A couple common characteristics big companies like Uber use to segment users for discount campaigns are:
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Recency of their last purchase & number of prior purchases: if they purchase frequently and often, chances are you don’t need to give them a discount to convince them to place another order
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Device type: customers more often browse on their phones (aka lower conversion) and break out the laptop when they’re more serious about buying (aka higher conversion). That makes it more efficient to offer discounts on mobile only. You may notice sites like Booking.com doing this
There are many more, and the trends above don’t necessarily hold across all industries. It’ll be up to you to determine what fits with your store and strategy.
Conclusions
I hope you found this guide helpful in thinking about your discount strategy! How effective each of the above categories and tips are will depend on the profile of your store - your average item margin, number of SKUs, variety of customer groups, average customer lifetime value, etc.
You should also think of the profitability of your discounts in each of the above situations as a relative measure. While it is likely true that you’d generate more profit per user by communicating your discounts higher up in the funnel, you may still generate some profit per user by communicating them lower in the funnel too. In fact, if you don’t have many email addresses to use for sending discounts but have a lot of organic traffic, you might generate more overall profit $s by advertising the discount on your website.
If you would like to chat about your discount strategy specifically, book a consultation with our team here.
