Discounts 101 : Boosting Sales Without Sacrificing Revenue

Sep 10, 2023

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In the fast-paced world of e-commerce, small business owners often grapple with the challenge of increasing sales while maintaining healthy profit margins. Discounts can be a valuable tool in your arsenal when used strategically. In this guide, we'll delve into the facts about discounts, highlight the psychology behind it, explore how to decide when and how to apply them, discuss various types of discounts, and provide tips to ensure you maximize their effectiveness. 

The Facts

1. Discounts Boost Customer Satisfaction: Research shows that discounts make customers happier. In this study, participants who received coupons experienced "38 percent rise in oxytocin levels and were 11 percent happier". When customers perceive they are getting a deal, it enhances their overall shopping experience.

2. Discounts Increase Revenue: Discounts can lead to higher sales volumes, offsetting the reduction in profit margins. Emails that include coupons lead to a 48% increase in revenue. A well-executed discount strategy can significantly boost your revenue.

3. Discounts Discourage Cart Abandonment: Discounts can serve as a powerful tool to combat cart abandonment. Customers are more likely to complete their purchase if they perceive they are getting a great deal, as indicated by the surveys run by SheerID.

4. Discounts Are a Common Practice: According to a Shopify post, a staggering 97% of retailers use discounts as part of their pricing strategy. Moreover, 90% of consumers use coupons, according to BigCommerce. So, if you're not leveraging discounts, you might be missing out on a competitive edge.

Psychology of Discounts: Understanding the Consumer Mind

Anchoring Bias: Leveraging the Power of Perception

Discounts exploit a cognitive bias known as anchoring. This bias reflects our tendency to rely heavily on the first piece of information we encounter when making decisions. When discounts are executed effectively, they prompt customers to focus on the original, higher price. By establishing this anchor, and then revealing the discounted price, buyers perceive the purchase as a prudent decision. This psychological trickery creates a sense of value and satisfaction, compelling customers to complete the transaction.

FOMO (Fear of Missing Out): Capitalizing on Urgency

Another phenomenon that discounts leverage is the Fear of Missing Out (FOMO). Flash sales, which offer discounts for a limited period, rely on this fear. The time-sensitive nature of these promotions triggers a sense of urgency, making customers fear missing out on a great deal. This psychological pressure often prompts immediate action, leading to increased sales during flash sales events.

Seeking Pleasure and Avoiding Pain: The Thrill of a Good Deal

Humans are wired to seek pleasure and avoid pain. Passing on a bargain or missing out on a great deal can lead consumers to experience discomfort or regret. Shoppers are often inclined to complete purchases to avoid the unpleasant feeling of missing out on a deal that others are enjoying. This innate desire to avoid pain and seek pleasure is a powerful driver behind the success of discount strategies.

How to Decide on Discounts

Before diving into discounting, it's essential to ask yourself some critical questions:

1. Why are You Using Discounts on This Product?

Discounts should be strategic and targeted. Consider offering discounts on products that benefit from them, such as seasonal items, products that lead to future upsells, or secondary products that boost sales of your primary offerings.

2. Why Are You Using Discounts in the First Place?

Discounts should complement your existing revenue streams, not replace them. They are most effective in engendering customer loyalty and driving repeat purchases.

3. Do Profit Margins and Order History Support Discounts?

Focus on products with healthy profit margins or high sales volumes. Discounts are most effective when applied to products that customers frequently buy in large quantities.

Types of Discounts

In your quest to decide whether to roll out discounts and to identify what products to apply them to, knowing what discount types there are is invaluable. Below, popular discounts are outlined succinctly.

  • Referral Discounts: Encourage customers to refer friends and family by offering discounts for successful referrals.

  • Event-Based Discounts: Ideal for seasonal businesses, these discounts coincide with specific holidays or events.

  • Loyalty Discounts: Reward loyal customers with discounts based on points, anniversary milestones, or birthdays.

  • Exit Intent Popup Discounts: Re-engage potential customers who are about to leave your site with enticing discounts.

  • Abandoned Cart Discounts: Follow up with customers who abandoned their carts by offering discounts to entice them back.

  • Product Bundling: Offer complementary products at reduced prices, such as buy one get one free or free gifts with a purchase.

  • Volume Discounts: Encourage bulk purchases by offering discounts on larger orders.

  • Selling at a Loss Discounts: Ideal for clearing out excess stock.

  • Tiered Spending Discounts: Reward customers who spend more with progressively larger discounts.

Tips for Effective Discounting

  • Segment Your Target Customers

    Tailor your discounts to specific customer cohorts, ensuring they are relevant and appealing. For eg, hook first time visitors with deep discounts, converting them into customers. Customer acquisition can be a costly endeavor, and most first-time visitors leave your site without making a purchase so creating a special discount for first time visitors is crucial.

  • Clearly Indicate Duration

    Make sure customers know when the discount ends to create a sense of urgency. Shopify recommends three-hour flash sales for optimal increases in traffic, conversion rates, and revenue. To intensify the sense of urgency, consider setting up a system where the discount percentage decreases as time goes by. This dynamic pricing approach keeps customers engaged and motivated to make swift decisions.

  • Focus on Discounts that Encourage More Buying

    Choose discount types, like product bundling, that motivate customers to purchase additional items.

  • Use Discounts Sparingly

    Overuse of discounts can diminish their impact. Maintain their allure by offering them strategically.

  • Use Tiered Discounts To Encourage Larger Orders

    Calculate your average order value and set spending thresholds just above that threshold to encourage customers to buy more than they initially intended. Tiered discounts provide an incentive for customers to add more items to their cart to reach the next discount tier, ultimately increasing your sales revenue.

  • Build Your Own Customer Database To Future-Proof Your Marketing

    With third-party cookies being phased out, it's crucial to collect customer data for future marketing campaigns. Utilize pop-ups and banners to gather email addresses from your visitors. To maximize effectiveness, consider offering discounts or promises of discounts in exchange for email addresses. A case in point is SkinnyMe, which increased their email collection by 758% by offering a 5% discount and a free eating plan in exchange for email addresses.

  • Experiment with Discount Types

    Continually test different discount strategies to optimize your approach, particularly in preparation for big holiday shopping events.

The Downsides of Discounts

  • Lost Revenue: Some customers may be willing to pay full price, resulting in lost revenue when discounts are applied universally.

  • Difficulty in Stopping Deals: Once customers become accustomed to discounts, it can be challenging to wean them off, potentially impacting long-term profitability. Seasonal discounts, like Black Friday or Cyber Monday, are exceptions, as customers anticipate and appreciate these deals. The ever-increasing holiday-spend by customers shows this. Use discount automation tools like UpsellGlobal to help you carve your piece of the pie.

In conclusion, discounts can be a potent tool to increase sales for small e-commerce businesses when used thoughtfully and strategically. By considering your catalogue, sales data and types of discounts, you can strike the right balance between boosting revenue and maintaining profitability. While discounts should be employed sparingly, consider the support of UpsellGlobal to automate your holiday sales and enhance your discount strategies when the time is right. Remember, a well-crafted discount strategy can be the key to achieving sustainable growth in the competitive e-commerce landscape.

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