As the story goes, way back in 1887 the founder of the Coca-Cola company gave out hand-scribbled notes offering a free glass of cola. Thus was born the idea of discount strategies – a brand new sales and marketing tool. And as they say, the rest is history.
Today, discounts, coupons, and sales are a big part of retail selling, be it brick-and-mortar or online. The arrival and explosion of e-commerce has only fueled it further. What started as a sales gimmick soon turned into a strategy to undercut competitors. You cannot think of retail today without thinking of discounts.
But what drives this massive need for retailers to offer goods at discounted rates?
Do shoppers only care about the pricing and want everything at the cheapest price?
There is more to the concept of discounting than just the idea of ‘customers want lower prices’. There in fact a whole science to it.
The psychology of discounting strategies
In a 2012 study by a professor of Neuroeconomics, it was discovered that coupons and discounts actually cause a rise in oxytocin – one of the happy hormones – in buyers. They make people feel relaxed and give a sensation of satisfaction. Discounts literally make people happy! But we can’t really say we are surprised by that now, can we?
How many of us get delighted by the idea of buying something at a ‘lesser’ price or ‘got a great deal’ on something? Almost all of us! Discounts help retailers to push a sense of urgency onto the shoppers about making the purchase. Since discounts are always available only for a limited time, the shopper comes off feeling they’ve saved money on a purchase they were anyway going to make.
Another idea that drives discounting strategies is the anchoring bias. This is where people tend to depend on an initial piece of information that drives their decision making. When faced with a discount offer, the consumer’s anchor onto the original price of the product, before the discount is applied. From here they make judgments on how much money they are saving because of the discount and the value it is adding to them.
Types of discounts
Depending on the type of business, there are different types of discounts that retailers use. The factors that influence which type of discount is deployed include things such as:
- Season and occasion
- Stock availability or limitation
- Change in trends
Store/site-wide vs collection based discounts
Retailers, both brick and mortar and e-commerce, can host discounts across their entire product range, or choose to discount only certain items or categories.
When doing a store/site-wide discount, every product is included in it. There could be a range of discounts available for different products or a flat discount for every purchase. For example, it could be a ‘Get 20% to 40% off across the store’ type of sale or a ‘get a flat 20% off on all products’ offer. This type of discounting strategy is usually influenced by a holiday season or a major occasion, like Thanksgiving, Christmas, Labor Day, etc.
When retailers have excess or unsold inventory of certain products, they try to sell them off with collection based discounts. This is when discounts are available only for those specific product categories or types, and not for all other products sold by the retailer. This type of sale is largely driven by current stock, the anticipation of new stock, and a seasonal change that is round the corner.
Limited period discounts vs ongoing discounts
In a ‘limited period’ discounting strategy, the slash in pricing is for very specific days or periods. For example, a Christmas sale would mostly run mid-to-late December and Black Friday sales happen the weekend following Thanksgiving. These types of sales are specific to those few days around major public holidays and events.
The ‘ongoing discount’ strategy is largely employed by discount stores and almost all e-commerce stores. This is where the products are almost always available at a price lower than the marked or list price. Their sales and revenues are driven by the volume of shoppers that the constant discounts attract.
Online Discounting Strategies
Online retail has many different types and operations – from marketplace to a direct-to-consumer model, commonly called D2C. Each uses different types of discounting strategies to acquire and retain customers. Let’s take a look at what some of them are.
Discount codes vs automatic discounts
There could be two ways in which you could offer sitewide discounts to e-commerce customers. Which one to go for really depends on what the products are, the customer journey and experience that is intended, and the target audience.
Discount codes are basically online versions of physical coupons. They can give the buyer any number of fixed benefits. Discount codes could offer a fixed percentage or value off of the items on all or a collection of products being sold. However, the shopper has to manually enter the discount code to avail of the benefit it offers.
Automatic discounting gives customers a benefit when they hit a threshold or a minimum on their purchase value. They see the discount apply on its own and they don’t really have to do much. It could also be used to drive customers to add more items to their cart so that they hit that value to avail of the discount. It is a more seamless way of offering a discount, while still keeping the pricing control in the hands of the seller.
Because e-commerce retailers have the benefit of data and activity tracking, they can offer custom or personalized discounts. This can be based on data such as the users’ activity and actions on the site and their purchase history.
This could be used to drive abandoned cart conversions by giving those users a special discount if they make the purchase. It would also help in making first-time buyers into repeat customers – by giving them an extra discount as added benefits on their next purchase.
Personalized discounts create a sense of more intimate user experience for the customers, as the discount they are getting is exclusive for them based on their own actions.
Referral and subscription-based discounts
A great way to retain existing customers and acquire new ones is through a well-built referral program. It incentives users to invite their friends and family to shop with an e-commerce business since they get a little something for their action. For the new customer, it offers them an instant benefit to signing up and shopping with the brand or business.
Another strategy that really works is subscription-based discounts. The users could subscribe to a ‘pro’ or ‘premium’ customer tier for a small fee. This would give them a set of benefits they normally would not receive. With this, customers can be retained for longer as they are continuously being engaged and making purchases. From the customers’ standpoint, they are receiving additional discounts for being a subscriber.
Brick & mortar discounting strategies
The advantage brick-and-mortar stores have is that customers are physically present in their store and can view, touch, and feel the products. It becomes a step easier to persuade them to make a purchase when they are already there.
Here are some ways brick-and-mortar stores deploy discounting strategies.
Product display practices
A smart way retailers can make the most of their discounts is to display the items on sale
at the back of the store, to put the focus on the new/full-priced stock. While people will still navigate to the discount section, they will also pass by the non-discounted section. This gives them time, even if it is a glimpse, to view everything that the store sells, not just the discounting products. This helps drive up the sales of even those items that are not on sale or are discounted.
There will be customers who see something they like and more than likely buy it, even if there isn’t a discount available on that. And this is purely because they happened to see it, not that they were specifically looking for it.
Promoting impulse purchases and upselling
Prominently displaying the available discounts helps tap into impulse and discount shoppers, who often make a purchase because it was available at a discount. Most times such unplanned purchases are outside of what they came in to buy.
It is easier to make customers buy more when they are already in the buying process. Offers like ‘buy one get one free’, ‘buy 2, get X% off’ help drive up the numbers. These types of discounts and offers help customers feel that they are saving more by upgrading their purchase. There is more value for the end consumer on this. They can’t say no to that!
Different discount levels for different types of customers
It is important for brick-and-mortar retailers to really understand who their customers are and how they tend to shop at their store. There can be different types of shoppers, such as –
- The discount shopper who only looks for the best deals
- The shopper who appreciates a discount
- The customer who is looking for a quality product and a discount is an added bonus
Retailers can segregate their products and associated discounts based on their respective store visitors. They could have different collections and different levels of discounts, based on the customer type.
Perils of discounting strategies
While offering discounts and offers is a great way to attract customers, both old and new, it can also be damaging to a retail business if not done properly.
Offering a discount is great, but retailers might not want to be known only for their discounts. That hurts their brand image and their bottom line.
Some downsides of discounting are –
- It creates a price war with competitors trying to outdo and undercut each other’s pricing strategies
- The perception of the brand could change with constant discounting and special offers
- It instills a sense of expectation in buyers about what price they are willing to pay, and will always seek discounts
- Discounts are difficult for retailers – it’s a hard bargain that the volume of products sold will offset the discount
Advantages of online and in-store discounting strategies
Both online discounts and brick-and-mortar discounts have their own benefits over each other. Each serves their respective purposes for their target customers.
The advantages of online discounting strategies are –
- implementation and execution is far easier
- They also have the power to reach a wider group of customers
- Discounts are fully customizable
The advantages of brick and mortar discounting strategies are –
- Helps build relationships with customers, as the experience is in-person
- Shopping is usually a social experience and discounts add value to that
- Stores can attract customers that normally might not purchase with them
Discounts help retailers to bump up their sales – when done with the right strategy. Discounts are an excellent tool for customer delight as the customer often comes off feeling great about their purchase and the price at which they made it.
What are the other discounting strategies that work really well for retailers? Let us know your thoughts!
Sharan is an avid writer with experience writing on different technologies for startups in various domains. He’s a self-professed tech nerd and start-up buff who likes keeping abreast with all the latest news in these areas.