Breaking the discount cycle

Recently released reports by Shopify and Deloitte both touch on just how much of a factor low prices and discounts have become when it comes to shoppers’ buying decisions today.

But if the current challenge for brands is to get customers to buy from them when they normally wouldn’t, who said marking down products was the only way?

When it comes to growth in the current climate, the conversation among eCommerce and direct-to-consumer brands is shifting from ‘reducing the price’ to ‘increasing the value’ shoppers receive. Think about it this way: anyone can offer a discount, but only you can offer shoppers that little bit extra to keep them coming back to you: virtual try-ons, express shipping, gift wrapping services, whatever that looks like.

From listening to our customers and partners, and it’s becoming clear that brands in the ANZ region are well on their way to break the discount cycle and explore more sustainable retention strategies.

Where can brands begin?

A connected stack that gives eCommerce marketers insight into customers’ journey more fully. Segmentation capabilities in their email solution that lets them send more personalised offers to inboxes. Tiered loyalty programs they can leverage data from. Hitting every touchpoint in their campaign strategy without overspending. Ensuring a smooth customer experience without their customer service team needing to be involved. All of these can play a key role in helping brands get more strategic when it comes to making the shift from reducing prices to increasing the value for customers.

Unchecked customer expectations around discounts
Discounting too often can lead customers to expect lower prices and wait for sales, making it difficult to sell at regular prices. The perceived value of your brand and its offerings can also diminish.

Lack of product innovation and price wars
Continued reliance on discounting can place added pressure on already squeezed margins which can impact innovation and product development. Competing solely on price for similar products can also trigger price wars which can potentially harm the entire market.

Increased costs from operational complexity
Managing major promotions requires additional resources and coordination, which can increase operational complexity and costs. White Fox’s 2023 Black Friday campaign drew a lot of media attention after it went out with a highly compelling discount campaign that saw its warehouse capacity and customer service pushed to the limits. Brands need to carefully consider the impact of discounting on functions like logistics, marketing, and customer service.

To illustrate just how important it is for brands to move away from discounting, Profitpeak founder and eCommerce thought leader Carla Penn Kahn analyses what happened with department store Myer.

“There is no better example of how over-discounting can impact a brand’s profitability than one of our biggest department stores, Myer.” Carla says. She cites a recent trading update by Myer that discusses the underperformance of brands such as sass & bide, MARCS, and David Lawrence that were expected to represent approximately half of Myer’s year-on-year decline in net profit. In a bid to move inventory, Myer was forced to sell these designer brands at heavy discounts and low margins. “Now more than ever, retail and eCommerce brands need visibility into inventory level unit economics.” says Carla.

What can we learn from Myer’s trading update?

“In the current challenging trading conditions, we are acutely focused on optimising operational performance including tightly managing costs, inventory, and margins and fully leveraging our Myer One loyalty program.” This extract from Myer’s statement is a reminder to all direct-to-consumer brands that heavy discounting does not drive topline revenue growth for profitability.

To avoid challenges like these, brands need to:

1. Have real time visibility into contribution profit on ad spend across all investments.
2. Keep a handle on inventory – what’s moving, what’s not, be on the front foot if a style is slow and determine why before discounting.
3. Know how contribution profit is covering tightly managed cost base on a daily basis.
4. Leverage their customer base through retention efforts like loyalty and email.

Shopify’s new AU retail report said 92% of consumers would become loyal to a brand if it offered them consistently low prices. The same proportion have also switched brands, often for a better price. Today’s shopper loves a good deal. Shoppers are trading down and happy to take no label over a label in certain areas. This also explains the growing appeal of brands like Kmart and ALDI.

But over-discounting can condition customers to always expect low prices making it important for brands to lead with value and other non-price related approaches like perks for special occasions, thoughtful, personalised email marketing campaigns and more.

Non-price related incentives to keep shoppers coming back

• First access to new product launches and sales
• Free gift with purchases
• Mystery boxes and loyalty points redeemed on mystery boxes
• Free gift wrapping in the holiday season
• Expedited shipping or guaranteed delivery by date

Carla Penn Kahn explains why these work so well. “These measures still come at a cost to the business, but in a way that discounting doesn’t become learnt behaviour.”

While discounting is a good lever to pull when demand slows down, it’s important to maximise impact and minimise margin erosion. Here’s what to keep in mind:

• Be strategic with discounting: Make discounts a two-way street. If you’re going to give away a discount, ask for something in return. “Write us a review to get 10% off.”
• Be creative with discounting: Is your brand turning 10? Offer 10% off on selected items. Has a customer been with you for 12 whole months? Give them 12% off if they shop for X amount of more. Discount all yellow t-shirts ahead of RU Okay Day. While you’re still giving away free money, you’re creating cool experiences and strengthening your bond with customers.
• Balance discounts with profits: Leverage data analytics to set optimal prices to ensure you’re driving profitable sales. 
• Think beyond discounting: Aka add value instead. Instead of competing purely on price, retailers can differentiate themselves through value-added services such as superior customer service, exclusive products, or other non-price related incentives.
• Don’t discount at all: Focusing on product differentiation and building a strong brand identity can reduce the reliance on discounts and help maintain customer loyalty even at higher price points.

Discounts won’t get you where you need to be; focus on cash flow

We asked Iain Calvert, eCommerce coach at Boom Commerce, to share his thoughts on the love-hate relationship eCommerce and direct-to-consumer brands seem to share with discounts. Here’s some of what he had to say. 

“Let me start out by saying I’m not a fan of discounting for discounting sake. It hurts Gross Margins: one of the most important metrics in ecommerce. What I am a fan of is keeping cash flowing in a business. Right now in Australia (2024), discounts are pretty essential with evidence suggesting it’s the only way to stimulate sales and keep cash flowing. The downside is profit becomes a hard thing to come by.”  Let’s unpack this evidence a bit more.

• Merchant sales
  Customers seem to only be buying when there is a genuine deal. Otherwise, the revenue reported by merchants is pretty bad.

• Sale signs on bricks and mortar stores
  Retailers tend to go on sale when not hitting targets and off late this seems to be on the rise.

• Search volumes for discount-related terms on Google
  This means customers are researching deals more than ever.

• Conversion rates are down year on year, but visits are up or flat
  This means more window shoppers than buyers.

• The news cycle of the pressure on household spending
  The government wants to reduce retail spending to help reduce inflation and customers with  mortgages or rent to pay are watching how they spend every last dollar.

Ultimately, Iain says, this is hurting the average Aussie SMB when it comes to seeing profits.

So, what can brands do when it feels like not discounting is not an option?

1. Review costs weekly.
2. Negotiate with suppliers for better deals.
3. Be smart with your discounts (for example, can you clear old ageing stock?).
4. Make it clear when a promotion is about to end: The biggest days are often the last.
5. Focus on marketing that costs less, for example, email marketing targeting previous or potential customers.

While it’s tempting to increase discounting to appeal to budget-conscious shoppers, particularly in an economic slump, balancing the desire to keep customers coming back with profitability is key.

While customers seem to have become accustomed to the fact that there’s ‘always a Sale on somewhere’, brands can combat this by ensuring the quality of their products and customer experience are strong enough to justify non-discount prices. Carla says, “If your product strategy is a bit ‘me-too’ you run the risk of having to compete on price.”

Remember that big promos like BFCM, Boxing Day, and more are no longer just revenue-driving days. Use these key retail dates more strategically to engage your customers deeply, win points with superior customer experience, and cement brand loyalty.