How to Execute a Profitable Retail Discounting Strategy: A Definitive Guide
Offering discounts is often controversial, but it is a potentially helpful pricing strategy that retailers have been using for decades.
Before getting into retail discounting, let us first understand how discounts, as we know them today, came into being.
The first discount coupons were introduced by Coca-Cola co-owner and genius marketer Asa Chandler in 1887. It was a never-seen-before concept and made a lot of noise.
However, retail discounting and usage of coupons in the USA boomed in 1930 when people struggled to afford groceries during the Great Depression. Without discounts, there was no demand, and without buyers, grocery store owners would have gone out of business.
What started as a necessity eventually evolved into promotions and sales tactics for retailers. Many US households continued using discounts and coupons for their purchases even after the Great Depression came to an end.
Today, about 93% of shoppers use discount deals and coupons throughout the year.
But is a discounting strategy beneficial to your brand? Is it possible to offer discounts without hurting profits? Is there a better way to use discounting than what you are currently doing?
To find answers to these questions, go ahead and read through this blog!
- Pros and cons of retail discounting
- Popular discounting strategies used by retailers
- Implementing a discounting strategy while staying profitable
1. Pros and cons of retail discounting
When it comes to a successful discounting campaign, there are a lot of layers and intricacies.
But before we jump to that, we have to ask the question: Are discounts a surefire way to boost sales and revenue?
As a retailer, you should know both sides of the coin: the pros and the cons of retail discounting.
Take a look at this to understand better!
2. Popular discounting strategies used by retailers
While there are countless ways to offer discounts that retailers have used or will use in the future, we will look at some that will be at the core of any new or custom retail discounts that you would want to roll out.
a.) First purchase or first interaction discount
Some consumers may browse through your website or your shop and like some of your offerings. But, they might be on the edge and not able to decide if your products are worth the value. You can use a special first purchase discount to tip them over in the category of paying customers.
You may want to take a different approach for consumers that feel a discount may not be enough to lead to a purchase decision directly.
Instead, you can offer a discount coupon code – that expires in the next few months – in exchange for their email address. You can then use these email addresses to provide them with product recommendations and new product launches.
b.) Discounts on purchases from other stores
Suppose you own a menswear store. You also specialize in tailored tuxedos and wedding suits for men. There is a bridal store for women nearby, and you are on good terms with the owner since you have complementary services.
You can strike an agreement that whenever a purchase of more than $X is made by someone in the bridal store, they can offer a discount coupon that can be redeemed at your store. You can do the same on purchases in your store.
This strategy is an excellent example of using discounting to boost your retail brand awareness and acquire new customers without devaluing your brand in customers’ eyes.
c.) Referral discounts
This discount strategy in retail typically works by implementing a system for your current customers that incentivizes them to refer new customers to you. The referred customers, in turn, also get a discount on their first purchase.
Your current and referred customers feel valued and this creates great memories of your brand.
A referred customer will be 18% more loyal to your brand than a customer acquired by any other means. Therefore, it is not surprising that referral discounts may give you the highest return on your efforts and investment.
Tip: We have written a step-by-step guide on starting a referral marketing campaign which can be really helpful for your business! Click here to jump right to it!
d.) Loyalty rewards
Most consumers in today’s world expect to be rewarded for shopping at your store and taking home memorable experiences.
Studies say 75% of consumers say they favor companies that offer rewards.
You can give out a cash discount on every nth purchase, a points-based rewarding system that can be redeemed whenever they want, or gifts on completing purchases of X amount of merchandise.
e.) Discounts that target specific groups of the population
You can consider offering exclusive discounts to specific groups of people like the military, or in the current scenario of the pandemic, doctors, or other frontline workers.
You can also use this discounting strategy for social awareness, leveraging moments like a vaccination drive. You can give away a discount offer to people who have been fully vaccinated, showing your support to an important cause, and keeping the specific consumer segment happy.
Customer data is one of the greatest assets for a retailer. You can use it to target your customers with product recommendations, exclusive deals, and understand your shopper behavior.
You can also use it to win back customers you may have ticked off unintentionally, and they may take your discount as a goodwill gesture and start shopping with you again.
f.) Discounts on pre-orders of upcoming products
You can generate sales from products before they even hit the floor by offering exclusive limited-time prices on pre-orders.
This retail discount strategy can also help you secure the cash you need to buy the next round of inventory and clear shelf space even before the products arrive.
g.) Abandoned carts based discount
The average shopping cart abandonment rate is 70% in the retail industry. This is a huge problem for retailers, and they have put much effort into solving the issue.
Clever discounting has been known to work and can be used to make consumers think twice before they abandon their carts.
For example, if your customer has a cart full of items that they didn’t end up purchasing, you can kickstart this discounting strategy by first sending them a reminder email. If the abandoned cart email doesn’t work, you can send a follow-up email in a day or two. And worst-case scenario, if they still don’t purchase those items, you can send an email informing them about a discount on the items in their cart! Happy days!
h.) Loss leaders strategy
You have fresh arrivals coming in, but you need to make space for them and get rid of your old stock. You also need to promote the new product line and recoup some of the cost of your old stock.
You can use the discount pricing strategy of “loss leaders”. This strategy works because you set a market price a little below the market cost on the stock you need to get rid of and promote your high-margin merchandise.
i.) Gifts-based discounting
Everyone loves gifts! Gifts will help create a positive feeling in the minds of consumers about your brand and will likely be better for your business than conventional percentage-based discounts.
You will also have the power to choose what to give away and leverage this opportunity to get rid of not-so-popular stock.
You can sell your products by offering gift certificates to your customers as well! Selling gift certificates is an absolutely creative and convenient idea to boost your sales and build rapport with your clients.
j.) Conditional discount
Conditional discounts can help you maintain a healthy profit margin while also increasing your revenue.
For example, 20% off on purchasing $500 worth of merchandise rather than a straight 15% on every item is likely to be healthier for your business. It will also be more helpful in increasing the average basket size and average revenue per consumer.
k.) “Free” products instead of cash discounts
Research in consumer psychology has shown that buyers are usually unable to perceive percentages and numbers for what they are.
For example, if you have two promotions running parallelly, 50% off on one product or buy one get one (BOGO), the odds are that BOGO will generate much more sales.
These kinds of offers also tend to be more profitable for you because the “free” product is usually the cheapest of the lot, and the consumer pays for the costlier items.
3. Implementing a discounting strategy while staying profitable
Knowing about various discounting strategies is good, but you also have to understand how to choose/build one and implement it effectively. These steps are the key to running a successful discount promotion while still having a profitable business.
Step I: Define your objective
The common goal of any discounting strategy is to product promotions and increase sales in the long run. But, there are other primary objectives that you should think of when choosing your preferred discounting plan.
Some possible objectives are:
- Customer acquisition
- Customer retention
- Clearing out inventory
- Customer win-back
We have already seen some discounting strategies for each of the above-mentioned objectives. You can keep the diagram below as a reference to look at, whenever you want to run a discount or build a discount structure in the future.
Step II: Segment customer base
You must know a buyer’s behavior in great detail for any marketing campaign you want to launch. You must know each customer’s complete shopping history. These include likes, dislikes, shopping frequency, when was their first purchase, and their last purchase.
If you use a retail appointment scheduling software to take appointments from your clients, make sure it collects the customer data and shopping history.
Step III: Decide the timing
In the recent past, retailers have tried to introduce promotions or discounts to boost sales whenever their business was on the low. However, this tactic usually failed. You have to change the consumer behavior for it to work, and it is generally tough to do so.
Instead, rolling out discounts at the busiest time of the year will likely give much better results.
Let us look at some of the popular times of the year for rolling out a discount:
- End of season sales/Seasonal discounts: This will help you clear your inventory of the previous season to make a fresh start for a new season. For example, you can use a seasonal pricing strategy to get rid of winter clothes at the end of the winter season.
- Quarterly discounts: These are usually used to increase sales and reach quarterly targets.
- Holidays and special occasions: Holidays are one of the busiest periods of the year for retailers, and this period is also highly competitive. Retailers tend to stay ahead of the competition by aggressively discounting around them.
Tactically timed discounts are also known to work for some businesses. Some examples are:
- Store anniversaries and events: Use the date of your store opening and in-store events to roll out discount offers.
- Customer birthdays: Send out customized birthday offers for customers on their birthdays.
- New product launches: Aggressively discount your old products just before new product launches. You can also use the increased in-store traffic to promote the new launch and create hype.
Step IV: Do the math
There are multiple factors involved when it comes to answering ‘How to add discounts to prices?’ or ‘Should I really add a discount on this item?’. To see if you’d want to offer a discount on a particular item, take a look at a general calculation that is widely used:
Cost to Purchase (by the customer) = Procurement Cost – Operations Cost (include Marketing Cost here) – Shipping Cost
If this equation gives you a positive number, you can decide how much discount would be appropriate.
For example, if you are rolling out a campaign for acquiring new customers, you likely have other expenses like advertising and marketing other than the discounts you are offering them. You need to take them into account in your calculations when you decide the number of discounts you can offer.
Similarly, if you are rolling out a discount to increase profits and sell more products, know how much profit you are currently making on the amount of merchandise you are moving and how much more you have to sell at the discounted rate to make more profit.
Step V: Test different discounting tactics
You won’t hit the mark on your first promotion strategy. It would be best if you kept studying the results of your discounts, optimizing them, and repeating this process until you hit the system that works best for you.
For example, percentage vs dollar discount has been a contentious topic in the retail industry. A 15% off on a $350 product amounts to $52.5, which is more than $50 off on the same product. But, a customer may be more excited by the discounted pricing of ‘$50’ than by ‘15% off’ because most people find it tedious to do the math.
Again, this may vary from business to business, and you have to find the system that works best for you.
Step VI: Communicate discounts to your customers
A good promotion strategy is not complete without a proper marketing plan.
A well-thought-out communication strategy will be a significant deciding factor in the success of your retail discount campaign. Some of the channels that you can use for your discount marketing are your curbside, window displays, SMS and email, and social media.
Discounts are a great way to give a momentary revenue boost and increase your customer base. But at the same time, you cannot depend on only discounts to run a successful retail store. It would help if you could generate sales around the year, even when there are no discounts.
However, today when many retailers, especially the online ones, offer year-round discounts, competing can be challenging. You have to tell customers why you are worth that extra buck and why they should visit your store.
And adopting a few creative ways of executing a smart retail discounting strategy can definitely prove to be useful for your business!
If you want to attract customers to your store, without necessarily giving away discounts, read our comprehensive blog on the best retail marketing strategies!
We wish you the best of luck! 😊
We at Appointy, help business owners grow and run their businesses with our online scheduling software. This blog was a part of our ‘Manage your Business’ category, where we provide expert tips, resources, or simply talk about the challenges that small and medium businesses face every day.
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