Breaking away from deep discounts
Why a business needs sustainable discount strategies
What are deep discounts?
A business (most likely a B2C business) generally offers a price reduction to their products/services as an incentive to customers to make a purchase and discover value in the business. It’s a hopeful attempt by the business with the belief that a customer that’s incentivised to make a purchase now will turn into a long term paying customer thereby justifying the cost of the discount offered.
These price reductions usually don’t hurt businesses too much as the monetary value of discounts offered are strategically decided such that the profit margins are reduced within an acceptable limit. Also, other steps are taken to prevent customers from undermining the actual value of the product, discounts are usually capped at a certain amount and offered only if the order value exceeds a certain minimum amount.
However deep discounting differs from this where in the discount offered is absurdly high; much higher than the acceptable limit. Deep discounting can hurt profit margins significantly and can result in a business suffering losses even while making a good amount of sales. Deep discounting strategies that are widely used today by e-commerce, ride booking and food aggregator platforms.
Why are deep discounts not sustainable?
Deep discounting used to be a rare occurrence in the past. Retail stores would offer heavy discounts and sales during the end of seasons to sell their leftover stock. It was a way of ensuring maximum returns on what could be leftover inventory. Restaurants used deep discounts in the form of happy hours. These were offered only during non-peak hours when restaurants usually had extremely few customers coming in. This ensured the restaurant had some orders even during off hours. Today, we have multiple mobile app based businesses and e-commerce platforms who have scaled new heights simply because of their deep discounting offering. Some of the top companies today thrive in current competition solely using these deep discounts.
Let’s look at why deep discounting is not sustainable in the long run:
1. It is Financially Unsustainable
Long term deep discounting strategies run by a business can only head in two directions — bankruptcy or inflated marked prices to make the discounts affordable to the business. However customers today are more informed than ever and a large percentage of customers make purchase oriented decisions only after thorough research. So inflated price tags are a poor strategy to make discounts enticing to the bargain hunting customer.
2. Customer addiction and sale fatigue
With the rise of e commerce and online aggregator platforms, deep discounting has become a norm. Customers are so used to receiving heavy discounts all the time that they’ve become addicted to it. It’s extremely unlikely that a customer would choose to make a purchase at full price when finding a discounted alternative involves just a few clicks more.
This kind of constant deep discounting ensures e-commerce platforms undercut their offline competitors. But let’s not forget, these discounts are offered by everyone. So the quick fix strategy that was used to drive more sales when targets weren’t being met has now become an inescapable trap. If an e-commerce business wants to stop offering deep discounts, it has to risk losing all its business as all the existing customer base will flock to a competitor business offering those discounts that they seek to survive.
Sales fatigue is also becoming a real phenomenon where customers aren’t impacted by the occurrence of a sale anymore. Sales have become a norm as compared to a rare and seasonal occurrence that it used to be in the past. According to retail research house Conlumino, consumers are now less fanatical about Black Friday sales. Some 70% of 3,520 US consumers polled in early November last year said they view Black Friday as a less significant activity compared to before as there are already sales and discounts throughout the year. They also stated that Black Friday shopping is “ less fun than it used to be”
3. Psychological value reduction
When the prices offered by a business for their products/services are constantly low, it drives the thought that these low prices are how much the product/service is worth. We’ve seen businesses who are leaders in their domain that rarely offer discounts. Netflix, the streaming giant, offers a free trial so customers can experience the value the platform offers after which a fixed subscription pricing model follows with no coupon codes and no discounts. Even with competitor content streaming platforms offering services at a much lower rate, Netflix has stuck to their pricing, while steadily increasing their customer base every quarter.
Are deep discounts always bad?
In today’s day there are multiple large businesses which have based their value proposition on offering the best deals and discount offers to customers. There are many businesses which have a large customer base solely because they constantly offer deep discounts. Once these discounts stop, a large chunk of their customer base are likely to disappear. A one-time deep discount isn’t harmful; it could in fact be useful to get a customer to try out a new product while mitigating the risk factor for a customer (the risk of spending too much on a product/service whose value is not known.) For such purposes, we’ve observed profitable businesses offer massive discounts on the first try not quite different from a free trial. When these deep discounts start to ruin a business is when customers are so accustomed to receiving discounts that it becomes the sole trigger for a purchase.
So how do we make discounts sustainable?
Stopping discounts entirely will result in a huge drop in sales & customers flocking to competitor platforms. So what is the sustainable middle ground here? In today’s digital world, most brands and businesses have the ability to send out marketing actions to customers at an individual level — either by text, app notifications or even ads on social media and search engines. Businesses must harness this capability to provide differential discounts to customers based on their current stage within the customer’s life cycle. Stages can be more in number as well as more specific rather than just broadly segmenting customers into pre-acquisition & post-acquisition segments.
Today nearly every customer facing business tries to collect as much data as possible about their customers. Using this data in the right manner to create the best experience for every individual customer must be the aim of every business. We’ve built MARS to solve this problem. MARS learns from past user data and recommends the lowest possible discount needed to get a user to convert — within your allocated budget.
Every customer is unique, with a different engagement level, spending behavior and life time value. MARS treats every customer as an individual and sends out a fine tuned discount to each customer. This results in maximum conversions with minimum discount cost. Also MARS learns from user behavior over time to reduce the discounts sent in such a way that customers keep purchasing without getting hooked to the discount. MARS runs every discount campaign with one goal — maximum customer retention. So unlike deep discounts, MARS only sends out the (necessary) right discounts to the right users. We’ve built this tool to support discount pricing models sustainable to businesses in the long term.
Originally published at https://blog.marax.ai on August 23, 2019.
