How to Offer Retail Discounts Without Slashing Your Profits

Retail sales and discounts | Shopify Retail blog

Discount promotions are one of the most common approaches for increasing retail sales. But just because discount promotions are popular doesn’t mean they’re always effective. Lowering your prices might bring in customers, but if you don’t execute your sale properly, you could cut into your profits and even damage your brand and your reputation.

It’s important to weigh all the pros and the cons of running a sale or discount and to define your goals and actions. Here are some tips to help get you on your way.

Pros of Discount Pricing Strategies

According to a study by Software Advice, discounting is the top “pricing strategy for retailers across all sectors, used by 97% of survey respondents.”

Selling items at a discount is a low-risk way to drive more sales volume and bring in customers have never tried your products or services before.

Getting a product at a discount can also make your customers feel good. A study led by Dr. Paul J. Zak, professor of neuroeconomics at Claremont Graduate University, discovered that shoppers who were given a $10 voucher experienced a 38% rise in oxytocin levels — a hormone associated with trust and happiness — and were 11% happier than those who did not receive a coupon.

In addition, their respiration rates dropped 32%, heart rates decreased by 5% and sweat levels were reportedly 20 times lower than their peers. In other words, they felt more relaxed, which leads to positive associations with your brand.

Cons of Discount Pricing Strategies

There is some inherent risk when offering a discount. Once customers have your product or service, they might feel like it’s lost its value. In a double-blind study conducted by TK, shoppers who paid discounted rates were less satisfied than shoppers who paid full price. It’s thought that those “paying higher rates expected a better experience and molded their assessment to their expectation.”

Discount pricing also brings the risk of ending up without much profit. Some discount sales may come from new customers, but you also could lose some profit margins on customers who were planning to buy anyway.

Define Your Goals

Retail discounts and sales | Shopify Retail blogAfter weighing the pros and the cons of offering a discount, focus your mission so that you can remain profitable while offering a lower price. Different reasons call for different types of discounts, which is why you need to know your objectives.

Here are a few common motivations behind offering a discount:

Acquire New Customers

A lower price can make customers who have never tried your product or service before deciding to take a chance on you. If they like what you’re selling, they’ll probably come back again, even once your sale is over.

Increase Sales

Here your goal is pretty simple: sell as much product as possible. This can be done in various ways, including product bundles, conditional promotions, or rewards for loyalty program members.

Re-engage Past Customers

Using a discount to encourage brand loyalty in casual customers can be done through promotions like loyalty programs. Research shows that 55% of people enroll in loyalty programs to get discounts on purchases. This not only makes your loyal customers feel exclusive, but it also encourages new customers to become members and join in your loyalty program.

You can also offer personalized deals based on your customers’ past purchases.

FURTHER READING: Learn about how to leverage a customer’s order history to make more tailored recommendations and boost sales.

Get Rid of Old Product

Sometimes you need to get rid of the old to make room for the new, and discounting products can help with that. For example, if you’re a clothing boutique, you would want to clear out your summer goods as the fall months near closer. The same can be said for clearing out holiday items after the first of the year.

Try Different Methods

Once you have a goal for your sale or discount, choose the type of pricing discount that works best based on your objective.

Bundled Discounts

Lower the price of a group of items bought together as opposed to lowering the price on just one product or service. These discounts can help you increase your average transaction size because you’ll be selling several items within a single order. With each online sale in this scenario, more items are sold, more revenue is made per order, and costs per order are decreased.

This is also a chance to pair items that aren’t strong sellers with products that have proven themselves as bestsellers. Make sure you measure the sales of the less popular items to see if they increase after the discount, and consider bundling items that customers are already buying together or that can help solve a problem in a similar way.

For example, group together a body wash with face lotion or a cookbook with local spices.

Buy One, Get One Free

Sometimes a discount isn’t enough to attract more interest. A study published in the Journal of Marketing found that most shoppers prefer to get items for free rather than at a discount. Why? Because it’s easier to do the math on “free” than it is to work out a percentage.

A different survey found that 93% of consumers have taken advantage of “buy one, get one free” promotions, while only 79% have used general discounts. Buy one get one free (also known as BOGO) is great for attracting impulse buys, moving inventory, and acquiring new customers, but you can also offer a “free” gift with a full-price purchase. Try offering a popular high-margin product with a freebie that’s less expensive but hasn’t sold well, or even offer free shipping.

For example, maybe there’s a scent of lotion that hasn’t been flying off the shelves. If you offer it as a “free” gift with the purchase of a more expensive, more popular face wash, you’re moving twice the inventory and getting a higher sale.

Conditional Promos

Black Friday Cyber Monday promotions | Shopify Retail blogIf you’re looking to implement discounts while protecting your margins, conditional programs are a good choice. Instead of running a straight deal like “$5 off any purchase” or “15% off all items,” set limitations or conditions that shoppers need to meet in order to redeem the offer: “Buy 10 items and receive 20% off.”

Other conditional promotions include seasonal or limited-time discounts, like the ones you often see in the lead up to Black Friday Cyber Monday.

How to Stay Profitable

It’s important to calculate whether your discount will still allow you to be profitable.

There are two ways you can make sure this happens:

Watch Your Margins

This calculator will help you determine selling prices for your products in order to save money and increase profits. In order to keep your margins healthy, it’s important to keep your marketing costs low. You need to promote your discount, but not at the literal expense of your profits.

Start by marketing your discount to consumers that you’re already in contact with, such as existing customers, email subscribers, and social media followers. When spending to attract new customers, compute your projected profits from the discount and account for these marketing expenses.

Another way to watch your margins is to segment shoppers and tailor offers accordingly. For example, offer the discount to first-time customers rather than customers that have a history of being repeat buyers, or vice versa. In the former example, this increases the chances that you lure in new sales without losing out on the margins of sales that would have happened anyway.

With the latter group, you can use your point-of-sale system to get a history of what shoppers previously bought, then create tailored discounts based on what that customer has purchased in the past. Both tactics can greatly increase conversions.

Know Your Customer Acquisition Cost

It’s critical that you know how much you’re spending to get a new customer because that number will change when you offer discounted products or goods. Make sure you add your lost margins during the sale, as well as your additional marketing expenses.

You can keep your costs down by converting those new customers into repeat customers. Offer upsells and cross-merchandise items in order to get the maximum return on that new customer’s first order.

Optimize your website to reduce shopping cart abandonment. Make sure there are no technical speed bumps creating friction at checkout and send a reminder email a few hours after a customer abandons their cart to encourage them to go ahead and make their purchase.

Many digitally-native brands are even moving into physical retail to lower their customer acquisition costs

Moving Forward With Discounts

Discounting can be a great way to bring in new customers, reward loyal customers, and move a lot of inventory in a short amount of time. You just have to have a strategic approach and know your goals in order to increase your sales and revenue.