Stop Counting on Discounting

I received an email from Esprit, one of the apparel few retailers I have bothered to sign up for a loyalty card with. Upon sign up I was opted-in to Esprit's email program, and received this offer yesterday:

What's wrong with this picture?

Esprit is offering 30% off all items, including new arrivals. While this looks like a sweet deal for me, it makes me shake my head at Esprit. I'm their dream segment. I buy at regular price and Esprit has my cross-channel purchase history via my loyalty card to prove it. An email informing me new styles have been added to the website would be enough to drive me to the e-store (or the local store). But Esprit, like so many retailers, are clinging to discounting and couponing strategies in the hopes of winning and keeping customers.

George Michie from the Rimm Kaufman Group says it well on his blog:

Fast forward to the online world. To whom do retailers email offers? To the folks least likely to buy, or the folks most likely to buy? It’s the latter. Most of our email files are made up of buyers and we flood their in-boxes with discounts.

What about our coupon friends? Most retailers offer discounts (via affiliates) to anyone who does a search on their brand name. Who are those people who search for a retailer’s trademarks? Loyal customers walking through the door to your online store.

Seems to me that this is backwards. Giving discounts to the folks most likely to buy without them, rather than to the folks who haven’t decided where they want to shop makes promotions less likely to generate profits in the short term or the long term. We not only raise the bar for short-term profitability, we condition our best customers to wait for an offer.

Discounts: Unremarkable Tax?

Kevin Hillstrom of MineThatData has a great quote: "Discounts and promotions are our version of 'financial weapons of mass destruction.' They are taxes placed upon brands for being unremarkable."

He offers this advice:

You are probably already executing reporting of this nature, but in case you aren't, please ask your Business Intelligence team to run the following report for you:

Step 1: Categorize customers into one of four buckets.

1. Historical customer who only purchases merchandise at full-price, and never uses discounts/promos.
2. Historical customer who buys using a mix of full-price, sale, discounts, and promos.
3. Historical customer who only buys using a mix of sale items, discounts, and promotions, never purchasing full-price merchandise.
4. First time buyers.

Step 2: Sum demand spent within each of the four groups --- full-price items with no promotions, sale-priced items with no promotions, full-price items using discounts/promos, sale-items using discounts/promos.

Step 3: Run this report, for the month of December, for each of the past three years.

What do you observe? Are you converting all of your full-price customers to sale items? Are you converting all of your customers to ones who only buy when there is a discount or promotion? Do discount/promo/sale customers ever purchase full-price merchandise without the aid of a discount or promotion?

How to avoid the discount ditch

It's important to understand your customer segments and market to them accordingly. Unfortunately, if you've been on the promotions/discount hamster wheel for long enough, your data will not show the true percentage of customers who would have bought full price yet were conditioned to wait for your sales and hunt for your coupons. And un-training them can be difficult. Your brand and perceived value of merchandise may have already been cheapened beyond repair.

You may ask, "if we don't discount, how can we stay competitive in this economy?" In my recent interview on the Rimm-Kaufman Group Blog, George shared that many of his clients find themselves in brutal price and offer wars with their competition. He asked me if I had any secrets to staying competitive without having to give away the store.

It’s tough to have a good value proposition in an online world – where there’s so much transparency of alternative sites to buy from. But a clear and attractive reason why a customer should buy from you (at full price) rather than any one of your competitors is very important to keeping your margin. One of the most popular ways is to offer free shipping. But that’s becoming ubiquitous and expected. So retailers are offering free overnight and free return shipping. And that doesn’t help the bottom line either. Loyalty programs can be effective, as can incredible customer service (which prompts glowing word-of-mouth through social media).

But perhaps the best way to stay competitive without discounting is to invest in conversion optimization. If you can convert more of the traffic you are already getting just by changing the site design, features and content, maybe you don’t have to discount at all.

Easier said than done, but table stakes these days if you want to be profitable online.