For years, the department store chain, JC Penny, relied on discounts to sell their merchandise.
And it worked: Discounts helped to keep the company afloat.
But in 2012, all of that changed when Ron Johnson took over as CEO. Along with several other changes, he implemented a new pricing strategy that eliminated discounts entirely and instead advertised “everyday”, low prices.
The result? Sales plummeted. JC Penny lost $4.28 billion in sales during the first year of Johnson’s plan. In the end, JC Penny was forced to return to its previous pricing strategy of discounts and sales.
The problem was that their customers had grown to expect those discounts. Discounts came to define JC Penny, and as soon as they were taken away, customers felt like they had no reason to shop there.
The rise and fall of JC Penny perfectly exemplifies just why discounting can be so dangerous. You see, once you go down the road of discounting, it can be difficult to go back…
The Dangers of Discounting
In the book, The 22 Immutable Laws of Marketing, Al Ries and Jack Trout state that “there’s more and more evidence to show that sales decrease business in the long term by educating consumers not to buy at ‘regular’ prices.”
He argues that,
Many companies find they need a quarterly dose of couponing to keep sales on an even keel. Once they stop couponing, sales drop off. In other words, you keep those coupons rolling out not to increase sales but to keep sales from falling off if you stop. Couponing is a drug. You continue to do it because the withdrawal symptoms are just too painful.
And that was exactly what happened with JC Penny. The department store chain became so hooked on discounts that in the end, it could not survive without them.
Yes, discounting will almost inevitably lead to a spike in sales short-term….but long term, it won’t always prove beneficial. And can sometimes even prove disastrous. Here’s why:
Discounting Puts the Focus on Price
Discounting puts the emphasis on price instead of all those other great things that your brand has to offer. It can send the message to your customers that the best thing about your company is its low prices.
When you do that, your customers are always going to seek out the lowest price, whether it’s with you or your competitor. They won’t develop any sort of loyalty to your brand. After all, why should they?
Gucci takes the exact opposite approach:
See how there are no prices shown (unless you hover over or click on the product)? Rather than putting any sort of focus on price, Gucci puts the focus entirely on the products.
Discounting Can Cheapen the Brand
There’s a reason why high-end brands (like Gucci) rarely (if ever) have discounts. Discounts can cheapen the brand, lower the perceived quality of the products, and send the message that your products are not worth as much as you normally sell them for.
In the book Predictably Irrational: The Hidden Forces That Shape Our Decisions, Dan Ariely argues that, “price can change experience” and that “if we see a discounted item, we will instinctively assume that its quality is less than that of a full-price item — and then in fact we will make it so.”
In other words, people’s expectations shape their reality. Discounting can lower the expectations that people have for your product—which will result in a lower quality experience.
Discounting Can Breed Distrust
Discounting might cause your customers to feel deceived and wonder: Is the regular price really a fair price?
Discounting Sets a Bad Precedent
I love yoga. And I often buy $30-$40 Groupons for unlimited monthly yoga classes. I’ve gotten so used to paying that price that now, I refuse to pay the normal price that yoga studios generally charge (at least $100 a month).
This has to do with something called price anchoring, which is the psychological tendency to rely on the first price that we are given as an “anchor” to which we compare all future prices. So because Groupon set my price anchor for unlimited yoga classes to a maximum of $40, I now can’t stomach paying much more than that.
Whether you do it with your old customers or use it to reel in new ones, discounting sets a low price anchor in your customers’ minds…so when the prices of your products return to normal, your customers will be more reluctant to buy from you.
Discounting Is a Race to the Bottom
If you lower your prices, then your competitors are inevitably going to do the same. You’ll end up competing on price, which always ends up as just a race to the bottom. And trust me…you don’t want that.
So What Can You Do Instead?
Feeling discouraged? Don’t worry. Fortunately, there are many alternatives to discounting. Here are a few:
Justify Your Price
More and more brands these days are practicing price transparency and telling their shoppers exactly why their products cost what they do.
The clothing retailer company, Everlane, is a good example of this. They never offer discounts to their customers; instead, they justify the price of their products and explain where the customer’s money is going.
Then when the price of something does change, they tell the consumer why it has changed:
Thanks to such transparency, Everlane’s customers trust that the prices are fair. Wouldn’t you?
Or take a look at the athletic apparel company, Lululemon:
I don’t know about you, but before I pay $78 for a long-sleeve t-shirt, I’d like to know why it costs so much. Lululemon justifies their price by explaining that the shirt comes equipped with “anti-stink” technology. They assure potential buyers that this isn’t just your average t-shirt.
Beckett Simonon is yet another brand that succeeds in justifying its prices. They are able to reduce their costs by not holding inventory and instead allowing customers to pre-order the items.
In the FAQ section of their website, they answer the question, “How can you keep your prices so low without sacrificing quality?”
Their answer helps to reassure their customers that the products are high quality and that they are paying a fair price.
Let Customers Decide the Price
When many other eCommerce stores were slashing their prices for this year’s Black Friday and Cyber Monday, Everlane chose to do things a little differently.
Instead of discounting their already just prices, they decided to promote a “choose what you pay” payment model, which lets customers choose from one of three prices listed. Then when users hover over the price, a message pops up explaining where the money is going and what percentage of the sale is going to Everlane.
By letting their customers choose the price they pay, Everlane makes the customer feel in control, valued, and more inclined to give (or pay) more.
Version Your Products
In Predictably Irrational, Ariely also talks about how “most people don’t know what they want unless they see it in context.” So if you just give your customers just one price, with nothing to compare that price with, they are less likely to go through with the purchase.
Ariely talks about how Williams Sonoma was once having a hard time selling their breadmakers. To try and boost sales, they introduced a comparable breadmaker that was priced 50% higher than the original; all of a sudden, the sales of the cheaper breadmaker skyrocketed!
Because people had something to compare the cheaper product with.
Take a look at Philips Sonicare toothbrushes:
They offer a variety of different electric toothbrushes for customers to choose from—and a range of price points. My guess is if that they only sold one electric toothbrush, their sales would be much lower.
Versioning has a dual advantage: It provides your customers with a reference point, which helps them decide what they want. And by letting your customers choose the price or product that best suits them, it puts them in the driver’s seat and makes them feel more in control of the buying process.
Sell Refurbished Products
Got some like-new products lying around that your previous customers have returned? Why not sell them as refurbished products at a lower price?
There are some products (like toothbrushes and cosmetics) that you obviously can’t sell refurbished. But if you sell something that holds its value once opened, like electronics or jewelry, then why not consider selling your returned and previously opened products as refurbished?
Chances are, your customers will appreciate your honesty (and the fact that you aren’t selling the products as if they were brand new).
Start a Loyalty Program
Loyalty programs create loyal customers: 84% of customers say they are more likely to stay with a brand that offers a loyalty program.
From point system to tier system, there are various types of loyalty programs you could implement. Or you could create a hybrid model. For example, you could create a point system that rewards customers with a free gift or perk once they accumulate a certain number of points (or spend a certain amount). Then once your “members” obtain a certain number of points, they’re eligible to move up to a higher tier that offers even more benefits.
The gamification aspect, combined with the perks (so long as they’re good), just might be enough to keep your customers coming back again and again for more.
Looking for a platform to help you implement a customized loyalty program? At eScale, we’re fans of Swell.
Offer Something Unique
Apple rarely, if ever, offers discounts. And yet people around the world buy Apple products regardless.
In fact, it’s probably partially due to the fact that they don’t offer discounts that Apple retains its high perceived value and is one of the world’s most powerful brands.
As Apple demonstrates, the key is to really differentiate your brand and offer something that’s truly of value: a product and experience that can’t be found anywhere else.
Remove the Fear in the Buying Process
But alas, we can’t all be Apple. If your product isn’t that unique, then you could at least offer your customers something that nobody else does.
The Hyundai motor company did this well during the recession. They discovered that many people were understandably afraid of losing their jobs and therefore hesitant to buy cars.
So in response, they created their Assurance program, which said that if buyers lost their jobs, they could return their vehicle and stop making payments, without any penalty.
In doing so, they removed the fear and buying hesitation that they recognized many people had. As a result of the Assurance program, sales went way up and very little money was lost: Fewer than 100 people returned cars within the first year.
Don’t Be Like JC Penny
In direct contrast, JC Penny came to rely on discounts precisely because they did not offer anything unique. All of their products were sold at Walmart, Kmart, Sears and the like and they did not offer any sort of unique experience for their customers. So they had no choice but to compete on price and rely on discounts to survive.
Don’t be like JC Penny. Whether it’s through free shipping and a flexible return policy or no-interest financing for your expensive products, find a way to stand out from your competitors and offer your customers something unique. If you do that, you won’t have to offer discounts to get people to buy from you.
Bundle Your Products
When people become overwhelmed with choices, they often end up not making any choice at all. It’s called the paradox of choice.
Bundling products can help to narrow down the choices for your customers, making decision-making a little bit easier.
Product bundling also makes people feel like they are getting a good deal or discount (even if they aren’t).
Think about when you go to a fast food restaurant…do you look at all of the different products on the menu…or do you skim through the “bundled” food items or menu items? If you’re like most people, it’s the latter. I’ve done this before, only to find out that sometimes, I’m actually not saving any money at all!
But the restaurant sure does a good job at making you think otherwise. Customers tend to choose the menu items because they help ease the decision-making process and because the fact that they’re bundled together makes the menu items seem like a bargain.
The Dollar Shave Club is an example of an eCommerce brand that does this well:
Products are pretty much automatically bundled together, which just makes things easier from a customer standpoint. The shopper doesn’t have to think about what they need and then go and search for each individual product–instead, the products are already packaged together for them.
Think about the products you offer that go well together and then bundle them together. By providing recommendations for your customers and making their lives just a little bit easier, your sales are bound to go up.
Offer a Subscription
Another reason why Dollar Shave Club has been able to succeed is because it sells its products via a subscription-based pricing model. Customers choose the type of set that they want and then they receive refills however often they want.
The cosmetics company, Birchbox, also relies on a subscription-based pricing model. Birchbox subscribers receive a box of four to five sampler cosmetics each month. Then based on what they like and don’t like, they receive personalized samples; each box is therefore tailored to the customer.
It works because it’s noncommittal (people can try different products until they find the one(s) that they like) and users feel like they are getting a free gift each month (even though they are paying for it). It gives subscribers something to look forward to each and every month.
So if you have a replenishable product, consider offering subscriptions to your buyers. But do think about the way that you price your products…$80 a year sounds a lot more than $6.60 per month.
Start a Membership Program
Almost whenever I need to buy something, I check to see if it’s on Amazon first. Why? Because I’m part of their Prime membership program, and I get free, two-day shipping on any Prime items that I purchase. I also get access to Prime movies, music and exclusive deals and products.
Why would I shop anywhere else?
Turns out, I’m not the only one that thinks this way. Amazon loses approximately $1-$2 billion a year on Prime. But they make up for this loss with a higher transaction frequency: Prime members spend an average of $1,500 per year on Amazon, while non-Prime members spend just $625 per year.
Like subscriptions, memberships can provide your business with a valuable source of recurring income. Plus, it makes your customers feel like they are a part of something special.
You could provide your “members” with free, express shipping, like Amazon does. Or you could send them exclusive information products each month. Think about the things that would be most valuable to your customers. The options truly are limitless.
Have a Limited Product Selection
Human beings place a higher value on things that are limited in quantity than things that are of great abundance.
The Hermes Birkin bag is one of the most coveted handbags on the planet. At a starting price tag of $12,000 and going up to more than $200,000, they are probably also one of the most expensive bags on the market today.
But no matter how much money you have, you can’t just walk into an Hermes store and buy a Birkin bag. Nor can you buy one online. In order to be graced with one of these exclusive handbags, you’ve got to have long-standing connections with the sales associates. There is rumored to even be a several-year waiting list for the bag, but word on the street is that you just have to charm the right person at the right time…and get really lucky.
My point here? The exclusivity and scarcity of the Birkin bag is, undeniably, what has made it so famous and so desired.
So when it comes to your eCommerce store, take advantage of the fact that people want what they can’t have. You could highlight the fact that your products are limited in quantity. Then when one of your products runs out, give your customers the opportunity to waitlist for it.
Have Limited-time Products
Limited-time products have the same effect.
On the fifth of each month, the watch and accessory eCommerce store, the 5th, sells certain products that are unavailable the rest of the month. In case users forget, there is a timer at the top of the homepage, counting down the time remaining until the products become available.
Limited-time products create a feeling of urgency. And if you hype them up beforehand, like the 5th does, it builds anticipation and excitement.
Starbucks succeeds in doing this each year with their famous holiday beverages and specially designed cups, which are only available certain months of the year. I’d say it’s no coincidence that their busiest sales month of the year is December, followed by November and October.
Everyone likes to buy from a brand that does good and contributes to society. For some brands, social good defines what they are all about. Take Tom’s shoes, for example, which has a “one for one” model. Each time a pair of shoes is purchased, the brand gives back to a person in need.
Yellow Leaf Hammocks is another example. Part of their core value proposition is that they are helping to break the cycle of poverty around the world:
On their About page, they even share photos of the people that make the hammocks. Then clicking on the CTA “Learn their story” brings the user to another page that shares short snippets of who some of the weavers are.
Personally, as a potential shopper, I feel much more inclined to buy a Yellow Leaf Hammock after learning about how my purchase will help others—especially when I discover who exactly those individuals are.
When customers know that at least part of their money is going towards a good cause, they are much more inclined to buy, and on top of that, they naturally feel a deeper connection with the brand.
Spoil Your Customers with a Freebie
Also in the book, Predictably Irrational, Dan Ariely talks about the power of free. He claims that, “most transactions have an upside and a downside, but when something is FREE! We forget the downside. FREE! Gives us such an emotional charge that we perceive what is being offered as immensely more valuable than it really is.”
Adding a small freebie to your customers’ orders is therefore an easy way to increase the perceived value of their orders—without spending much.
Take a look at this email I got from the blow-out salon, Drybar:
They offer a free Drybar travel bag with every purchase of three full-size products. On top of that, they offer a free shampoo and conditioner sample with every online order.
Giving away free samples of your products has two main advantages: It can encourage your customers to buy (because everyone loves to receive freebies). And it can also give your customers the opportunity to try out the sample you’re sending them (and once they try it out, they’re more likely to come back and purchase it from you).
Not convinced? Free samples have been found to increase sales by as much as 2,000%.
But if a free sample isn’t relevant to your brand—or if you’d prefer to go another route—you could offer a free PDF guide instead. Or a free accessory to your product.
Whatever it is, think of something small that your customers would appreciate. Sure, adding a small freebie to your customers’ orders might cost you a little bit more upfront—but the increase in sales is likely to make it worth it.
When to Use Discounts
With all of that being said, discounts aren’t all bad. When used correctly, they have the potential to drive growth and help your business succeed in the long-term.
Here’s when you might want to consider discounting:
You Have Excess Inventory
If you have way more inventory than you had planned for and you need to get rid of some products to make room for others, then that’s probably fine to discount those selected products—but be sure to tell your customers why. That way, they won’t come to expect it as a normal or frequent occurrence.
Your Customers Buy in Bulk
When your customer buys many items in bulk, it’s generally expected that they will be rewarded with a discount.
Your Customers Pay Upfront
If you have a high-priced item, then many of your customers might need to commit to a payment plan and pay for the item over a long period. To encourage people to pay everything upfront, you could offer your customers a discount when the price is paid in full right away.
‘Tis the Season
It’s hard not to jump on the bandwagon of seasonal discounts (although there are many brands that do not do this—and still succeed). But if you are going to offer discounts on your products, then the holidays is probably the best time to do it.
Just make sure that your customers know that the discounts are for a very limited time and this isn’t something that will be offered throughout the year.
It’s Their Birthday
Similarly, birthdays are another acceptable time of the year to offer discounts. Offering your customers a discount on their birthday can be a great way to build brand loyalty and show your customers a little appreciation.
You Want to Reel in First-time Visitors
Most online shoppers have come to expect some sort of discount the first time they visit a store. Doing so can set a dangerous precedent and a lower price anchor. But if you want to go this route, just make it clear to your customers that you are only giving them a discount on their first order.
Or rather than lowering the price of your products, you could offer your customers a certain dollar amount off their first order. That way, your products themselves are not devalued at all.
You Get Something in Exchange
Realistically, you can’t really expect your customers to share your product on social media or refer a friend to your website unless you offer them something in exchange (like a discount).
Whether or not you should engage in discounting will depend on your brand. For some brands, discounting is never a good idea. For others, there’s a time and place for it.
If you decide to discount, just make sure that you put some serious thought into it, that there is a reason for the discount you’re giving, and that your customers know that reason. If the price of your product suddenly drops, tell your customers why that happened. That way, at least your customers will know that the price of your products is not completely arbitrary.
Whatever you do, don’t give out discounts blindly. If you do, then your eCommerce brand will pay the price for it in the end.
Luckily, there are many things that you can do instead of discounting. To recap, here are a few ideas:
- Justify your price
- Let customers decide the price
- Version your products
- Sell refurbished products
- Start a loyalty program
- Offer something unique
- Bundle your products
- Offer a subscription
- Start a membership program
- Have a limited product selection
- Have limited-time products
- Be socially-conscious
- Spoil your customers with a freebie
Need some help deciding whether discounts are right for your eCommerce store? Get in touch to find out how we can help you create a tailored strategy that’s right for your brand.