Discount codes: 5 ways retailers can handle their deal addiction

Discount vouchers can be a great lever to grow top line revenues and engage new customers. However, they can also become a highly addictive and dangerous drug for retailers, increasingly relied upon (with diminishing effects) as a reaction to three major challenges: customers becoming conditioned to buy only with a discount; cannibalisation of organic sales; and a ‘pull forward’ effect with sales spiking artificially in the short term and declining post-promotion.

As their usage becomes increasingly widespread, there’s a rush by retailers to understand the full extent of their economic impact on the customer journey and get smarter with how they’re deployed.

Here are five strategies to make them work:

Have a plan. Compelling offers that are aligned to recognisable events (Black Friday, January sales etc) can be powerful conversion levers at peak shopping times. However, if you’re focused on short term gains with heavy usage of tenuously themed codes, the chances are your customers will see through it eventually. As Jeff Bezos said: “When things get complicated, we simplify by saying ‘what’s best for the customer?’ And then we take as an article of faith if we do that, it’ll work out in the long term.”

In the context of promocodes, ask yourself: what’s best for the customer? A commitment to consistently fair prices with reward-based discounts (for new customers, rewarding loyalty or guaranteed incremental purchases), or a convoluted mire of vouchers that leaves them questioning full-price value?

Restrain yourself. Don’t compromise the plan to squeeze out some end of month/quarter sales, without understanding the exact cost. Do you know the effect on customer lifetime value? Have you calculated the impact of cannibalisation of otherwise full-price purchases? Have you forecasted the post-discount drop in sales accurately?

Consider them marketing spend. It’s easy to consider discount code cost and revenues separate to traditional marketing channels, with the cost a percentage of margin at the point of sale rather than upfront cost. However, in order to properly gauge the impact, it’s necessary to understand their effect on the whole end-to-end economics of the customer journey. One company we polled revealed that upon adopting our multi-touch multi-channel attribution model, they revised the ‘incrementality calculation’ for the long term bottom-line revenue impact from discount codes from 70% to 5% of the total revenue generated using them.

Be smart with targeting. Identify and focus on channels and customer segments where the revenue they generate is more incremental. One example is exclusive offers through specific affiliate partners that can reach new customers and reduce the risk of cannibalising existing customer purchases. One customer segment approach is to immediately target customers who recently purchased with a time-sensitive offer as a way of generating genuinely additional sales. At Fospha, one of our favourite features is building different customer segments with different propensities to convert either with or without promos. This way you can consistently and accurately avoid wasting promos on people already planning to buy.

Use intent triggers. Many ecommerce platforms push discount code messaging at each stage of the funnel. Whilst this approach is effective at delivering the most impactful short-term revenue, it also maximises the cannibalisation effect and encourages customer association between the brand and discounting. New generation customer journey optimisation companies like us help businesses understanding exactly where customers are most likely to drop off or abandon their carts and trigger in-site messaging with discount codes to increase conversion where they’re needed.

Jonathan Attwood is CEO at Fospha.

Fospha specialises in turning customer data from every user journey, interaction, device and silo into actionable insights to optimise the economics of every moment of the customer journey. Get in touch here.

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