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Ecommerce Discounts: A Race to the Bottom?

Ecommerce Discounts: A Race to the Bottom?

Retailers are locked in a price tag battle, constantly eyeing other brands to make sure their prices are the lowest on the market. While this comes with a slew of benefits for consumers, it’s not so great for the brands themselves.

To the naked eye of the average shopper, of course low prices are a boon. After all, who would choose to pay more for the same product?

It’s almost a rite of passage now for merchants to offer new shoppers a discount on their first purchase. Go to any popular direct-to-consumer (DTC) brand, scroll a bit, or try to leave the page and you’re very likely to be served a popup that promises 10% or 20% off in exchange for your email address.

I was on Bombas’ site for all of two seconds before I was served this popup encouraging me to claim 20% off my first order (it doesn’t mention that you can already be a Bombas customer and still claim 20% off if you haven’t already).

Drunk Elephant didn’t even give me the chance to check out their site at all before throwing their popup in my face.

But when I visited Grove Collaborative’s site, there was a resounding silence. No amount of scrolling or pretending to leave the site summoned a popup, but then I noticed it: a sticky offer at the top of the page that promised something free along with my first purchase. And breathe – order is restored.

Nimble Activewear forced me to scroll all the way to the bottom of the page before I could “cure my FOMO” and get 15% off my first order.

Discounting is prevalent in pretty much every industry – above are examples from the fashion, beauty, and cleaning verticals – but it’s particularly rampant in the fast-paced fashion world. In fact, price discounts in clothing stores are leaving brands $300 billion out of pocket.

It’s definitely not limited to the world of socks and sundresses though. Merchants operating in every industry from healthcare and pet food to art and jewellery are jumping on the discounting bandwagon.

Why are discounts so prolific in the ecommerce world?

The most soothing answer here is that brands are having to compete with behemoths like Amazon and Walmart. But when you consider that Amazon changes product prices up to 2.5 million times a day, it’s a difficult pill to swallow.

Of course the biggest ecommerce site in the world has mammoth amounts of data to analyze and powerful technology to automatically switch up pricing on the regular. Most ecommerce brands don’t, yet they still try to compete with Amazon’s dizzying array of pricing tactics.

This isn’t the only reason discounts are spreading like wildfire through the ecommerce world.

Acquire new customers in bulk

Every brand wants to attract new customers, and slashing prices especially for the occasion seems like an easy way to do that.

But by offering cut-throat pricing, brands could be doing themselves a disservice by:

  • Attracting bad-fit buyers who only care about price
  • Emphasizing individual products over their brand as a whole
  • Setting customer expectations for low prices from the get-go

Sure, if I was looking for a pair of headphones I might take advantage of Urbanears’ discounts but, without knowing much else about the brand, there’s a high chance I’d only choose them based on price. That first-touch may well be my last-touch with them if they don’t work hard to follow up with me afterwards.

Discounts aren’t just a common on-site tactic, either. They’re evident across all marketing channels – the wider you cast your net, the more shoppers you reach. Take brands that work with influencers, like Curly Cailin here. She promotes discount codes directly in her Instagram bio for the brands she works with, attracting potential new shoppers with the promise of money-off.

But what happens after they buy? Without ongoing nurturing, they’re unlikely to come back.

Match changing customer expectations

One study recently revealed that customers rated discounts in email as the biggest influence on their purchase decisions – even better if they can get percentage off discounts (35%) or free shipping (20%).

While it seems customers expect discounts before they purchase, it could be a chicken vs the egg situation: what came first, the discounts or the expectation of them?

According to BigCommerce, the three biggest buying segments (Gen X, Millennials, and Gen Z) are willing to hand merchants their personal data in exchange for free shipping or discounts.

But brands that think the discounts are the driving force for handing over data might be barking up the wrong tree. Personal data allows merchants to carve individual journeys for each shopper, and this could be what they’re looking for rather than money-off or a freebie.

And, when you type “[brand] discount code” into Google and are served upwards of 100,000 results among pages and pages of discount codes, it’s hard not to think that price cuts are what customers want.

Sheer amount of competition

Back in the day, customers could only buy what was available in the shops. If something they wanted wasn’t in stock, they were out of luck. Now, the internet gives them access to all the information they need, including thousands of choices.

Add to that the sprinkling of “MUST-HAVE” products on everyone’s social feeds and you have a recipe for instant gratification.

The shift from a supply-led market to a demand-led one has brands scrabbling around trying to keep up with this ravenous appetite for newness. And, when it’s far easier to cut prices than build a brand, optimize marketing campaigns, and grow a loyal customer base, it’s clear why it’s the go-to option.

Shifting from supply to demand

Standing out is hard. Especially post-pandemic when almost every retailer has been forced online. With fierce competition around every corner, it’s easy for merchants to think that if they don’t offer a discount, customers will go elsewhere.

In what might be a misguided attempt at creating a good customer experience, they drop their prices to undercut their biggest competitors and use discounts as a competitive edge (J.Crew is a prime example of a brand that has become known for its never-ending discounts – so much so, that nobody ever bothers buying at full price).

And, when even the biggest retailers are offering discount after discount, it can be difficult to see any other way.

But the results speak for themselves: JC Penney is a perfect example of a big brand that learned the hard way when it offered discounts as a way of boosting sales.

Just as expected, sales increased, but it really suffered when it tried to get rid of its long-standing discount strategy. Sales began to plummet and, when JC Penney tried to revert to its old strategy, the customers’ perspective of the brand had already been affected. To this day, JC Penney is still trying to recover from that damage.

Macy’s Inc is another huge e-tailer that was affected by offering hefty discounts without a proper strategy. In fact, it was recently reported that the brand is on the verge of closing 125 department stores over the next three years.

Spike in sales and a cash injection

Discounts can generate a surge in revenue if deployed at the right time, but they lead with price rather than value. While it can be great to capture a few new customers and see your bank account blossom, it’s actually existing customers that bring in the most money for your brand.

Consider the similarities between promotions and discounts as well as the differences. Whereas discounts slash the price of a product, promotions add something of value on top, whether it’s free shipping, a free gift, or a loyalty-based perk.

The goal of both discounts and promotions are the same: to get customers to take immediate action but they have a different psychological impact on buyers.

Huel offers a free shaker and t-shirt with all first orders.

Why discount fuels the race to the bottom and hurts your bottom line

1. Erodes average selling price

The Average Selling Price (ASP) of a product is the average price it’s sold at over a given timeframe. If prices are deflated for too long, customers become accustomed to getting that particular product at a very low price. If you’re constantly offering a discount on your bestsellers, customers are going to start thinking your products aren’t worth any more than that.

2. Destroys your margins

Constantly offering discounts erodes your margins and means you have to push harder to sell more units. If you generally have a 30% gross margin and you offer a 20% discount, you need to increase the number of units you sell by 200% to maintain the same gross profit.

Low AOV can be sustainable in the short term, but if it doesn’t go back up and you’ve got no strategy in place, it can be disastrous. You’ll soon find that your AOV is locked well below it’s starting point, dramatically hurting your overall margins.

3. Devalues your products

If you’re competing on price and are consistently coming in as the lowest option, customers are going to start wondering why your product is cheaper than everyone else’s.

The perception of value can make a huge difference in how customers interact with your brand and market it to their friends and family. Think about it: if one water bottle costs $5 and another costs $25, it’s easy to believe that the $25 bottle has more value.

If customers see you discounting your products, they’ll start to think you don’t believe in your product which will ultimately lead to a lack of buying confidence. Instead, they’ll be asking themselves:

  • Is this product as good as I thought it was?
  • Should I trust the brand that’s selling this product?
  • Why should I pay more for the same product in the future?

4. Reduce trust levels

Brand trust is becoming increasingly important for today’s consumers. They want to buy products that align with their beliefs and share the same values as them – with so many options available, it’s no wonder.

If you keep discounting prices, how do customers know you’re being honest with them? It’s like having a countdown timer that doesn’t time out at the end. Customers will just think you’re trying to get quick cash out of them and they won’t come back. Even worse, there’s a good chance that customers who pay full price might be offended.

5. Attracts the wrong customers

Consistently discounting your prices won’t help you reach the customer base you want to. Instead, you’ll end up targeting price-driven consumers who are on the hunt for a deal.

It’s very unlikely these price conscious buyers care about the values behind your brand, your backstory, or anything else other than how cheaply they can get your products.

6. Demoralizes loyal customers

Loyalty is fickle – especially in the ecommerce world. While there are plenty of loyalty programs that reward existing customers, it’s not quite the same if everyone is being rewarded.

Consistently offering shoppers a discount shows that you don’t value past buyers and their ultimate loyalty to your brand.

Consider these stats:

  • It’s 5-25x more expensive to acquire a new customer than it is to retain an existing one – with discounts, you’ll spend a lot and earn very little
  • Returning customers spend more with a brand. If you lower your prices just to attract them, it will be harder to build loyalty with your normal prices later down the line

Racing to the bottom isn't sustainable

While slashing your prices to compete with bigger brands can be very tempting, it’s not sustainable. Selling your products for less means you’ll be selling at a loss and will have to push harder to shift more units.

The answer isn’t to focus on price, it’s to find an alternative differentiator.

Any brand can cut their prices and sell cheaper versions, but what makes you different? What makes your brand stand out? It could be anything from supporting a worthy cause, using local materials, or tapping into a specific customer segment and their pain points.

Our plea to you is this: don’t jeopardize your future for a quick cash injection.

If your margins aren’t healthy, you can’t invest in the future – and you certainly won’t be able to guarantee it (just look at what’s happened to Macy’s).

It’s amazing how quickly temporary price cuts can become permanent, simply because the competition is so fierce and it can be addictive seeing your sales ramp up. But reduced profit margins mean fewer options for growth and, when you try to claw back trust, value, and revenue by inevitably raising your prices, you’re only going to drive customers away.

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