E-commerce Profitability

Optimizing Discounts: A Data-Driven Guide to Profitable Discounting in Ecommerce

Henrik Hoffman
September 27, 2023

In conjunction with marketing initiatives in Paid Social and Paid Search, discount campaigns are the primary drivers of sales activities for numerous e-commerce companies. These strategies form the cornerstone of their efforts to boost revenue and attract customers.

Typically, when running a "successful" discount campaign, you expect to see an increase in your ROAS (Return on Ad Spend) thanks to improved click-through rates and conversion rates, leading to increased sales. However, it is essential to know that an increase in sales and ROAS does not necessarily translate to a rise in Net Gross Profit 3. These campaigns can often end up costing the company more without any clear solution to improve the situation.


When trying to push sales and ROAS, one should consider the crucial cost drivers at the order level.

  1. Discounts naturally hurt your Gross Margin 1 = (Gross Sales - COGS)/Gross Sales.
  2. If your discounts don't act as an AOV booster, and perhaps lowering your AOV, it will, together with the decreased GM1, reduce your Gross Margin 2
  3. Often, discounts increase the sense of urgency for the customer, which is suitable for driving sales and conversion rates. However, they often increase the risk of higher return rates since the customers might think through the purchase less than usual. And if that's the case, your Net Gross Margin 2 will suffer greatly.
  4. Make sure to measure the long-term effect on your customer cohorts since discounting many times can boost short-term but dilute the CLTV long-term.

If the increase in your marketing efficiency, i.e., ROAS, is not offsetting the above loss in profit - you will lose more than what you gain on the discounts. 

You, like others in the industry, are aware of this. However, it's difficult to avoid this when discount campaigns and daily marketing spending rely solely on Sales, ROAS, and perhaps Gross Margin 1 as metrics. But if your commercial team (marketers and buyers) aligned around a metric like Net Gross Profit 3 and aimed to maximize that, you could make it easier.

For modern e-commerce companies seeking to implement discounting strategies effectively, it is crucial to have the ability to optimize and adjust prices, as well as include or exclude products from campaigns, all supported by real-time reporting. That's what Dema.ai offers, making it an essential component for success in the industry.

A scatterplot showing net gross margin 2 and net gross profit 2 for products
Following your discounted products on Net Gross Margin 2 and Net Gross Profit 2 throughout the whole campaign

Different ways you can work with discounts and still secure a certain level of profitability


3 different discounts with a basket size demand

You can quickly eliminate the risk of too low profitability when knowing the average Gross Margin 1 in your campaign and conditioning the discount with a specific basket size. It might be the case that your customers don't like to shop in this way. Therefore,  you could test this out on a limited part of your current customer base, sent out via email, before going broad and approaching all your customers and using this tactic in customer acquisition.


Below are three discount tactics you should try out. Depending on what your e-commerce platform supports, you can do this differently. 

  1. A %-discount with a minimum basket demand. You can also have different steps that allow additional discounts. Incentivizing the customer to increase the basket, i.e., better actual contribution on each order.  
  2. A fixed discount amount with a minimum basket demand. Fixed discounts are also powerful for adding 1-2 extra thresholds to higher numbers. The advantage of a fixed discount is the extra profit derived from the amount above the threshold. That whole amount is technically "sold" at full price.
  3. "3 for 2" or "the cheapest product for free" kind of discounts where you can set the rules to orchestrate a good enough order profitability.


Eliminate the profit killing aspects of the orders

When lowering your Gross Margin 1 significantly with a discount, and you can’t increase or keep the AOV you might not have the margin to be able to offer the campaign to all your customers, or apply it to all your products. Considering the following

  1. Limit the "service", for example: free next day delivery (or whatever drives the most costs for you)
  2. Excluding countries that are too expensive to ship to (Customs, shipping, returns, and transaction fees included) or with a too unfavourable currency exchange rate
  3. Categories / Products that are too expensive to ship compare to the expected discounted Gross Profit 1 that they contribute with. 
  4. Avoid the unprofitable “coupon hunters” and those who with historically high return rates

3 steps when analyzing and learning from historical discount campaigns' effect on your profitability

Analyze your recent discount campaigns, or for that sake, similar to the one you are planning in 3 easy steps (if you have your data in order)

  1. Check your Net Gross Profit 2 for your orders with discounted items, if it looks good in general → Copy paste as much as possible of that campaign; discount levels, design, landing pages, emails, ads etc. If it doesn’t look good, continue:
  2. Try to find orders that look good on Net Gross Profit 2. If you find orders that have a satisfying Net Gross Profit 2 level - do you see any patterns how the orders differ from the less profitable ones? Marketing channel? Already a customer/new customer? Certain types of products? Etc…  If you don't, continue:
  3. Find the biggest margin killers in your orders and see if you can put together an attractive campaign without them? If you can't, continue:
  4. If your a multibrand shop and you need discounts to move your inventory - go to your suppliers and negotiate for marketing contributions. If you can't, you are in trouble, and  you should dive deeper into point 2 and 3 again, and the other tips in the previous paragraphs.


Summary

In conclusion, it's essential to remember these points:

  • Understand and monitor the impact of discount campaigns on your various profit margins.
  • Align your marketing and buying teams around a common profitability metric like Net Gross Profit 3.
  • Utilize real-time reporting tools, like Dema.ai, for optimized price adjustments and product inclusions/exclusions in campaigns.
  • Implement basket size-demand discounts to eliminate the risk of low profitability. Test these strategies with a limited customer base before full-scale deployment.
  • Explore different ways to implement basket size-demand discounts, such as %-discounts for different minimum basket sizes, actual discount amounts at certain steps, or "3 for 2" kind of discounts.
  • Minimize profit-killing aspects of orders by limiting services, excluding expensive shipping countries or products, and avoiding unprofitable customers.
  • Make sure to measure the long term effect on your customer cohorts and get in control of your long term CLTV.
  • Analyze your recent discount campaigns in four steps:
  1. Review the Net Gross Profit 2 for orders with discounted items.
  2. Identify orders with satisfying Net Gross Profit 2 levels and analyze their patterns.
  3. Identify the major margin killers and consider campaigns without them.
  4. If you're a multi-brand shop, negotiate with suppliers for marketing contributions.


If this resonates with you - don't hesitate to book a demo to see how easy it is to get better at these things when working with Dema. You can be up and running in less than a week!

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