A lot of brands run promotions. And a lot of them run them wrong, leaving money on the table. No bueno… Good news, though: Today, we break down how to run a truly effective promotion for your brand.
Walking away from this piece, you’ll have the confidence that the promotions you run for your brand are positively contributing to the bottom line.
How To Use Promotions The Smart Way
“I run an eCommerce brand, therefore I run a sale.”
Sometimes it seems like this is how brands and agencies think. When you offer a product to customers at a reduced price, it does often make sales go up. But if you aren’t careful, you end the month with less cash on hand than anticipated. And in the worst cases it becomes nearly impossible to sell your products at full price.
Sales and promotions are a powerful tool, but “with great power comes great responsibility”. If you want to run profitable promotions that help make your business more valuable over time, you need some context on how customers behave when you push those markdowns live.
Quick note: I am defining a sale as a “hard markdown”, where a sale price is displayed next to the original price and the item does not return to its original price after the markdown is taken. I am defining a promo as a temporary discount, usually via a promo code.
Customers Are Price Sensitive
Sometimes when we put on our marketer hat or eCom operator hat, we get so far into the weeds that we forget to wear our consumer hat. Consumers are price sensitive–you probably are too!
For example: would you pay $20 for your morning cup of coffee? Probably not! Priced at $3 to $5, this daily ritual doesn’t make much of an impact on your total budget. But increase the price to $20 and your caffeine fix starts to add up fast.
The people who purchase from your brand think the same way. Unless they are really, really wealthy or really, really bad at budgeting, they have a price that they feel is reasonable to pay for a given item from a given brand.
As a marketer or a product developer you can do things to raise that price, but a person’s disposable income sets a hard upper limit.
A customer’s first order is a good indication of the price they’re willing to pay for your products over the next three to five years. Changing life situations have the potential to change a customer’s “reasonable to pay” price.
A new job with a big salary increase can increase it and the decision to retire and downsize can decrease it. But these changes don’t occur often.
If you analyze your customers’ purchasing behavior you will typically find the following:
- Most of your repeat customers do 60-80% of their spending within a single price range.
- When customers spend outside of their preferred range, it’s usually at a lower price range.
- If you run frequent sales and promotions, customers will shop less often at full price as time goes on.
The last point is what we all hope to avoid, because it drags down customer lifetime value and can even start to tarnish the perception of your brand.
How Promotions Change Customer Behavior
Running a promotion changes the behavior of individual customers, but it also changes the dynamics of your total and current addressable markets.
As marketers, our job is to change customer behavior, which is one reason that promos are so popular. But it’s also our job to make decisions that benefit the business today and in the future. That’s where promotions start to get tricky.
Promotions and sales change customer behavior because they can use the element of time-sensitivity to pull your existing customers into “shopping mode”. If you like something, and that thing is being offered at a lower price, and you know that price will only be available for a limited time, you’ll probably at least consider buying it.
Promos create a sense of urgency because they typically have an end date and your customers don’t know when the next promotion might run. Sales create a sense of urgency because, when run correctly, the inventory is limited and the customer doesn’t know if it will still be in stock tomorrow.
This urgency effect is amplified if your item has a high price relative to the rest of the consumer’s purchases and it’s something that the person needs multiple times per year. Luxury beauty products or high-end golf balls are two examples.
But the urgency effect is diluted if you run sales multiple times per year, run progressively deeper discounts as the selling season progresses, and rarely run out of stock.
Fashion businesses with poorly managed inventory planning run into this issue a lot. If the consumer knows that markdowns will get deeper each month and the “good stuff” will still be around at the end of the season, why would they purchase at full price?
Promotions and sales also bring in conversions from net-new customers who wouldn’t have considered shopping with you at full price.
If you’re consistently marketing your brand via paid social or other prospecting channels, there are people who are aware of your brand but can’t afford it. A sale or promotion may bring your prices within their reach, resulting in new customer acquisition.
Sales and promotions drive customer acquisition in another way. The clickthrough and conversion rates for ads featuring a sale will always be higher than average because the addressable audience for a brand on sale is larger than for that same brand at full price.
On platforms like Facebook where clickthrough is an ad quality signal, these ads will get broader, cheaper distribution. This will expose your brand to a larger audience of prospects, and some of them will convert on their first visit.
There is also a segment of consumers who can’t resist a big, juicy sale, no matter what’s being sold. If something is marketed as “70% Off!”, this group will click through the ad or pop in the store reflexively.
Digging through the racks or clicking through the pages of a deep clearance sale is almost like a drug for this group–they’re addicted to the thrill of the deal. A deep clearance sale will net you some customers from this group.
The Do’s & Do-Not’s of Running Profitable Promotions
- Customers are price-sensitive. They typically enter your business at a certain price point and stick with it for the next three to five years at least.
- Promos broaden the audience for your brand, resulting in more customer acquisition for less money.
- Promos also incentivize existing customers to shop more by creating a time constraint.
Now you can clearly see the “promo trap”: customers you acquire by running a sale will rarely shop at full price. And if your audience of recent purchasers becomes heavily weighted toward promo customers, it will be harder to sell anything at full price.
Here are some guidelines for avoiding the promo trap and creating offers that support your long-term goals for the business.
Don’t Make Inventory Clearance A Growth Event. You should never run sample sales or clearance events on your primary DTC sales channel. When you do this, you pollute your core audience with customers that will never, ever buy at full price. Your pixels, lookalike audiences and email list get “skunked” for weeks or months, dragging down performance when you try to sell at full price again.
Everyone makes inventory planning mistakes sometimes, but if your business ends every year with a warehouse full of excess inventory, you need to address the root of that problem. You should try to clear excess inventory through third parties, or through a separate eCom website.
Avoid The Urge To Plan Growth Into Promo Events. If your overall growth goal for the year is a 20% increase, your promotion and markdown days should not be planned up any more than 20% year-on-year. It might be easier to drive sales growth during promotional events, but if you do this too much, for too long, it will become nearly impossible to sell at full price.
Limit The Days/Year You Are On Sale. This will create the perception that your brand rarely goes on sale, which will make the sales you do run more effective. I’m talking about the big, splashy sales that are advertised across your entire website and marketing mix here. Offers aimed at specific audiences, shared through private channels like email and SMS, are ok to run more frequently.
For Customer Acquisition, Try Promo Alternatives. Yes, I know that everyone and his/her mother offers a first order discount as an incentive to sign up for email. But have you ever run a true A/B test of offer vs no offer? Or compared subscriber quality between those who signed up for an offer and those who did not? Very few brands can answer yes to those questions.
Offering a first order discount starts your relationship with the customer on the wrong foot. As we’ve covered above, they are unlikely to buy from you again at full price. If you want to incentivize email captures from high quality customers, try promo alternatives like free shipping, sample packs redeemable for a discount on a second purchase, or product bundles.
Save Promos For High Potential New Customers. In most single-brand DTC businesses only 20-35 of every 100 customers you acquire will come back and make a second purchase. But you’ll never turn a new customer into a loyal customer unless you cross this hurdle. That is why “bounceback” offers for new customers are one case where I advocate for the use of promotions.
But you shouldn’t provide a bounceback promo to just any new customer. Analyze your sales data for the first purchase characteristics of high LTV customers. They usually come in through certain categories and purchase more units across more categories than your average customer. Reserve bounceback offers for this group.
Test Incrementality Of Loyalty Offers. You should be testing the incremental impact of all your offers, but that isn’t always practical. But the one place marketers are most likely to overpay is in marketing to loyal customers. This audience is already highly engaged and highly likely to return for another purchase, so driving incremental sales is difficult.
When you measure loyalty offers on a last-click basis, the performance looks great. But if you compare the sales performance between a test group and a holdout group, you’ll often see that most of those sales would have happened even without the promo.