Discounting Playbook

Discount pricing strategies are a double edged sword. When used correctly, they can be incredibly effective at nudging customers to purchase, but not understanding the psychology behind promotional pricing may result in a short term burst in conversion rate and a longer term hit to your margins. Brand perception is also a sensitive element that needs to be carefully managed.

This discounting playbook will guide you through effective promotional pricing strategies and why they work, empowering you to improve conversion while protecting brand perception.

Pricing strategy #1: Protect your brand's perceived value

Perceived value is customers’ willingness to pay for a certain product or brand name, which can be influenced by the frequency and degree of discounting. The tricky thing is that consumers don’t respond the same to discounts on every product or brand. Additionally, we assume that by lowering prices, we can increase conversion, but when that damages the perceived brand value, conversions will actually take a hit alongside price. Discounted luxury products, for example, are often seen as inferior perhaps due to being out of season or out of fashion - thus a lose-lose situation appears in this case. Not only has the brand devalued its image as a result of discounting, but have also reduced conversion rate. The high original price serves as an anchor for customers to perceive the product as high-quality, but by discounting, the brand signals to consumers that their product is less appealing and competitive.

Of course, this is a particular case for luxury goods where brands want to maintain exclusivity and protect customers’ willingness to pay by rarely discounting. In other industries, there may be fierce competition for customers, so discounting will be the norm, and discounting can be used as a competitive advantage. That being said, discounting too often ingrains in customers’ minds that your store is a discount brand. This brand positioning trains consumers to wait until the next promotion comes about, which ruins the urgency aspect that makes discounting so effective in the first place. Therefore, it’s important that you decide whether your brand will use discounts, and to what extent. Be sure to plan for this discount level in your long term margin strategy and P&L!

Pricing strategy #2: Create the sense of urgency

Fear Of Missing Out (or FOMO) is real. People don’t like missing out, especially on a hot discount they know won’t last long. Limited time discounts or flash sales are popular pricing strategies that increase traffic and create a sense of urgency, encouraging customers to take action on spot instead of leaving the site. Offering a free shipping deal that expires within an hour of the customer landing on the site will incentivize customers to take action and not miss out on a good deal.

Low-stock sales - ie, the rise of “drop”-style sales led by Supreme - can generate scarcity that also leads to FOMO and a higher willingness to pay. Airlines and hotels use this strategy to great effect - e.g., when you see “2 tickets left at this price.”

Pricing strategy #3: Figure out the best way to “show” your discount - the Rule of 100

The way that customers perceive your price can be as important as the price itself. “The Rule of 100” is a helpful way to think about the best way to present a discount, playing on people’s cognitive biases. Marketing professor and internationally bestselling author Jonah Berger found that consumers misattribute larger numerical values as a large discount which makes them favour one discount over another even if they are mathematically identical. His Rule of 100 states that “A % discounting off an item < $100 will always look larger than the $ discount and conversely a $ discount off an item > $100 will always look larger than the % discount”.

For example: 10% off a $50 shirt sounds like a bigger and better discount than framing the discount as a $5 off sale, despite the fact that they are mathematically identical discounts. Conversely, a $200 discount on a $1,000 laptop “feels” larger compared to a 20% discount.

Pricing strategy #4: Offer threshold discounts

Finally, using threshold discounts is an effective way to win customers. Threshold discounts such as offering new customers a 15% discount when they spend $150 encourages shoppers to not only make a purchase but actually increases their order value to a specific threshold in order to receive a discount - which feels like a win psychologically. Similarly, offering free unexpected gifts that don't impact shipping costs can be a cost-effective way to earn loyalty and increase customer lifetime value … just make sure you have enough stock!

Alternative promotional pricing strategies

Bear in mind that discounts don’t have to be monetary. If the aim of your promotional pricing strategy is to funnel more traffic to your ecommerce site or create hype around your business, price discounting directly on products certainly isn’t the only way to achieve this.

For one, temporarily offering free shipping is a strategic way of winning customers without impacting brand value or bottom line nearly as much. Alternatively, discounting through referral campaigns allows you to recoup value through new customers acquired from word of mouth, which is the strongest way to acquire customers.

Discounting (when done right) can be incredibly effective for ecommerce companies, but it’s also much easier to get it wrong than you might think. The Intelligems platform allows you to split test different discount models and will recommend the pricing strategy that produces the best bottom line results. With co-founders who designed the surge pricing model at Via and have conducted over 10,000 pricing tests, rest assured that you’ll be guided by the pros who’ve seen and done it all.

If you’re unsure which strategy produces the best bottom line results, start a test with Intelligems!