Retail and brand marketers know promotions are a race to the bottom. But they’re also an addictive marketing tactic, and the promotional habit is one that’s hard to break. Let’s face it, promotions can bring a quick boost to online conversion and digital commerce revenue. But like most every other bad habit, promotions eventually catch up to you in one of four ways:
- Unsustainable top line growth
- Deteriorating profit margin
- Erosion of brand equity
- Declining customer lifetime value
Free shipping promotions, retargeting offers, email sign-up offers, discounts on future purchases – all of these can temporarily drive up digital commerce revenue, but if they’re over-used, consumers will begin to expect these incentives. They’ll even grow wise to the triggers and timing of these offers. Savvy shoppers know leaving items in their online shopping cart will trigger an email offer within three days. So they do just that and then they wait.
Retail and brand marketers responsible for digital commerce results find themselves locked into this waiting game with customers. Those marketers in organisations that are focused on top line growth feel pressure to sustain weekly online sales. When those sales start to lag, they immediately return to promotional tactics. Which offers worked best over the last year, quarter, month or week? Let’s try them again. How much is sitting in abandoned carts? Let’s test a retargeting email offer in an effort to boost conversion.
In the short term, these tactics work. The offers seem effective at driving transactions, increasing conversion and even improving average order value. But, the margin from those transactions tells a different story. Retailers are losing money on free shipping, hurting the P&L by leading with promotional offers and teaching consumers to never pay full price.
Many have convinced themselves it’s worthwhile to offer deep or continual discounts in order to attract new buyers or win a bigger share of wallet. It keeps leaders happy because weekly sales show sustained or rising revenue and profit margin may only be evaluated on a quarterly basis. They’ll make it up at the end of the quarter when the next season’s merchandise hits the site and they can charge full price on new items.
Unfortunately, what they may not account for is the subtle shift in their customers’ buying behaviour. They wait a bit longer to complete a transaction, holding off because they expect a coupon code to come in email, they’re anticipating the weekly SMS with a promo code or they know you offer free shipping every Sunday.
These marketers may not have considered that the new customers they acquired in recent weeks only came for the discounts. Instead of segmenting customers and targeting offers, when, where and to whom they’re needed, they set the behavioural bar low, giving incentives to anyone who visits their site and types in an email address in the pop-up box, often extending this to repeat customers who would have bought anyway.
In the meantime, they’ve slowly lowered customer lifetime value across their entire portfolio. Existing customers only know to wait for a discount, newly acquired customers only shop the sale and clearance pages and the number of customers buying at full price had drastically declined. Ultimately, full priced merchandise become underperforming inventory and gets discounted.
So what’s the solution?
Have courage. Executives will need fortitude to manage through near-term hits to digital commerce sales. It takes bravery to walk away from a bad deal and go after a better deal . But somehow marketing leaders in digital commerce have become so consumed with getting the sale that they’ve forgotten to ask if it was worthwhile.
Set the right goals. Digital commerce revenue objectives need to be paired with margin goals and thresholds. Both sets of metrics should be proactively tracked and monitored with the same cadence and gravitas. Equal focus on top and bottom line performance will highlight the real impact of promotions.
Do the math. It’s up to marketers to use customer data and analytics to forecast sales impact, prepare executives for short-term affects of fewer promotions and illustrate the long-term pay off in higher margin and customer lifetime value. It’s also the marketers’ job to proactively track and monitor results in order to show changes in performance, advise leaders on when and how to course correct and remind executives of the potential gains at stake.
Trade promotions for personalisation. Tapering off deep discounts and ongoing offers doesn’t mean “do nothing”. Instead put marketing resources behind personalisation to learn what is most relevant to your customers. Personalisation won’t deliver overnight results. It will help you achieve incremental improvement in conversion metrics by putting the right campaigns, content and products in front of shoppers at the right time and in the right channel and context based on their behaviour.
*This article is reprinted from the Gartner Blog Network with permission.