Unlock the Secrets of Profitable Promotions - The Truth Behind the Numbers

Before I ran my own brand, I assumed that lower prices always meant more sales – like the story told in my economics class.

In reality, things are more complicated, and one of the worst things you can do for your business is just continuing to drop the prices on everything without considering the impact on your brand and the customer experience. Equally as short sighted, a discount can be so hard to use that the uplift is negligible, and only the most determined shoppers will go the extra mile to make sure they get that discount.

At Abra, we’ve seen merchants sometimes stumble with promotions that negatively impact both the customer experience and profits.

Today I want to dig into the data and share a mental model on how you can use advanced pricing tactics to improve your sales and profits.

First, I want to break down the two different sets of metrics you can use to analyze and plan better.

Front of House Metrics

The first reason anyone creates a promotion is to increase sales volume and revenue. The idea being a bigger price markdown or merchandising of a timely product will drive more attention and convert better than directing someone to your homepage. This is especially true when you have insight on your customers’ past behavior or ad audiences.

Before we define the metrics, let’s think through the customer journey:

• A customer sees an ad or an email. If they find it compelling – they click.
• They browse your store and add items to cart. They see their total in the cart. If they understand and are satisfied with the cost – they proceed to checkout.
• At checkout, they add a discount code, confirm shipping fees and taxes, and if they are happy – they checkout.

You can use the following metrics to follow this journey:

• Ad views or email sent / Clicks = Click Through Rate (CTR)
• Sales / Number of Orders = Average Order Value (AOV)
• Number of Orders / Number of Visitors = Conversion Rate (CVR)
• Number of Orders x Average Order Value (AOV) = Sales

Now, let’s talk about a couple strategies you often see.

The “Everyone” Sale

Using something like Shopify Automatic Discounts you would give everyone that visits your site the same discounted price.

This promotion type is commonly used during big sale events like BFCM, or by stores with large catalogs. It is the simplest promotion for merchants to execute and most transparent to customers. However, the merchant gives up control of the customer experience when it doesn’t match the expectations, and could hurt your brand image in the long run if this tactic is constantly used.

The “Treasure Hunt” Discount

Create a unique code targeting a unique product, collection or customer. Optimize your ads or emails to increase awareness of the offer and have the customer add the code at checkout.

Often these types of promotions are more valuable, exclusive and interesting to customers. Merchants also invest a lot of time and effort in positioning these promotions to reduce diluting the brand appeal, test out new product launches, and help clear old inventory.

However, given how Shopify storefronts work, the customer is left treasure hunting through the website to find the right product, calculate the discounted price, and if all goes well – remember to add that code to checkout.

Buy More, Save More

When calculating the size and value of the discount, often a bigger price markdown can make sense at a higher order value. Offering a bigger discount to customers that spend more is a good way to incentivize increasing the AOV.

If you know the most common purchase combinations in your store, you can design the discount tiers around them. This creates a clear incentive to increase your AOV and maximize your returns.

Back of House Metrics

After you get the uptick in traffic and customers convert at checkout – the money starts to hit the bank account.

How do you analyze if it was worth it?

Now, without calling the accountant, I have found the following to be the best leading indicator of profits , at least for informing my marketing efforts. Keep in mind that these calculations don’t include other business operating expenses.

Gross Sales - COGS - Shipping - Ad Spend - Discounts = Profit

As an example:

$10,000 in Gross Sales - $3,500 in COGS - $1,200 in Shipping - $1,500 in Ad Spend - $1,500 in Discounts = $2,300 in Profit

There are obviously many other variables that go into your cash flow calculations, but mapping it in this way allows you to observe the shifts in a couple of key areas:

• Can you improve AOV to increase your sales to shipping cost ratio?
• Does a discount reduce your cost per acquisition in your ads?
• Do certain discounts have less impact on AOV while increasing sales?

Which approach works better will vary by brand but experimentation is always the best teacher – what worked in the past might not work today. The unique economics and lifecycle of your business will determine what gives you the best return.

The Good, the Bad and the Ugly - Real Numbers

So how does this look practically? Let’s dig into some cases and the mental models you can use to set your goals.

Baseline

As a starting point, let’s make the following assumptions on our core numbers. These numbers are conservative averages in ecommerce for no particular vertical or industry. And as a reminder, we are not including other business operating expenses, and are only looking at this to inform our marketing efforts.

The “Everyone” Sale

In presenting a discount to everyone, we will expect a lift in clicks and conversion rate, but a decrease in average order value. In this example, we are going to use a 10% discount off everything.

Of course, we are discounting sales, and the total COGS are increasing too, but overall this approach would see a 24% increase in sales and a 19% in profit due to an increasing ad and funnel efficiency.

The “Treasure Hunt” Discount

This is likely the most popular discount use case to help clear up some inventory, but as you can see here, it isn’t always the most effective.

Despite a decrease in clicks and conversion rates relative to the “Everyone” sale above – a decrease in total discounting and a healthy increase in average order value significantly boosted the profit margins.

Here you see a smaller increase in revenue but a bigger lift in profits.

Buy More, Save More

This promotion type allows you to advertise a bigger potential discount and have an even greater increase on AOV. However, where we see this fall behind the other promotion types is on the checkout completion rate.

If you could keep a constant conversion rate as the previous examples – you could see as much as a 35% increase in profits. This is an interesting design problem we will dig into in a follow on post.

Figuring Out your Strategy

These are just some examples, but the real wins will be visible when testing with your business. Some of the core principles here to learn from:

• A discount shouldn’t just be a cut to your bottom line
• The promotion experience can make a massive difference between a profit and a loss to your marketing efforts

The realities of each business – repeat purchase rates, expiry dates on products and seasonality – will inform the best approach for your promotion strategy. If there is one take away from this guide it is that you shouldn’t be afraid to try something new as long as you are measuring your efforts along the way.

In the coming weeks I will walk through the details and tactics of optimizing for the greatest profit through customer experience.

If this article caught your eye, and you are looking to see how your promotions impact your profits, book a conversion audit with us.

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