As usual, I would like to remind the meaning of the abbreviation “EFB”: “E-commerce for beginners” series. So, my recommendation for professionals would be to read other articles.
This article is a piece of my short experience in Rocket Internet Dubai. Moreover, this article does not tell the “Discount tactics” (such as odd pricing, increasing value for the same price etc..), but instead it tells about the process of giving discount.
I will skip “why do you need discount?” part and I will assume that you have already decided to give discounts after establishing a clear strategy and some logical reasons behind. My other assumption will be the consideration of your competitors’ pricing and your market positioning. So let’s dive into to the subject directly:
1) Determine the components & conditions of the discount:
Are all customers eligible, or have you identified different customer groups to be given discounts? Under which circumstances would you adjust the percentages of discounts, if it is dynamic? What are the components that you should consider for the discounts? For the last question, these metrics below would ease your decision making process. Please keep in mind that these metrics should not be used by themselves, they should be considered as the components of discount process.
- Product margin: No need for explanation
- Stock on hand & sell through rate and all other stock-related KPIs: It’s always better to get rid of the excess amount of stocks in your warehouse. For instance, if you are running a fashion website, then it makes more sense to get rid of the ones from the old season at first. Have you checked the velocity for the sold-out cases recently?
- Sales of that product: Did any customer buy that product lately? (on a weekly basis) What is the trend of sales of that particular product.
- Conversion rate of the product: (sales of product / # of page views of that product) If the sales is low, can the reason be lack of promotion, or ineffective marketing strategies?
- Total weeks (or months) online of that product: Is it early to make decision for discount? How long has that particular product been displayed on your website? Did your marketing department displayed these products in a wrong time?
As I said, all these metrics should be in harmony while establishing a model.
2) Prioritize the discount:
Rationale behind this is simple: Discount is not something that has one dimension, so are the components of discount. In a way, basic theories of microeconomics don’t work in real life, in terms of action – reaction. Price and quantity does not have the ideal harmony in e-commerce as opposed to the economy books.
So it is always better to determine which products to be discounted first, instead of giving discounts in all items. For instance the additional revenue which you had targeted might be achieved right after giving discount for only a small set of items (which means earlier than you expected). After establishing a model based on the components above, you should break your strategy into levels of priority, such as
- Low priority
- Medium priority
- Urgent discount
3) Define the price levels for all products such as
- Low price
- Medium price (or good price)
- High price
In this step, you should check out the prices and promotions of your main competitors. Also, you need to verify your price level groups with the voice of your customer, because most of the times, it is not about what the market offers but it is about what the customer perceives. After ensuring these, you should manually define the price levels per category or sub category. If you think that your time is sufficient to do this price levels per item, then do it because I think it is the ideal method.
4) Set a “recommended price” for all items:
First three steps are more about the method of discount, whereas this step is more about the “discount tactic” aspect that I mentioned in the second paragraph.
Keep in mind that discount process is not complete unless you set the new prices for all discounted products. Here is what I think: The more you respond to market changes by adjusting your prices (the more you have flexible structure), the better you would compete in your industry. This is even more applicable in e-commerce.
Define a set of rules for recommended price. Considering the components above, you can find a way to decrease prices on a weekly basis with a percentage which changes each week depending on the reaction of customers. Don’t worry, reaction will be reflected on sales. So if you monitor the process carefully, it is not too hard to measure the effectiveness of your discounts. As I repeat in most of my articles, monitoring the processes is vital.
Please see an illustrative for a dashboard:
After getting this kind of a dashboard, you might need to make subjective decisions by considering multiple components together. In my opinion, discount process shouldn’t be automatized 100%.
Image source: Flickr