Should You Offer Discounts or Not?

Dear Dr. pROfIt: My boss thinks that free shipping and 20 percent off promotions are the key to competing with brands online. My team thinks we're giving our business away for free. Who's right?

Dr pROfIt: It’s hard to say who's right. Fortunately, your data can give you the answer. In your database, find customers who ordered between October 2008 and September 2009. Add the customer spend of those customers in the past 12 months to their previous lifetime spend with your brand up until October 2008. Then, determine if the customers are discount/promotion shoppers, mixed shoppers (i.e., buys with discounts and promotions, as well as at full price) or full price-only customers. Finally, measure the net profit of each customer between October 2009 and September 2010.

If you have a statistical analyst on-staff, run a model that predicts the impact of a discount/promotion shopper, a mixed shopper and a full price-only shopper, using historical data to predict profit in the next 12 months. If your discount/promotion and mixed shoppers yield lower future profit than your full price-only shoppers, you might have a problem.

Also conduct a “migration analysis.” Determine if customers who used to be full-price customers but now shop because of discounts/promotions eventually migrate back to full price, or if they continue to shop only because of discounts and promotions.

So often customers that used to shop full price become discount/promotion shoppers, failing to ever go back to full-price shopping behavior. This behavior results in the short-term benefit of a promotion, followed by the long-term frustration of having to offer the customer discounts and promotions repeatedly in the future.

Don’t let opinions on Twitter guide your strategy. Simply use your own customer data to answer the question for yourself.