Scott loves racing video games and competing online against people around the world to test his skills against theirs. To excel in these games, you must spend time practicing on the racecourse and tuning your car—adjusting wheel suspension, overall aerodynamics, tire pressure, weight distribution, steering and wheel angles, height, transmission gearing, etc. With so many moving parts, reaching an optimal setting is not humanly possible. But by developing a method of continuous adjustment, measurement, and retesting, you can ensure constant improvement.
Optimizing your promotions is similar but simpler, as it involves fewer configurations needing adjustment. Unfortunately, few retailers we have observed are continuously making adjustments for improvement. This guide aims to help you identify the levers available to build a strategy for optimizing your promotions.
When a user shops online, they can be overwhelmed by the variety, types, and delivery methods of offers. Some incentives provide a percentage off the whole order, others off specific items. Some offers require a coupon code, and others are simply a sale strikethrough price. Each incentive has its own T&Cs that can make the experience seamless or challenging for shoppers to understand. And in some cases, the offer is designed in such a way that it actually hurts conversion. We will summarize key attributes of promotions and how they impact conversion.
Factors shaping ecommerce promotion impact
Crafting impactful promotions requires understanding several vital factors. Each organization’s financial goals, product category performance, and customer base triggers differ, meaning there is no single “optimal” promotional strategy that can be universally applied. However, with a mindset of continual testing, learning, and improving, you can adjust these configurations to move toward the best strategy for your organization.
Coupon optimization: driving conversion with a discount
The discount holds a crucial role in customer attraction and sales impact. Generally, the higher the discount, the higher the conversion. However, higher discounts substantially negatively impact profit margin rates and, possibly, margin dollars.
For instance, imagine a scenario with a 100% discount—an extreme case where every product is free. Undoubtedly, this discount would skyrocket conversion rates as every visitor would make a purchase and purchase more items. However, such a promotion instantly turns product margins negative.
In contrast, imagine a 1% discount. While it would likely have a negligible impact on margin rate, it would not drive a sizable conversion rate increase and may even decrease conversion if shoppers are turned off by such an annoying offer. Have you ever seen a strikethrough price of $39.99 replaced with $39.97, a $0.02 savings? How did you react? If you are like us, that tiny discount makes you less likely to click on the item—a “conversion negative event”.
These two unrealistic examples illustrate the extremes on both sides. The job of a good marketer is to test and optimize the discount amount to determine the sweet spot.
Coupon optimization: increasing basket size with minimum spend
Establishing minimum spend thresholds is designed to encourage customers to spend more to activate the discount, ultimately increasing the revenue per transaction. However, it’s crucial to strike a balance, ensuring this threshold doesn’t become a barrier for potential customers.
If the minimum spend threshold exceeds the order values of a significantly large portion of customers, it might discourage transactions altogether. At Session AI, we believe the sweet spot for the minimum spend threshold is an order size where about 70% of the orders naturally fall above the threshold. This threshold means that 30% of your shoppers will need to stretch their wallets and spend a little more to get the offer. This strategy encourages increased spending without alienating a significant portion of potential customers.
Note that any offer with a minimum spend threshold will have a lower conversion lift than the same offer without a minimum spend (e.g. “10% off” will drive higher conversion lift than “10% off $100”). The key lies in setting a minimum spend that incentivizes higher order value while ensuring the threshold goal is accessible to a considerable portion of shoppers.
Discount application: is the coupon automatically applied?
When a shopper enters items into their basket and goes to checkout, is the discount automatically applied, or do they have to take another action, like entering a coupon code, to get the offer that was presented to them earlier in the session? When it comes to coupon codes vs price strikethroughs, there is no clear best practice that we have seen, but a friction point such as the need to type in a code leads to a lower coupon redemption rate, preserving margin.
If the customer finds it difficult or confusing to find the coupon to enter or activate the discount, they may get distracted or frustrated and not make the purchase, hurting conversion.
Financially, there is a balance between using price strikethroughs and coupon codes. Through deliberate testing and measurement, your organization will need to understand the tradeoffs.
Limiting exposure: restricting eligible items
Product category exclusions or restrictions are designed to protect the retailer’s margins from discounts on low margin items, or to ensure that supplier agreements are satisfied. Consumers often expect exclusions and restrictions, but if used excessively, they can create another “conversion negative event”.
To illustrate, Scott tells us this story: “My wife gave me a $50 coupon for an unnamed shoe store that had no minimum spend requirement, which was, in my mind, free money. She asked if I wanted a pair of shoes, and I said yes as I was just about to throw out my worn-out old jogging shoes. So I went to the website, picked out a pair of shoes, and went to check out. When I tried to apply the coupon, a pop-up said ‘items not valid for this offer’. So I picked another pair, and got the same message. Then another, and another…. and another. Nothing worked. I called customer service and asked what shoes were valid. They put me on hold for 10 minutes, and came back with a single brand, one specializing in women’s formal heels. I told the agent, ‘you just lost a customer for life’. I have not been back.”
There are several potential solutions:
- Ensure the only customers who see the offer are ones who are interested in eligible items. In other words, this should not be a sitewide offer, but instead is only shown to customers who have visited specific pages (such as category or item detail). We have done this frequently and successfully at Session AI.
- Make the exclusions very transparent and simple to understand. Transparency can be accomplished by either flagging eligible items in the search results or product pages, or having simple-to-understand exclusions for entire categories of items. If it is critical to preserve conversion, shoppers should not have any surprises on the check-out page.
- Or, if these exclusions are just to protect margin, we encourage testing the sitewide conversion and margin impact of the offer with few restrictions vs. the offer with many restrictions. If a reduced exclusion offer increases conversion and margin substantially over an offer with many exclusions, the reduced exclusion offer may be preferable. If not, more exclusions may be needed to protect margin.
Stackable offers: simplifying choice without diluting impact
The ability to stack multiple offers can entice customers to make larger purchases, amplifying overall sales impact. However, clearly communicating this policy while showing customers an abundance of competing offers (via many potential channels) can create confusion and dilute the effectiveness of each individual offer while also diluting margin.
At Session AI, we have seen that when customers encounter multiple distinct offers—website promotions, online offers, email offers, or in-session exclusives—they might find themselves in a dilemma, needing to calculate on the fly which offer provides the best value. This situation often will confuse the customer, negatively impacting conversion. Also, having multiple comparable offers might diminish the sense of exclusivity or special treatment, impacting not only conversion but also loyalty to the brand.
Allowing specific offers to be stackable, and controlling the distribution of these offers with clear communication, prevents much of the confusion and increases conversion and order sizes. Stacking still allows the customer to feel like they are special, receiving an offer tailored just for them.
Offer valid on sale items: preserving margin vs. conversion impact
Some retailers make sitewide offers only valid on full priced items. Like product exclusions, this policy can create confusion and frustration, potentially negatively impacting performance. Excluding sale items will preserve margin, but at the cost of conversion. If the items customers desire are already discounted and are excluded from the coupon, customers may feel they were baited and switched.
For instance, customers might feel enticed by an item on sale only to realize the discount coupon doesn’t apply. This scenario risks not just losing the potential sale but also damaging the customer’s trust in the brand. While this policy may preserve some margin, the cost in terms of lost conversion lift and potential brand loyalty could be significant.
Customer expectations: do your customers expect a large discount?
Do you have a promotion calendar that regularly includes a very rich offer, such as 30% off sitewide? If so, you may find that having a less generous offer such as 10% or 20% off does not increase conversion. This situation may happen because you have trained your customers to wait for these rich offers, postponing their purchases until the offer exists.
Many of our clients at Session AI are trying to wean off of promotion spend. This can be a very difficult and long-term process if your customer base has been trained to expect big discounts. If you don’t continue with occasional large discounts, you won’t get the sales in the short-term, and maybe not in the medium- to long-term either. If you keep the large discounts flowing, you won’t be reducing the promotion spend.
At Session AI, we recommend reducing the sitewide promotional offers, resulting in overall lower promo spend, while maintaining the generous offers to the customers who can be impacted the most.
Competition strategy: what is in the market
If you are offering a 20% sitewide discount, for example, the performance of the promotion might be drastically different if a major competitor is offering no discount versus 30% off. Do not lose visibility into how your offers perform based on what the competition is doing.
Striking the right balance for growth
Like tuning a racecar, optimizing the impact of ecommerce promotions involves understanding and testing the impact of the various levers you have for each promotion. A cultural focus of continually tweaking, measuring, testing and adjusting each promotional strategy will result in improved performance long-term. This effort is not easy, but with the right organizational mindset, is very achievable.
By applying these insights and taking deliberate strategic action, marketing executives can navigate the ecommerce landscape, leveraging promotions as key drivers of balanced P&L growth.
