Finding the discount sweet spot
Discounts work because everyone likes them. Customers feel like they’re saving money, merchants increase their sales, everyone’s happy.
Want quantitative proof? Just four months since our Coupon Pop marketing tool was launched, it’s already responsible for 20% of our merchants’ sales. Merchants collect emails, fans and followers, customers are more engaged with stores and visit 2.5x more pages while seeking what to use their coupon on. In the process the sales go up.
But we are not the focus today. The focus is all on you, and how YOU can optimize the discount you give your customers!
We want to answer the most important question that you can possibly ask yourself when it comes to coupons; what is the sweet spot for discounts?
Will a higher discount yield greater sales?
Linear logic based on an assumed rationale consumer would say yes. You would think that customers love discounts, so the higher the better right?
The reality is a bit more complex. Thanks to Prof. Dan Ariely and his work on the subject we now know that people are not always rational. The following comprehensive data analysis can point to the EXACT place where discounts become ineffective.
Want to learn how to optimize your discounts to increase YOUR sales? Of course you do! Let’s start from the beginning.
Using the statistics from our Coupon Pop tool, we checked the behavior of 10 million customers over a period of one month to see how they reacted to different discount rates.
These are the categories that we checked:
These are the countries that we checked:
We grouped together the visitors and sales according to the percentage of discount offered by our merchants.
We then divided the sales made by each group by the number of visitors exposed to the promotion of each group; filtering in an out the extreme values in order to ensure that none of the big sellers, those who make $40,000-$80,000 a week through our tool, would skew the data collected from the other SMB’s.
We aimed to find what the most effective discount percentage is – aka, which percentage has the best ratio of visitors-to-sales? In order to find this we counted the number of sales made per 1,000 visitors.
What we found amazed us, so we had to share it with you!
The findings – Discount Sweet Spot
Although a 10% discount had a better ratio of visitors to sales than 5%, when the discount got any higher the ratio actually got worse! Now that’s mind blowing! Instead of rising as expected, the ratio of visitors-to-sales decreased, i.e. the bigger the discount was, the lower the sales per visitors were. As clearly reflected in the graph below, a 10% discount is the tipping point. Providing a bigger discount yields lower sales!
Why? Prof. Ariely might explain this by saying that customers value a product less when it is saddled with a large discount, or that they perceive that the merchant still has a large profit margin and is therefore able to offer a large discount. Without testing the reasons we can only speculate as to the psychology behind the results but we did conduct a comprehensive analysis in order to reach them.
Since these results caught us by surprise, we were skeptical. We wanted to make sure nothing threw off our findings. So, we dove back into Excel (we love Excel :)) in order to check if the ideal discount percentage changed according to product prices. The bottom line is this:
Products of up to $100: 10% is indeed the sweet spot.
Products between $101-$200: The sweet spot moves up a bit towards 15% – but doesn’t go up any more than that.
Products above $201: The sweet spot actually moves down. Merchants should settle for a 5% discount! Even 10% takes you beyond the tipping point.
So go ahead, check which price category your products fall into and test the discount rates on your own store the next time you run a promotion. We’d love to hear your results. Please share any questions or comments below!