The art of the deal: Discounting for sales and profit

Nov 01, 1999 10:30 PM  By

The appeal of catalog marketing for many is the unique blend of art and science. Without question, cataloging offers an outlet for creativity – while also requiring a rigorous analytical discipline.

This balance of right brain and left brain thinking is especially apparent when it comes to developing and promoting discounts, special pricing, and other deals to convert prospects, reactivate buyers, or increase order sizes. You need to be creative in terms of developing and pitching your special deals to get the reader’s attention, but you also need to run the numbers to ensure that the deal you’re offering will be profitable in a variety of scenarios.

Here is a short list of universal “rules” for developing a successful discounting strategy. Of course, rules are made to be broken. But even when you consider breaking a rule, keep in mind that there is no substitute for creativity coupled with testing and analysis.

Rule #1 Never make a deal unless you’re willing to promote it

This is a common battleground in the war of the artists (creative directors) vs. the scientists (marketing analysts), particularly with catalogers targeting upscale clients or using high-end creative. Many mailers are reluctant to mar the beauty of catalog cover art with sale messages, so they’ll make an offer in a type size so small that someone flipping through a pile of catalogs would never notice it. Or they won’t run the offer on the cover but instead include only a teaser, such as “Special offer on page two.”

The danger in this halfhearted approach is that it does not have the desired effect on consumer behavior. Typically, the purpose of a special deal is to encourage people who would not otherwise place an order to do so. But the person who is on the fence about buying from your catalog never notices the subtle offer or is not sufficiently tempted to look further. Instead, the customer who was going to buy from you even without a special offer gets the discount, eroding your profit margin.

Let’s assume you want to use an offer of 20% off any order to reactivate a group of customers who are typically unprofitable to mail. There is a dispute among the decision-makers in the company about how to promote the offer, so you put it to the test by mailing a sample of the inactive customers a catalog with no special offer, while another group gets the offer placed in small type on the catalog cover, and a third sample gets a bold cover mention of the discount. The chart directly below indicates what might happen.

A cursory look at the results of the subtle mention may suggest that it was successful. Two hundred additional customers ordered – an increase of 16%. But after applying the discount, the loss per order increased from $1.25 to $6.66. On the other hand, the bolder offer made people take notice and almost doubled the number of orders, which actually made the mailing profitable.

A compelling offer needs a compelling presentation. You have to believe in the deal, and your creative execution should indicate that you’re proud to offer it, or your efforts will backfire.

Rule #2 Match the offer to the audience

Invariably, your best customers respond differently from inactive customers, and both react differently from prospects. Perhaps the most powerful tool to improve the profitability of your business is testing discounts by customer segment. The way you segment your mailing can vary, but the following categories can be used regardless of the type of catalog:

- Best customers – a combination of recent and frequent buyers, perhaps even older one-time buyers with larger-than-average orders. This is a little different from the often-used segmentation strategy of separating single buyers from multibuyers. This method acknowledges that a recent single buyer may be more likely to buy than an older multibuyer.

- Average buyers – those customers who can be mailed profitably without any discount but are not your most active fans.

- Inactive buyers – those who have not purchased for a specified length of time, such as more than two years. This group would not be mailed profitably unless there is a special promotion to motivate them.

- Prospects – people who receive your catalog unsolicited, including rental and exchange names. There is no indication that prospects will be aware of your catalog, let alone have any wish to receive it.

- Inquiries – those who have requested your catalog but have not yet made a purchase. You could further split this segment into those people who requested the catalog recently and those who requested it but despite several mailings have not yet made a purchase from it.

There is a tendency to concentrate all efforts on problems, such as getting more prospects to convert to buyers, or getting inactive buyers to buy again. One of the most often overlooked strategies, however, is to reward your best customers. Almost all catalogers will get the most short-term benefit from rewarding best customers with a special offer rather than trying to lure prospects with one deal. You must be sure to provide the right offer, however. Customers who were going to order anyway may not be interested in free expedited delivery, and such an offer won’t inspire them to buy more from you. But an offer of, say, 15% off their purchase may inspire these customers to spend twice as much.

The chart below indicates varied reactions to an offer to entice prospects to try your catalog, as well as to get buyers to buy again. The prospecting version reads, “Try us and save 15% on your first order,” while the best-customer version reads, “We’d like to thank you for your business with 15% off your next order.”

While the chart shows a lift from the prospects based on the offer, it wasn’t enough to cover the margin given up on all sales. In the final analysis of this program, this cataloger gained 8% more customers, but the cost per new customer almost tripled. On the other hand, the best customers responded enthusiastically to the thank-you message and rewarded the catalog with an 81% jump in sales and a 53% increase in contribution to overhead and profit.

Rule #3 Don’t make exclusionary deals

Many catalogers try to limit their risk or improve profitability by setting hurdles for the customer to jump over before he or she can qualify for a deal. You’ll frequently see offers such as “free shipping on orders of more than $100.” But when you measure the results of such hurdled offers, they’re often disappointing.

Think about the consumer’s reaction to such an offer: She takes your catalog from the mailbox. Before she even begins to browse, the message hits her. You want her to buy from the catalog, and you want her to spend more than $100. Now you’ve got the customer thinking about a tangible amount of hard-earned cash she is going to give up before she is even tempted to buy anything. This alone could send the catalog into the trash.

Or let’s imagine a different scenario: The customer or prospect knows she likes your merchandise, so she sits down to peruse the catalog. She sees something for $75 that she likes. Now she’s motivated to find something else to add on to her order to reach the $100 level to get her discount. She looks through the catalog more carefully, but nothing catches her attention. As she’s reading the catalog, time slips away from her, until she suddenly realizes that she had better hurry up and get her daughter to soccer practice. She puts the catalog down and never looks at it again.

The lesson of both scenarios is simple: Don’t make it too difficult for your customer or prospect to earn the incentive. If you need to set limits, consider them carefully so that you are not excluding too many potential buyers.

Of course, from a financial point of view, you may be unwilling to give the same incentive to customers placing small orders as to those placing large orders. This is why tiered discounting based on the dollar amount of the order works so well. This type of offer provides something for everyone, yet there is still an incentive to place a larger order.

Rule #4 Measure the impact of discounts over time

First off, if you are offering a discount to your catalog customers, you’ll want to make sure you are getting more incremental sales overall, not simply switching sales from one issue of your catalog to another. If you are testing a discount to customers, track a group of buyers over the course of a season to make sure that the sales and margin from those who were offered the deal are better overall than the sales and the margin achieved from the group that was not offered the deal.

For prospecting and customer reactivation deals, you’ll want to measure whether those customers who were brought in using a deal continued to respond at the same levels as those who did not receive a deal. One large apparel cataloger conducted a study of reactivated customers to see how these buyers performed over time. The study revealed that when these buyers were mailed catalogs the following season, they generated response levels 40% below those of other current buyers in the study.

If you can’t develop a reactivation deal that allows you to profit from the initial mailing, make sure you use reasonable assumptions about how quickly you’ll get payback from making the reactivation deal. The same holds true for prospecting. If you begin using a deal to hook more customers up front, will your customer file respond at different levels once you start mailing catalogs without special incentives?

The specifics of all these rules will vary depending on your particular business, but the overall concepts should hold true regardless of what you sell and to whom you sell it.

The final rule that applies to all of the above is, while fine-tuning the art of the deal, don’t forget the science. More than any other sales medium, catalog marketing allows you to measure consumer behavior and analyze the cost and benefit of your efforts. So test, retest, roll out, and back-test. In other words, if you roll out with a successful test, you should over time go back to the same segment with the same deal, but pull out a control group of customers who do not receive the offer. This type of back-testing will tell you if your offer has lost some of its power.

The bottom line is that you should continually test offers to make sure you have the best deal out there. Just because you’ve settled on a successful discount strategy doesn’t mean you’re going to stay with it forever. But with a little discipline in your discounting efforts, the right blend of art and science can have rewarding results.