13 Best Types of Discounts • Examples and Marketing Use Cases
Different Types of Discounts and Examples of Their Effective Use in Marketing
Discounts are an effective and versatile marketing tool used by both offline and online stores. Companies use them for various purposes, such as clearing out unwanted inventory, boosting sales, attracting customers, and increasing loyalty. Sometimes simply lowering the price isn’t enough—for greater efficiency, the type of discount that will be most beneficial to the customer should be used. Let's explore the most popular types of discounts and when they should be applied.
How
Discounts Help Businesses?
Companies have utilized discounts for decades. They were first used in wholesale trade, where they significantly increased sales volumes. Today, almost every store uses various types of discounts for the following reasons:
- Increasing Sales of Seasonal Goods: Helps clear out seasonal inventory.
- Attracting Customer Attention: Draws shoppers and increases store traffic.
- Building a Good Reputation: Creates a positive brand image by offering deals.
- Stimulating Potential Purchases: Encourages immediate purchases.
- Selling Remaining or Obsolete Goods: Efficiently clears outdated inventory.
It is essential to recognize that discounts are effective in a company’s marketing strategy only if they result in greater benefits. This principle applies when the company has a substantial markup on products. For instance, if a store buys 200 pairs of jeans, they may take a long time to sell without a discount, eventually becoming outdated. Applying a 15-20% discount can significantly boost sales volume, ensuring the goods don't remain in the warehouse for too long.
13 Best Types of Discounts to Increase Profit
Here are 13 highly effective types of discounts that can significantly boost your financial performance when properly tailored to your company's marketing strategy.
1. Percentage Discounts
This is the most common type of discount, offering a percentage off the product's price. It works well for items like clothing, appliances, consumer goods, and jewelry. Discounts can range from 1% to 50% or more, depending on the product and company goals. For loyalty program members, higher discounts can encourage repeated purchases.
2. Seasonal Offers
Used to attract customers during specific times of the year, such as holiday sales or back-to-school promotions. These offers help sell seasonal or leftover inventory.
3. Loyalty Program Discounts
Designed to reward regular customers with special discounts or offers, often involving point systems redeemable for discounts. Personal information collected can be used for targeted marketing.
4. Discounts for Purchasing Multiple Items
Buying multiple items together often costs less than purchasing them individually. For example, a ring priced at $5,000 and a necklace at $10,000 might be sold as a set for $13,000 , saving the buyer $2,000. This type of discount can attract customers but needs careful calculation to avoid losses.
5. Discounts for Online Purchases
Commonly used by companies with both offline and online stores, this discount offers benefits like a 10% reduction for online purchases. It boosts website traffic and improves search rankings.
6. Free Shipping
Offering free shipping can increase online sales by 30-40%. It's most effective for smaller items with lower shipping costs but requires careful consideration for larger, costlier-to-ship products.
7. Discount Subscriptions
Commonly used in gyms and fitness clubs, subscription discounts can also apply to other businesses like coffee shops. A monthly or yearly subscription reduces the cost per visit significantly compared to a one-time purchase.
8. Distribution of Coupons and Prize Drawings
Online stores should offer coupons to first-time customers or those spending above a certain amount. Coupons can incentivize repeat purchases and cross-sell products, like offering a beach towel discount with a swimsuit purchase. Prize draws and competitions can also engage customers by requiring purchases or social media interactions, with the method chosen based on company goals, such as customer retention or brand awareness.
9. Email Subscription Discounts
Offering discounts for email subscriptions is a great way to boost sales. Customers who sign up for newsletters receive a small discount, and companies can use the email list to promote new products and deals. This strategy is also effective for recovering abandoned carts by sending follow-up emails with discount offers.
10. Discounts for Exchanging Old Goods for New Ones
This discount allows customers to trade in old products for a discount on new ones, commonly used in automotive, electronics, and musical instrument industries. It encourages customers to upgrade and can be adapted to other sectors.
11. Target Discount
The key question when considering promotions should be "What do I want to achieve?" Goals like increasing profits, attracting customers, or clearing inventory will determine the discount type. For instance, a percentage discount is ideal for drawing new customers, while seasonal discounts are better for clearing out specific items.
12. Discount Testing
Testing various discounts helps identify the most effective promotion. For example, trial runs of percentage discounts versus free shipping can reveal which boosts customer numbers best, allowing for data-driven decisions.
13. Test Discount Implementation
Introducing new discounts requires careful planning. Start with a clear loyalty program to retain regular customers, and then adjust discounts based on feedback and results. Calculate feasible discount percentages using the formula: (Profit−(Profit\*Minimum Volume/Expected Volume))/Unit Cost. This ensures discounts align with company goals, attracting different customer segments as needed.
Additional Promotions to Maintain Customer Interest
Once a company has implemented a loyalty program and percentage discounts, other types of promotions can be introduced to keep customers engaged, such as:
- Small gifts for loyal customers
- Free delivery
- Special discounts for email subscribers
- Extra coupons for social media shares and reviews
It's important not to use all discounts simultaneously to avoid increased costs. Focusing on one or two rotating promotions is more effective.
Common Mistakes in Discount Implementation. Avoid these pitfalls to ensure successful promotions:
- Imposing too many restrictions on loyalty programs
- Failing to categorize customers and target high-value groups
- Neglecting to collect customer contact information
- Prioritizing company profits over customer benefits
There's a lot of speculation around marketing and different types of discounts, with many hypotheses lacking strong evidence yet gaining popularity, potentially harming companies. For instance, theories based on observational conclusions like, “Companies that grew faster than the market did certain things. Therefore, others should do the same to grow,” or simplified conclusions like, “Amazon launched Christmas discounts and increased sales by 14%. This shows how much people love discounts.”
Marketers often make the mistake of forming incorrect conclusions based on such observations. Scientists know that observing events sequentially doesn't mean one causes the other. Therefore, an increase in sales may not be due to discounts, even if it happens immediately after.
How can it be that discounts don't affect results when so many businesses use them? Paradoxically, discounts are a common mistake that few admit to. They can harm a business despite providing temporary benefits to customers.
Sales are everywhere: Black Fridays, Cyber Mondays, Christmas discounts, New Year sales, opening/closing discounts, etc. How does this mechanism work?
A discount is a temporary marketing campaign to reduce the price of a product for a certain period or under specific conditions (e.g., when you purchase $x, you get a discount of y%).
Discounts primarily serve two purposes. The first and most common is increasing sales. The second is managing illiquid assets, such as selling goods near their expiration date or more expensive to store than to sell at a discount, like out-of-season clothing. The second purpose is appropriate and competent.
However, the first task is complex. Typically, discounts do increase sales, as even students of basic economic law know. The law of price elasticity states that, all other things being equal, a decrease in price leads to an increase in demand, and vice versa.
This simplicity attracts lazy marketers because working based on this economic law is easy. However, the assumption that "all other things being equal" is rarely true in real life.
"All other things being equal" means that both products being compared would have identical characteristics, brand recognition, and physical location relative to the buyer. In reality, these conditions are never equal.
For example, most buyers won't be tempted to drive an extra kilometer or two for a 10% discount on a cup of coffee.
Why Discounts Are Popular Despite Their Ineffectiveness?
If discounts are ineffective, why do businesses often record record sales during promotional seasons? The answer is simple: during discount periods, the primary buyers of your brand/product/service are the same people who would have bought it without discounts. They either buy earlier or later than they planned or stock up for future use.
Over the course of a year, the total number of sales remains roughly the same, with peaks and drops around discount periods. Several factors contribute to this:
- Product Availability: Businesses anticipate increased demand during discount periods and stock up on popular items.
- Advertising: Massive advertising campaigns during discounts inherently boost demand.
- Service Readiness: Companies increase staffing, improve training, and enhance service quality before major sales events.
These factors positively impact sales regardless of discounts, but they are often overlooked in favor of the discounts themselves.
What is the real impact of discounts?
Promotions mainly influence people who would have purchased the product/service anyway, merely altering their purchase timing. A small percentage of new customers may be drawn in because they couldn’t afford the product/service without the discount. However, this audience is typically too small to justify the costs.
Margins and Growth
Discounts significantly impact margins, which are crucial for business growth and reinvestment. When marketers boast about reducing prices by 20% and increasing sales by 50%, they often ignore that discounts usually come from the margin—the difference between the cost and the retail price. If the margin is 20% and the discount is 20%, even a massive increase in sales volume won’t cover the losses from the discounts. Essentially, the margin is given away, and the business loses its strategic reserve for growth.
The Downside of Frequent Discounts
The primary beneficiaries of discounts are buyers. Competitors are also affected, but not because their customers flock to the discounted business. Instead, the perception of fair market prices changes, leading buyers to expect discounts as the norm. This phenomenon fuels price wars, reduces margins across product categories, and forces businesses to find alternative revenue streams, such as selling insurance with products.
Strategies to Minimize Discount Damage
Some businesses, particularly large retailers, mitigate discount damage by reducing prices through their vendors/suppliers/manufacturers rather than cutting their own margins. They promote discounts because the costs are borne by their partners. However, this approach weakens the vendors and suppliers over time.
Deciding on whether to offer discounts is complex. Simply stopping discounts is not feasible given the market norms. Instead, businesses need strategies to minimize discount damage while remaining competitive. Price wars and frequent discounts can lead to stagnation or collapse, but strategic discounting can be beneficial if managed wisely. Asian manufacturers have successfully penetrated markets by using price dumping, highlighting that strategic pricing can be effective.
Conclusion
Discounts can significantly boost sales if tailored correctly. Beyond standard sales events, consider loyalty programs, seasonal offers, and targeted coupons. Adapting these to your business's unique needs will enhance profits and customer loyalty.
Generally, discounts appeal to existing customers who adjust their purchase timing due to anticipated sales. A significant percentage of the interested audience consists of those who cannot afford the product/service without a discount; this segment can be huge and is often worth fighting for.
