What is the best permanent discount strategy for online retailers?
Online retailing has taken off in the past few years. Global digital commerce was $2.79 trillion in 2019 and is likely to grow to $4 trillion by 2024. The value of Indian digital commerce was $4 billion in 2019 but is expected to grow ten times by 2030. Encouraged by the success of this format, especially since the beginning of the pandemic, many players have entered the fray. Online retailers often give permanent discounts on their products to survive the competition since discounts are an established strategy to gain and retain customers. A study based on data from a Chinese online retailer tries to look into the effectiveness of this strategy and answers the question: What impact do permanent discounts have on customer purchasing behaviour?
A permanent discount is a discount that is continuously provided by the retailer. Permanent discounts are of two types: product-specific price discounts and order coupons. Product-specific price discounts are offered only when purchasing a particular product. These discounts are offered continuously rather than on occasions. For example, Amazon offers permanent discounts up to 60% on many household items, including small kitchen appliances. Order coupons, on the other hand, are applicable on the total shopping value rather than on specific products. For example, Swiggy offers various discounts on shopping values of Rs. 300, Rs. 600, Rs. 1000 etc. like “15% on orders of Rs 300 to a maximum of Rs 75”.
The study found that product-specific discounts have a complex relationship with purchase behaviour. They encourage profitable purchase behaviour only after a high threshold limit. For instance, the threshold for purchase incidence (number of customers making purchases) is 31%. This means that a discount of less than 31% will discourage purchase incidence, and only if the discount is 31% or more will purchase incidence increase. The threshold limit for spending is 27%, which means that spending increases when discounts are 27% and above but decreases for discounts of less than that. Similarly, the threshold for purchase quantity is 18%. That is, quantity purchased increases if the the discount is 18% or above but decreases for less than 18%.
This complex relationship develops because when permanent price discounts are offered, customers develop discount expectations. Therefore, they purchase the product only when that discount expectation is met. The discount expectations mentioned above may vary based on product categories and markets. Past discount trends in the local markets may also impact these numbers. So online retailers should arrive at these numbers for their specific contexts through empirical means.
Order coupons have a positive relationship with purchase behaviour, though they also work best only above a certain discount value. Order coupons are applicable on the entire cart or basket value and are generally conditional (e.g., Get Rs 100 off on purchase of products worth Rs. 1000/ Get 10% on purchases above Rs. 500). So, customers feel that the discount is on all the products they are purchasing rather than on only specific products. This encourages them to buy more products or higher value products to meet the amount needed to get the discount or to maximise their gains.
The study has important implications for online retailers offering permanent discounts. It suggests they should offer high product-specific discounts and low values for order coupons even though both work best at higher values. This is because the two are meant to be complementary. Getting a high discount on a product as well as the total purchase will only push up discount expectations. However, if product-specific discounts are low or non-existent, it is critical to offer high-value order coupons. Overall, a judicious mix of the two is needed to ensure profitable purchase behaviour among customers.