How To Design A Smart Promotion

Almost everyone in eCommerce land is going on sale or promotion right now. And there is a good reason for it:

  • We have reached 10% unemployment, so every brand and retailer is competing for a shrinking and increasingly wary audience
  • With physical stores closed, retailers are leaning on eCommerce cash flow to support their entire expense base, including payroll
  • Although the Covid-19 situation seems to be decelerating, there is uncertainty around whether fulfillment centers will remain open and for how long. Everyone is focusing on bringing in cash NOW

In this highly competitive environment, you’re probably going to have to be more promotional than normal. If we have to do it, we might as well do it smart. And the first step to doing it smart is understanding why more people buy from you when you’re on sale.

Why Sales & Promotions Work

You may be saying to yourself “it’s because the price is lower…duh!”. But why? What is the mechanism by which lower prices enable a higher volume of sales?

There has probably been PHD-level economic research written on these topics, but I boil them down into two “prices” that are different for every consumer and every item being sold.

The first is the “Ouch Price”. This is the price that makes a given person say “ouch” because even if they wanted or needed the item, they don’t have enough cash to pay for it after all their other, more pressing costs are covered.

If you have $100/month to spend after rent and other bills are covered, a $150 concert ticket is going to be an “ouch” for you; there is not enough money in your bank account that month to cover the expense. You could save up for the purchase over time or use consumer credit to make the purchase happen in the near term, but each of those options has an upper limit.

The second is the “Offensive Price”. This is the price cutoff set by a consumer for a given item based on their personal value system, and has nothing to do with their ability to afford the item at a given moment in time. Warren Buffet could most definitely afford this $2,500 Gucci Psychedelic Logo Windbreaker but you know that he would be unlikely to make the purchase based on the frugal values he speaks to and lives by.

These two prices determine the current addressable market for whatever you’re selling. These prices are hard to measure and constantly changing in the hearts and minds of each individual customer, especially during a global pandemic.

When you run a promo (a temporary sale) or take a hard markdown (a permanent price reduction), you unleash a pent up surge of consumer demand that results in a sales spike. People who had been looking at your goods but could not afford them, or found the prices unreasonable, are suddenly compelled to buy. If the timeframe of the sale or the remaining inventory is limited, it adds an element of pressure that nudges even more people into the consideration phase.

Whenever you broaden the appeal of your product offering your conversion rates go up because a greater percent of the people you direct to your site are going to be able to buy. Rising conversion rates mean lower CAC and higher ROAS. This is why agencies and digital media buyers love promos — they make short term results look great.

And if you could get any of the customers you acquire during a sale or promo to come back and purchase at full price, these would be great low-cost acquisition strategies. Unfortunately, it rarely works like that.

How To Design Good Sales — The Data

There are two types of sales: those that are designed strategically to capture incremental demand, and those that are run in a panic to churn through inventory. We want the first type.

When you run too many clearance events your customer file gets “skunked” with customers who have no hope of ever purchasing from you at a higher margin, much less at full price.

The first step in designing a good sale is understanding how price sensitivity plays out within your customer base. Before we get started, let’s get on the same page about some terminology:

MSRP = the retail price, or an item’s sticker price with no markdowns or promotions applied

AUR = “average unit retail”, or the actual price an item gets sold at to a consumer after markdowns or promotions are applied. If an item sells at full price, AUR = MSRP

Unit = one item. A customer can purchase multiple units in a single order

Step 1:

Take a data pull of every unit sold on your site in the past 12 months — full price, marked down or on promotion. Then sort the list by AUR from lowest to highest.

The larger the spread between the lowest priced item and the highest priced item, the greater the chances that your selling activity is covering a wide scope of consumer price segments.

Step 2:

Perform the same exercise for your current line plan/product assortment based on the full price MSRP. You want to know the price of the most and least expensive full price items. Take a look at how your unit selling and your line plan overlap:

The more overlap there is, the greater the probability that a given customer is going to purchase across price points, and across full price, markdown and promotional pricing. If your full price assortment is crammed into the top third or top fourth of your actual unit selling, you have a problem on your hands — your regular prices are likely inaccessible to the majority of your active customers.

Step 3:

Take that same dataset with all your unit selling for the past 12 months, remove all the clearance units (anything that was sold for 70% off or more), and line them up again from most to least expensive. Then divide that line into three, with each segment containing an equal number of units.

The price points where you divide the line become your low, medium and high price segments.

Step 4:

Sum each individual customer’s spend within each price segment (low/medium/high/clearance), and determine the segment where they spent the most money. This is their primary price segment.

You now have a framework for designing good sales and preserving the long term value of your customer file.

How To Design Good Sales — The Execution

You now have four customer segments, based on their primary price band: low, medium, high and clearance. Your goal is to preserve as much margin as possible by providing offers with the lowest discount percent that will nudge a product from one price tier into another.

As your promotional offers get more and more aggressive, they’ll appeal to a broader base of customers. A High customer may buy from the Low price band, but the reverse is not likely to happen. So you want to structure your promotional cadence like this:

  • Tier A: Offers that get High customers to spend more: these offers lower the full price AUR of a High price point item so that it is still within the High price band.
  • Tier B: Offers that get Medium customers to spend more: these offers lower the full price AUR of a Medium price point item so that it is still within the High price band.
  • Tier C: Offers that unlock new Medium customers: these offers lower the full price AUR of High items so they shift into the Medium price band
  • Tier D: Offers that unlock new Low customers: these offers lower the full price AUR of High and Medium items so they shift into the Medium price band
  • Tier E: Clearance Offers: just slap a crazy percentage discount on something to make your clearance customers go wild with desire

As you make your way down the list, each successive offer delivers less margin contribution. So you should invest more in paid media promotion for offers at the top of the list, and become increasingly segmented in your marketing approach as you move down the list.

For a Tier A offer, you could feel comfortable investing your prospecting budget against the offer because the customers you acquire have the best chance of shopping at full price sometime down the line. You would send the offer to your entire email or SMS list, because even if it was “out of their price range” there is no harm in trying.

If your business is running really efficiently from an inventory standpoint, you would only promote a Tier E offer to clearance customers through owned channels like email and SMS. Any paid promotion would be covert, like a private affiliate event. In a perfect world, this event would take place on a hidden landing page or a separate site.

Because you already ran the analysis on each customer’s primary price point, you’ll be able to leverage those segments in email marketing, paid advertising audiences, and any other communication platforms you may run — no fancy CRM required.

I used to design mom jeans (really). Now I help build bridges between quants and creatives and write about the future of retail.