As we lead into heavy sales period, you’re probably thinking about exploring ways on how you can discount your product to drive more sales. So for those participating in Black Friday (and Cyber Monday sales), here’s my question to you: how much are you going to discount?
If you’re like most e-commerce founders and operators, you’ll probably just make it up.
Discounting is the most destructive lever in your business, yet so many founders are so flippant about how much they give away.
And why is that?
So much time and effort is put into creative; advertising; email funnels and landing pages; warehouse management… By the end, you’re exhausted, so the financial strategy is put on the back burner, or not considered altogether
Most e-commerce operators focus on top line sales — but pay little attention to their gross profit. Simply put, they look at the wrong things
Little reflection is done after the campaign to understand whether it was worthwhile. In other words: did we actually make money?
I’ve spent over a decade understanding business models and their financial drivers, and have teased out what characteristics separate the high-performing ones that print cash, to those that struggle each month to break even.
The experience has allowed me to create this profitable discounting calculator (available to download below, along with how to use it) which can be applied to any type of discount or sale campaign you may run in your business.
BFCM Discounting Calculator Tutorial from Jason Andrew on Vimeo.
When most marketers and e-commerce operators run a sale — they are leaving things to chance. They are letting the market decide if their offer is good enough to drive sales.
And the issue is that all of your competitors are also running aggressive sales campaign. Everyone is copying each other to beat each other’s campaign.
It can be a race to the bottom. And we can agree that a race to the bottom is one you don’t want to win.
As an accountant, I don’t like this approach. I want my customers to ‘work’ for their discount. Have a bit of skin in the game. Essentially, I want to protect the downside scenario to ensure I make money in my discount campaign.
And we can be — by being a little bit smarter about how we design our discount strategy.
What we want to do is to guarantee that our customers spend more money with us, right? In other words, how can we force our customers to spend more before getting a discount?
There are two levers available: growth in orders and growth in average order value (AOV). We can’t control how many orders we’ll make, so let’s focus on the thing that we can control, our AOV.
I am a big fan of ‘Spend & Save’ campaigns. What this means is that our customers don’t get a discount unless they spend a certain amount of money with us in the first place.
This essentially sets a discount hurdle. We’re making our customers work for their discount.
For example, in the spreadsheet downloadable above, there’s a Spend & Save calculator which helps us determine what the growth in AOV we need to achieve is for every percentage that we give away as a discount.
Let’s say the current AOV in this case is $100. For every order, we make $54. Now if we give a 25% discount away, we only make $29.
So we want to understand what is the AOV we want our customers to spend with us before they get any discount.
With a bit of trial and error, we can work out that our customers need to spend with us to ensure we are profitable $200 in AOV, before getting a 25% discount.
This ensures we still make a profit on the sale, and our customers get a discount too. It’s a win-win!
We can then design our Spend & Save campaign to be: spend $200, get $50 or 25% off.
Under this example it means we are still generating enough profit to pay the bills, even with the discount.
The takeaway from this is you shouldn’t let the market decide if you will make money from your Black Friday discount campaign.
Make your customers ‘work’ for their discount. Make them put a bit of skin in the game.
Rather than setting a store-wide discount, consider establishing a discount hurdle to force your customers to meet an AOV threshold so you guarantee a profit on your sales (such as the above Spend & Save example).
Promoting your product with dollars off, rather than a percentage, is more palatable and contextual for your customers.
Jason Andrew is a chartered accountant and founder of SBO, an accounting and operational finance firm serving small businesses globally. He’s passionate about helping business owners extract value from their numbers and data.
