The Cost of Promotional Discounts

Free Shipping! $10 Off! 10% Offer! Free Gift with Order! Promotions like these are common today. They are a growing part of any print and online marketing program, used to drive Web traffic and increase revenue. But do you know the true cost of these promotions and their impact on your bottom line?

The four most popular offers are free (or flat) shipping, a free gift with order, a dollar amount off and a percentage off. Free shipping is always number one followed by a dollar amount off, then a percentage off and lastly, a free gift with purchase. All of these promos will most likely increase sales. Free shipping most often increases sales approximately 20%.

Even the weakest promo, a free gift, will increase revenue about 5% based on the testing we have done. However, in all cases, the contribution dollars and percent contribution are less than the control (no promotional offer) when all costs are considered. That’s alright as long as your objective is to increase the response rate and grow your buyer file.

It is the amount of the incremental lift or increase from the promotion that matters. For example, let’s assume the control group had a response rate of 3% with no promo. And, the response rate from free shipping was 3.6%. Therefore, the offer increased the response rate by 0.6%—i.e., the incremental lift. Consider that the promo had to be given to the customers who would have ordered without the promo. This impacts the bottom line and “true” cost of the promotion.

In order to maximize the contribution from an offer, consider no minimum order requirement (if you do insist on a minimum, set it at no more than 80% of your average order size). With regard to prospects, I often see an increase in both the response rate and average order size when there is no minimum dollar order requirement. When there is a minimum, consumers try to get to that order threshold and once they do, they stop buying. With no minimum, they tend to shop/spend more.

Follow these basic rules when making offers to customers and prospects. They will help you increase revenue while maximizing contribution to profit & overhead.

1. Know why you are making the offer. Use offers strategically.

2. Prepare a pro-forma; do your financial analysis. Know your true cost.

3. Test the offer against another offer.

4. Don’t over test offers within a drop.

5. Don’t make the offer during peak season if you don’t need to.

6. Don’t over use an offer; Retest against a control or another offer.

7. Know what your competition is doing. You might have to use offers just to stay competitive.

8. Make sure your sample size gives you statistically valid results.

9. Expect some decline in the impact of the offer over the control if the offer is repeated.

10. Read the results and act on what you see.

When planning a promotion, do your homework by doing a profit-and-loss analysis. Know the true cost of giving the promo. Consider the top line results but know the affect on contribution and bottom line. Promotions work. They are an important part of the marketing toolbox. Use them wisely.

Stephen R. Lett (steve@lettdirect.com) is president of Lett Direct Inc., a catalog consulting firm.