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Promotion Discount Strategies for Ecommerce Stores

What is the best way to illustrate value to the customer, is it by selling a product for $9.99 or is it by selling it for $12.99 but with a frequent 25% discount? This type of pricing strategy is referred to as EDLP (Everyday Low Price) vs High Low (High Price + Discount) and is common practice within retail and ecommerce businesses.

Which one is right, when does each one make sense?

Promotion Price/Demand Elasticities

Supply and demand theory show us that by reducing price (increasing supply) we should see an increase in demand, and that is the reason why we choose to do promotions in the first place, we expect that by promoting a product with a discount, there is some sort of demand uplift that is generated by it.

The reality though is that every product does not react the same to discounts, a 10% reduction in price of Product A may lead to a volume increase of 15%, while a 10% reduction in price of Product B may lead to a volume increase of 5%. This concept is referred to as "Promotion Elasticity", essentially its a measurement of how elastic the demand of your product is driven from promotion price changes.

Because different products, industries and categories may have different promotion elasticity, it means that some products may be more suitable for promotions than others. Imagine the following example:

Now let us imagine that Product A have a higher promotion elasticity than Product B and let us see what happens if we put both of them at 30% Discount:

In our example above, we can see that promoting Product A lead to a significant volume uplift that end up generating more profit to the business even though we are discounting it, on Product B we can see that the elasticity is lower (volume have a smaller increase) and it's a promotion that reduces the total profit of the product.

This is just an illustrative example, but conceptually it shows that some products are more suitable for promotion than others. This should be one of the considerations for the promotion strategy of an article in your store.

Vendor Promotion Funding and Back Margin

Another aspect that have a significant impact on the promotion strategy for an article, is the potential back margin or vendor funding negotiated with the supplier of the product for any promoted sales. For larger, more sophisticated retailers, the idea that the supplier will fund part of a discount is a very significant part of their business and can potentially help generate millions in additional profits, for smaller ecommerce stores this concept is usually overlooked.

So what is back margin and vendor funding? Consider that a supplier/vendor of a product have quite similar business model as the B2C ecommerce store. You are both buying (or manufacturing) products that you are trying to sell to customers for a profit, and selling additional units can drive overall higher profit, even if each individual unit sold have lower margin.

So for example, a vendor is selling Product A to you as the ecommerce business for $5.00. You are selling that item for $9.99 and you are able to sell 1000 units per week. Now, imagine if you know that the product have significant promotion elasticity and demand uplift driven by discounts, and you believe you could sell 2000 units per week if you reduced the price to $7.99.

This is clearly in the interest of the vendor, since they would now need to supply your business with 2000 units per week to cover the demand, and potentially double their revenue and profit. So if its in the interest of the vendor, then why should only you be the one that take hit to the profit? This is where vendor funding negotiations comes into the picture.

Negotiate vendor promotion funding with your ecommerce suppliers

A common way to structure the funding from the vendor would be that they fund $X.00 of every unit sold on promotion, and the ecommerce store send an invoice to the supplier after the promotion period after they know the results of the promotion. Another possible way to structure it is that the vendor fund a certain % of the overall discount.

For example:

The invoice of $1500 or $1000 is what is also referred to as "back margin", or in other words it is the profit that you make "on the backend" rather than towards the end customer in your store.

Promotion Strategies

Now that you understand what makes it into the decision making of whether an article would benefit from promotions or not, you can now decide on a pricing or promotion strategy for your article. Should you position it as a cheap product in the market by pushing for everyday low price? Or should you promote it with discounts and marketing?

Before we dig into the two different approaches it is important to first recap what the true intent of the promotion is. For the sake of this article, we are focusing on promotions that are driving incremental revenue and profit, rather than promotions that are aiming to maximize sell through % or to discontinue an item.

In this case we are only focusing on the "Promotions" part where the goal is to drive more business, profit and revenue.

High price with frequent promotion

If you have an article that you know benefit from a lot of discounts and promotions, it is important that the article is priced in a way that gives the article room for discounting. You cannot simultaneously push for a low regular price and on top of that do frequent promotions on the article, since that would completely destroy any margins on that article and make a promotion strategy infeasible.

Because of this, your promotion strategy is highly coupled with your regular pricing strategy, and a product's promotion dependency or frequency could be another potential input for your regular price strategy plan.

Grindbyte's data platform allow you to define a pricing strategy, monitor your competitor prices, price relative to competitors and identify which articles should be priced below competitors to drive customer value perception, and which products have more room to drive profit.

So when it comes to combining it with the promotion strategy, we could define a strategy that would look something like this:

As you can see, when we take the promotion strategy into account for our pricing strategy, we can ensure that articles that benefit from promotion end up with a slightly higher regular price, which gives it higher gross margins, and allow for more frequent promotions than the articles that are priced very competitively.

Everyday low price with few promotions

For articles that do not benefit as much from promotions but still depend on being priced competitively, is what falls under the bucket of "Everyday Low Price" or EDLP. Essentially this means that you price the article to always be competitive (e.g. 90-95% of competitor price) with the goal of driving customer value perception, but this would remove any opportunity to do seasonal discounting since there would be no room for it from a gross profit perspective.

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