#21 Welcome Discounts

A 10% welcome discount requires 40% more orders for the same profit

It has become common practice for many DTC brands to offer welcome coupons to new customers. However, the main reason for this is usually simply “because everyone does it”. However, welcome coupons are problematic for several reasons.

The Idea

The idea was adapted from the classic e-commerce of multi-brand stores. There, however, the codes had a real function: online multi-stores such as net-a-porter.com or similar were forbidden by the brands to give discounts on latest season items. E-commerce retailers still wanted to differentiate themselves from the competition on price and introduced welcome coupons. This allowed them to offer customers a lower price than the manufacturer's suggested retail price (MSRP) without upsetting the brands. Without thinking long and hard about the consequences, DTC marketers adopted the system to incentivize first-time purchases.

But at what cost?

Downsides

1. Customers who order directly from a brand buy out of conviction. As a brand, you have pricing sovereignty. It's not possible to buy the product cheaper elsewhere.

2. You educate customers that your brand offers discounts. This leads to hesitation in subsequent purchases as people wait for the next coupon code.

3. Repeat customers are "punished" and incentivized to create new accounts. To counteract this, more coupons are often issued.

4. And most importantly, the effect on margin and profit per customer. Coupons are not discounts on sales, but on profit!

Upsides

The most common argument for using welcome vouchers is to collect email addresses of potential new customers. This is indeed true. But too few people bother to calculate whether the loss of margin is really reflected in additional customers or lower marketing costs. A 10% welcome voucher must generate 42% more orders or 40% lower marketing costs to be worthwhile.

You should also analyze how many newsletter sign ups make purchases within 48 hours (as these registrations are not additional registrations but simply customers who would have bought anyway and just want the discount) and how many customers could really be converted to new customers days, weeks or months after registration via further newsletters. If this proportion is only very small, the argument should be reconsidered.

There is no one-size-fits-all answer. But you should analyze exactly this, as there is too much money at stake to make a decision.

As requested by many, I have created play sheet for you. You can get it here.

1) Duplicate the sheet and play with it as you like! Insert your own numbers.

2) I've added an extra sheet to show the impact on customer acquisition costs needed to offset the discount on the same transaction.

3) As I mentioned in a previous post, 60% of first time purchases are influenced by discounts, but those customers have a 30% lower repeat purchase rate and therefore much lower AOV.

Analyze Performance

One key metric to consider when evaluating the success of your discount codes is customer lifetime value (LTV). LTV measures the total value a customer will bring to your business over the entire time they remain a customer. If customers who use a discount code have a higher LTV compared to those who don't, it's a good indication that the discount is working as intended and attracting the right customers.

Another important metric to monitor is the repeat purchase rate after using a discount code. If customers who use a discount code are more likely to make future purchases compared to those who don't, it's a sign that the discount is effectively incentivizing repeat business.

If you enjoyed this article and want to implement this mindset for your brand, don't hesitate to book a call with me below.

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That’s it for this edition!

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Cheers,

Alex