Incentive insensitivity. Do your customers respond to your offers and discounts?

Incentives… that coupon code that gives prospecting customers that little push to click that “Buy Now!” button and the reason “savings enthusiasts” gather and give birth to coupon hunting sites like RetailMeNot, Dealspotr and CouponFollow.

In the e-commerce boom this past decade or so, we digital marketers have learned that incentives are great for businesses, but not without its side effects, the most obvious being the cut into your profits that each sale could otherwise bring in. And although it tends to increase the number of sales transactions, it is generally noted that the average order size decreases, mostly due to the fact that it draws in first-time buyers more than recurring (loyal) buyers, which the latter are usually more willing to part with their money as the trust with the brand is already built. And lastly, incentives increase the risk of “training” buyers to wait for sales periods to make their purchase, thus leading to lower sales volume during ‘off seasons’.

But for all the above, you get increased brand awareness, increased net profits and greater customer traffic, which are all key elements to the survivability of not just the marketing campaign, but that of the company itself as well. So here are a few tips on how we can identify the differ types of incentives to offer and also their application.

Types of Offers

Money Value Discount –
Probably the first discount that you have ever encountered in your life. These are the kind of discount that is based on a dollar value that can be positioned as a credit. It can come in various forms, but the concept remains the same:

• Direct (“Save $10 when you enter “SAVE10″ upon checkout”)
• x-for-1 (“Buy 2 get 1 free!”)
• Tiered (“Save $5 if you buy 1, $15 if you buy 2, $25 if you buy 3”)

Percentage Discount –
A popular incentive that deducts the usual cost by a percentage value and usually works better for more expensive orders. Some examples are:

• Direct (“Buy today to enjoy a 10% discount!”)
• On-2nd-purchase (“Buy one and have your second one at a 30% off!”)
• Tiered (“Buy 1 – 10%, Buy 2 – 15%, Buy 3 or more – 20%”)

Freebie –
This can come in many forms such as a complementary item, a usually-chargeable service, or even free shipping. Usually tied to a minimum order value/quantity to prevent abuse from customers who makes multiple small orders.

• Buying a piano and getting quarterly tuning services for a year
• Buying a car wash and getting a car wash towel
• Buying a dress and getting free delivery

Status/Privilege –
Probably the only kind of incentive that doesn’t directly decrease margin and profitability and is applicable almost only to businesses with the concept of exclusivity or have services or products that doesn’t incur extra cost regardless of this offer being taken up or not (e.g member only access, promotion to next membership tier, etc). Some use cases include:

• Membership (“Buy today and get upgraded to our Premium Member Club”)
• VIP Invite (“Purchase above $500 to receive an exclusive invite to our exclusive Fashion Runway”)
• Trial Access (“Sign up today and also get a one-month access to our members-only research document library”)

Dollar Value vs Percentage Discount

One challenge that digital marketers often face is not knowing when and which incentive to offer. It is important to understand that different incentives work for different target audience. The best way to find out is to do split testing, but generally it depends on which stage of the consumer buying process the customer is in.

A dollar value discount is likely to out-perform a percent discount for leads and new visitors as opposed to one with an intent to make a purchase (e.g came from a direct product search, abandoned a cart, downloaded a product whitepaper), as pointed out in an article on InternetRetailer.

It is much easier to understand the value of a $10 discount compared to a 10% discount for someone who hasn’t a clue what he might be buying, simply because if his cart is $0, 10% means nothing to him. On the contrary, a shopper who has abandoned his shopping cart is likely to have done his maths before deciding to abandon the cart and thus more receptive to doing some calculations on a 10% discount to know the value of it when presented.

It is also interesting to note that, from personal experience, for re-engaging abandoned cart customers, application of dollar value discounts will work better with exit-intend popups while the same could be said of percentage discounts with email re-targeting. One popular theory is that a popup gives a psychological impression that immediate action has to be taken, and if the user feels too stressed to perform an immediate percentage calculation, they are likely to just close the popup and exit altogether while if presented with the same percentage discount in an email, we give the user time to calculate and make a decision at his own pace.

Next Steps

If your business is looking to introduce incentives or is already doing so, spend some time understanding your audience and the user journey. Work out the marketing budget to see what kind of incentives you can offer and then do split testing of the various incentives across the different touch points along that user journey.

It is important to remember that ultimately profitability should still the primary factor for identifying the better performing incentive, so do note to measure not just impressions/open rates and click through rates but also conversion and profit per conversion. You know you are doing it right when your campaigns are converting leads into buyers, and buyers into regulars.

After you have given yourself a pat on the back for a job well done, do share with us what worked best for you and let the community learn from your experiences.