In honor of Halloween this week, I'm going to share one of the scariest trends that I encounter when I audit clients' growth strategies.
This trend is especially common within the fashion category (probably due to how the industry at large operates).
Before we get into it, I want to thank this week's sponsor: Layers. Layers is the first AI search & merchandising tool built exclusively for Shopify Plus. Faster, smarter, and more modular than the legacy tools, for a fraction of the price.
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If you run the wrong promotional strategy it can destroy your business in 12 to 18 months. That is not an exaggeration–I saw this happen to one of my former employers.
In this issue I’m going to bust some myths about sales and promotions and explain how brands unknowingly spin up a “flywheel of doom” that destroys their ability to generate cashflow.
The Biggest Myth About Discounting
The biggest myth about discounting is this: “The offer a customer uses on their first purchase doesn’t matter. We can turn discount shoppers into full price shoppers.”
How do I know this is a myth? Because I used to work for the brand that basically invented the “online sample sale”–a clearance sale where most items sell for 70-80% off their retail price.
These online sample sales were their bi-annual peaks, beating out Black Friday as the brand’s highest volume days. And why wouldn’t they be? This brand’s full price MSRP was $250-500. A clearance discount brought the product down to accessible, J Crew-like prices.
Management of this brand was under the impression that these giant clearance sales were a boon to the business. They were a high volume, low cost way to bring in new customers.
Only one problem with that hypothesis: full price sales had been down YoY for two years when I joined the business. All of the brand’s sales growth was coming from markdown periods.
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What is the best way to improve sell-through rates for full price and discount periods? Upgrade your sort and filter capabilities.
Two conversion rate killers:
- Seeing a product you have to have in a magazine or on an influencer, then searching the brand site and turning up zero results.
- Trying to shop a sale, only to find that nothing you want is available in your size–because the site won't let you filter on size.
If you're running Shopify's out of the box sort and filter capabilities, you're serving up both of these frustrating experiences to your customers.
What's the solution? Layers.
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9-figure Shopify brands like Rainbow trust Layers with their search and filter experience. And that trust is well earned–brands that use Layers have cut bounce rates, reduced “no result” searches by 30%.
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Management struggled to let go of the idea that a 70% off customer would become a 0% off customer, so I ran an analysis (using thousands of rows of raw data and Python code):
- I tagged every customer’s first order with a “promo bucket” (0% off, 1-9%, 10-19%, etc)
- I did the same tagging for the second and third orders, if they existed
- I calculated the promo bucket of each customer’s entire lifetime spend
This is what we found:
- ~73% of new customers never came back, period (if you a long time reader of this newsletter, you know that is normal)
- The most popular “promo path” through the lifecycle was three purchases from the same promo band as the first purchase. For example: 70% off -> 70% off -> 70% off
- Less than 5% of customers acquired during the Online Sample Sale ever purchased anything at full price
- When Online Sample Sale customers bought outside OSS, it was mostly during the end of the brand’s seasonal sale period, when product was at 50-60% off
In case you think this is a one-off fluke, I ran the same analysis at my next employer, and then for numerous consulting clients. The results were the same:
- People tend to stick to the promo band of their first purchase
- If people migrate promo bands, they tend to go more promotional, not less.
There is one exception to rule #1 above: a first purchase promo of 20% or less (25% or less for some brands). I.e. A Welcome promo. More of these shoppers do go on to buy at full price.
How Brands Build A “Flywheel Of Doom”
Brands that aren’t aware of the dynamics of discount customers will pursue strategies that…stuff their customer file full of discount shoppers. Here’s how that happens:
Step 1: The brand runs a sale. Maybe it’s their first sale, or the first time they run a more aggressive discount, or the first time they advertise the sale (vs doing email only).
Things go really well–ROAS is up, maybe a record sales day is achieved. And any recovering gambler will tell you…this is the worst thing that can possibly happen.
Step 2: The brand increases the scope of their promotional strategy. Existing promos are extended by multiple days, and new promos are added to the calendar. More media dollars are allotted to promos because they boost ROAS for the month.
Step 3: If this goes on for three to six months, the recent buyer pool is full of promo-oriented customers, many of whom will never buy at full price. The brand receives a shock when they release their next full price collection–sales miss expectations.
The brand’s cookie pool is also full of promo-focused buyers, so full price ads become less efficient (ROAS goes down).
Step 4: The brand panics, because inventory sell throughs are below projections and inventory is starting to pile up. To address this, they lean harder into the promotional strategy, potentially with an online clearance sale (70% off or more).
Step 5: Annual planning season approaches. The brand plans more of their YoY growth into days when promotions are running, for two reasons:
- If you’re trying to increase sales by $1M, you’ll do it faster by growing a $100k day by 10% vs a $25k day by 20%.
- Because promos are easier to scale with paid, they feel easier to control.
The flywheel of doom has been locked in. The brand will continue to stuff their customer file with promo shoppers who rarely buy at full price. A greater percentage of total sales, and of sales growth, will occur during promo periods.
And it’s not just the customers–the brand’s team will find that their time is consumed by the operational aspects of running promos–the ads, the emails, the site prep, the surge in order volume, etc.
At the former employer I mentioned up top, we would start preparing for “Online Sample Sale” months in advance. What ads would we need? How many emails would we send, and what would we put in them? How many extra employees would we need to hire at the warehouse?
Order fulfillment was delayed. If you wanted to buy something at full price during the sale…good luck. It would take close to a week to leave the warehouse.
Pulling out of the “flywheel of doom” is almost impossible, because it requires a brand to do two things that most business owners hate:
- Shrink to grow
- Take a calculated risk on full price marketing
It’s easier to avoid a bad situation in the first place. Remember: promo shoppers rarely buy at full price. If you’re growing your business with deep promos, you’re creating a liability, not an asset.
What To Do Instead
Does all this mean that you should avoid running discounts entirely? No. But you do need to use discounts in a strategic way.
Avoid running clearance on your own eCom channel. If you have to move inventory, sell it to a 3rd party discounter (like Nordstrom Rack) or create a separate "outlet" site with its own pixels and email list.
Study the impact of the different promos you run. Do your own analysis in Lifetimely to see how first purchase promotion impacts LTV. Maybe your business is different from every other brand I've analyzed...
But either way, you should lean into offers that result in above-average LTV and back away from promos that result in soft LTV.
Avoid running frequent site-wide sales. They're an inefficient way to use promotions, and they train the customer to expect discounts.
Save site-wide sales for the moments when they'll be most impactful: shopping holidays when everyone is on sale (ex. BFCM), the 30-45 days leading up to Black Friday (as a cookie pool builder), and special tentpoles you create.
Align promos with the value of the action you're incentivizing. Essentially you want to pay more for more valuable actions. When you run a site-wide promo, you're paying the same price for every customer. Even customers who would have purchased without the promo.
New customer acquisition and first to second purchase conversion are going to be your highest value actions, because they give you the most leverage in building LTV.