To Discount or Not to Discount? 🤔
We were recently asked by a brand how they could use Peel to prove out a strategy - “one could secure a high lifetime value customer with a high discount promotion.” The theory in some ecom playbooks is that by using a higher discount strategy, they can drive in more customers who will be valuable to them over time, even though they’re sacrificing a good portion of their margin up front to attract those customers.
But, why would anyone want to go with such an aggressive discount strategy that basically reduces their sales price down to cost?
In theory, a high discount promotion should:
- Help you acquire more customers because of the attractive pricing
- Improve sales volume due to increased # of purchases
- Increase customer loyalty - they’ll want to come back for more
- Boost customer lifetime value
Depending on your business, this type of sale may be a sweet spot to experiment with a couple times per year. But in other cases, you may not see a tremendous amount of benefit.
Either way, you can test the efficacy of your high discount strategy with this flow of metrics in Peel:
Average LTV per Customer > Customers Returning Rate > Cohort AOV per Month > Discounts by Cohort
Let’s talk about the flow, step by step, as it’s a great example of how Peel’s metrics work in tandem to give you a picture of your customer behavior.
Step 1: Average LTV per Customer
Okay, let’s set up a hypothetical brand to demonstrate the idea here.
Icarus Suncare wanted to know if they were getting long-term benefits from running sales on their signature “Don’t Melt Sunblock” to drive in valuable customers. They aren’t alone. The most common questions we find with our new customers are centered around discovering their customer lifetime value (LTV).
🤓 Quick crash course on LTV:
- Customer lifetime value is the amount you can expect a customer to spend throughout the duration of their relationship with your brand.
- High lifetime value customers are critical to growth for any ecommerce brand
- Retaining high value, long-term customers is up to 5x less costly than acquiring new customers.
If you want to learn more about customer lifetime value along with how to calculate it, check out our full breakdown article.
So, the first place we look is Icarus Suncare’s cohort metric: Average LTV per Customer. Cohort metrics group customers into monthly cohorts based on the month they made their first purchase with your brand.
The “Customers” column shows us how many customers Icarus Suncare acquired during each month. The following columns show the Customer Lifetime analysis, which tells us how much customers in each cohort are spending on average in subsequent months. This is a cumulative metric, so it’ll show the growth from month to month as customers come back and buy more.
👍 Rule of thumb: The higher the cohort LTV starts, and the faster it grows from month to month, the better it is for your store because it means you have loyal, repeat customers who are spending higher amounts with you.
As we can see, Icarus Suncare has a really strong July cohort. They acquired 1,000 customers and their average LTV is $70, which are both higher results than the other cohorts.
You can see that the July cohort reaches a peak much faster than other cohorts with its 4th month already showing $104. These healthy leaps in average LTV each month are exactly what you want to see. Whatever’s responsible for driving in these July customers is something that Icarus Suncare will want to repeat!
Just a seasonal uptick in sunscreen, protective lip balm, etc. for the summer months? Or was their discount strategy responsible for the boost in high LTV customers? This is where we jump to the next metric to investigate further.
Step 2: Customers Returning Rate
After finding their high LTV cohort, we want to know how many of Icarus Suncare’s customers are coming back for more purchases. This is an important layer that helps you validate that you have a strong, valuable cohort.
When you see LTV rising each month, that is due to a high proportion of the customers in your cohorts coming back and making more purchases each month. This is exactly what the Customers Returning Rate metric tells you. It gives you the percentage of customers from each of your monthly cohorts that are coming back and purchasing in subsequent months.
Sure enough, we see the customers returning rate matching right along with the strength we see in their July cohort. In the first 4 months after their initial purchase, customers in the July cohort are coming back and purchasing more than any other cohort.
👉 The Point: This is pointing to something more than just seasonality. When you see this strong of a correlation between acquisition and customers returning rate, you can pretty confidently bet that there’s some marketing or pricing action that led to your success.
Next, we jump to a metric that is going to help us look into how much these customers are spending on average per order. This will help us understand how much value these customers are bringing to Icarus Suncare on an individual order basis.
Step 3: Cohort AOV per Month
Average Order Value (AOV) is a great validator of how much a group of customers is spending on average each time they check out. Every company looks at this metric - and how they price their products is part of a strategy for securing an AOV that is comfortable for your margins. This is particularly important for a company like Icarus Suncare to keep an eye on because it’s a great measuring stick for the spending behavior of customers whom they acquired via their high discount strategy.
As we see with Icarus Suncare’s July cohort, their AOV is one of the best compared to other cohorts. Their high discount promotion drove in more customers who spent more per order than all months before and most months ahead. This healthy AOV is a clear sign that their discount strategy is a great driver of high value customers who bring serious revenue to their store.
✅ Check Complete: High AOV month over month signals growth and loyalty to a product.
Icarus wants people to buy their “Don’t Melt Sunscreen” because it’s an awesome flagship product, but it’s also at the top of the price line. Their July promotion was a bundle with another products offered at a discount but still a high enough price point that made it valuable to the company. Additionally, their customers love the product, so they coming back to buy more.
So, we’re on to one final check to make sure that we have an overall healthy strategy here. One common worry with discount strategies is that you run the risk of attracting customers who are so price sensitive that they may not bring long term value - or even short term sometimes - to your business.
Just like the resolution to any good math problem, there’s one final metric we can use to check our work and validate the efficacy of this discount strategy.
Step 4: Discounts by Cohort
Now that we’ve got three of the puzzle pieces in place, it’s time to dig into the theory that is well-executed with Icarus Suncare’s: running a high discount sale was good for driving in high value customers. We can do this by jumping to the Discounts by Cohort metric.
This analysis provides you with a cohort grid that shows you the total $ amount of discounts issued each month. As we can see here, Icarus doled out a hefty amount of discounts in July. This is the clearest way to check your discount behavior.
Icarus’s strategy worked as we can see in the high value, repeat customers. They pushed their popular “Don’t Melt Sunscreen” at the right price, sacrificing some of their margin to draw in a higher volume of valuable, repeat customers as we saw with the last three metrics.
💡 Lightbulb Moment: The right type of discount on an awesome product = a good discount-based acquisition strategy.
Digging Into the Bigger Picture
Insightful analysis doesn’t alway simply lie in a single metric; the deeper stories that lie within the data tend to use several metrics in tandem to validate theories or even unlock new actionable insights.
For Icarus Suncare, the intersection of the right product (in this case the sunscreen), with the right advertisements, across the right channels (awesome UGC content), reached the ideal demographic. Their strategically-priced bundle hit at the right season in the Northern Hemisphere, which they followed with a perfectly-timed retention email. They can even stand to put more marketing dollars behind advertising these campaigns because they are acquiring such high LTV customers who are bringing far more value compared to their marketing spend.
This is what we love to do at Peel; we love digging into customers’ metrics to help them discover the relationships between their go-to-market experiments and the patterns across their metrics. It’s about more than just getting automated analytics and looking at each metric in a silo. The way these metrics interact and help complete the story is invaluable for any brand.
Stay tuned for more customer stories and check us out on the Shopify App store for a 7-day free trial.
May your LTV remain high and your ad spend not fly too close to the… You know what? We’ll leave it there…
Until next time! ✌😎🌞