11 Feb 2013

Sign-up discounts: Bad strategy for eCommerce firms

Raj Bhatt

A lot of eCommerce players in the Indian eCommerce industry offer  up to 25% discount coupons on sign-up which give discounts up to Rs. 2000 (~$35). These include Jabong, Myntra, and fashionara, among others.

The logic that these players might be using for this strategy may be:
1) The discount coupons allow them to acquire new customers, that may remain loyal after the initial discounts are over.
2) They operate mainly in the apparel category where regular gross margins are 30-40% to begin with. So a 25% discount would not lead to a negative gross margin on each sale.

I think this is not a good long-term strategy because:
1) Based on chatting with a few young friends, I feel that most have figured out that they can use multiple email addresses to get multiple coupons. They don’t use the same email address to purchase after the discount coupons are exhausted. This also leads to a problem of customer duplicates in the database of the eCommerce retailer.

2) A 25% discount on an item which had an initial gross margin of 35% may not sound like unprofitable business. However that calculation ignores the free shipping given to the customer and the cost-per-action commissions (up to 10% of the sale!) given by the website. This implies that the items purchased by these ‘acquired customers’ are often being sold at a negative margin. The terms of the discount coupons (e.g., ‘Cannot be combined with other offers’) mean that most signups occur for fully-priced merchandise during the regular season. This is clearly a double whammy.

3) Most of these online apparel retailers are getting into accessory businesses. The discount coupons are often valid on accessories. This converts what should be a regular, high-margin, attachment business into a money loser.

4) I imagine there would be a significant sales backlash when the sign-up discounts are eventually withdrawn.

My advice: The industry needs to move from rewarding customer sign-up to rewarding long-term customer loyalty.

acquisition, coupons, CPA, discount, Ecommerce, fashionara, gross margin, India, Jabong, loyalty, Myntra, pricing

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2 thoughts on “Sign-up discounts: Bad strategy for eCommerce firms

  1. Hey,
    With respect I would like to disagree. If you have worked out the numbers well, and you are not selling at loss even after 25 percent discount, then it in fact does well in lowering the first purchase inertia, which is a big hurdle in e commerce business and going forward does get you loyal customers.

  2. RK on May 24th, 2013 at 9:58 am
  3. RK: Good point, assuming that the flat discount brought in new customers. Of course, one would have to evaluate this acquisition cost against margins during the acquired customers’ lifetime.

  4. Raj Bhatt on May 30th, 2013 at 9:21 am

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