Analyzing the ROI of Discount Campaigns: Tools and Techniques

 

Discounts are an investment for the business and are intended to generate more returns than what was invested. The most effective way of evaluating this impact is to measure the campaign’s return on investment, or ROI.

In this blog, we’ll touch upon key metrics and tools to calculate ROI along with techniques to analyze ROI of D2C discount strategies effectively.

 

First Things First: What is ROI?

ROI reflects the additional value generated through every dollar spent on direct-to-consumer discounts. While increasing sales is by far the most popular goal of discounting campaigns, brands may run discount campaigns for several other reasons, such as to reduce customer acquisition costs (CAC), increase brand engagement, or increase participation in loyalty programs, all of which may not see a corresponding increase in sales immediately.

Take the example of a D2C fashion brand that is focused on increasing brand engagement. While customers used the discounts, most of the increase in sales was in line with what they had anyway predicted for a non-discount period.

Does that mean the campaign wasn’t successful?

Can’t say. That’s because sales is not the correct metric to track in this case. What would better reflect the ROI are engagement metrics like pages per session, churn rate, or net promoter score (NPS).

 

How to Determine the ROI of D2C Discount Strategies?

The first step is to zero down on the metric that would most accurately track the performance of your discounts vis-a-vis your objectives.

ROI = (Additional value attributable to discounts - cost of discount campaign) / Cost of discount campaign

The metrics help brands calculate the additional value attributable to discounts. For instance, if the objective is to increase sales, then the tracking metric is incremental sales. If a $100 campaign generates an additional sales of $400, then the ROI is calculated as:

ROI = (400-100) / 100 = 3 (or 300%)

 

5 Key Metrics for Analyzing Direct-to-Consumer Discounts

There’s no one-metric-fits-all approach, and ultimately, only you know which metric will track your campaign performance best. However, here are commonly used metrics that can be used individually or in combination to measure ROI:

1. Incremental Sales or Sales Lift : Incremental sales show how much extra sales are directly caused by the discounts. Had the discount not been given, the extra sales would not have been possible.

For example, if you start a discount campaign during the Christmas season (Y), it’s best to consider the baseline period as any previous Christmas period (X) when you did not offer a discount. Now, assuming that sales would increase by 10% every year even without discounts, add 10% to the sales volume of the previous Christmas sales. This is your baseline sales against which you should compare your discount-period sales.

Ideal Impact of discount on the metric: Increase in sales or positive sales uplift.

2. Customer Acquisition Cost (CAC) : Every business pays a cost to acquire customers. For some, the expense is directly attributable in the form of ad spends, for some it’s not-so-direct expenses, like organic content marketing. But, there’s always a cost, and the lower this cost, the better it is for businesses.

Ideal Impact of discount on the metric: Reduction in CAC. It is assumed that well-planned direct-to-consumer discounts can bring in customers in bulk without major spending on other marketing initiatives.

 

3. Customer Lifetime Value (CLTV) : D2C businesses assume a certain lifecycle for every customer. They expect a customer to only stay for X years before they decide to abandon the brand for another one.
   CLTV measures the total sales a business can generate from a customer during their lifetime with the brand. It can be a few months or a few years. The higher the CLTV, the better it is for the business.

Ideal Impact of discount on the metric: Increase in CLTV. Several D2C brands offer discounts at the end of the first subscription period if they feel the customer is going to abandon the brand. For instance, a $9.99 per month subscription for an OTT platform billed yearly is in its last month and consumer behavior analysis shows that the customer will not renew the subscription after this. At this juncture, the company can try their luck and send a discount offer of one month’s free subscription if they renew for the next year. This increases the likelihood of customers reconsidering their decision to opt-out. If they renew, it’s a win-win situation as they get better rates and the company gets revenues for another year.

 

4. Conversion Rate : Conversion rate is one of the most important metrics of all things marketing. It refers to the percentage of website visitors who took the desired action that the brand intended. In discount campaigns, it refers to the percentage of visitors who used the discount offers.

Ideal Impact of discount on the metric: Increase in conversion rate. 91% of people search for a discount code before buying something online, so it’s a well-founded assumption that discounts will attract more customers.

 

5. Customer Churn Rate : The idea of D2C discount strategies is to usually attract new customers, and then let the product quality and brand appeal anchor them to the brand. Many customers also think the same way– they use the discount and once they are content with the product, they do not expect the discount to continue forever (except the occasional ones on birthdays and special events).

However, several customers are always discount-hunting, and buy from a brand only when there are discounts. In this scenario, the churn rate refers to the percentage of customers who purchase from a brand once discounts start and stop buying once discounts stop.

These customers do not help the business grow organically in the long term. Hence, the sales percentage generated by the churn-category customers must be reduced from additional sales while calculating the ROI to get a clear picture of the impact of discounts.

Ideal Impact of discount on the metric: Increase in churn rate. It’s important to note that businesses experience a churn without discounts, too. Hence, when reducing the sales share of churned customers to calculate ROI, be careful to reduce the impact of only sales generated by the extra % of churned customers. For example, if the business has a normal churn rate of 25% during non-discount periods and the churn rate immediately after the discount period goes up to 35%, the sales share of churned customers to calculate ROI should only be reduced by 10% (35-25).

 

Techniques for Effective ROI Analysis

1. A/B Testing : Brands usually do a pilot test of different direct-to-consumer discounts among their target groups (called A/B testing) before launching an all-out discounting campaign. The technique involves comparing two versions of a discount campaign to determine which performs better. For example, a brand looking to increase sales can create two pilot customer groups and offer different discounts to each– 10% and 20%. The ROI can be calculated using the combination of incremental sales and churn rate. The additional sales can be calculated as follows:

• Additional sales = Sales during discount period - Forecasted sales without discount - Sales contributed by churned customers (churn rate as described above)

• ROI = Addition Sales - Cost of Discount / Cost of Discount
  Using this technique, brands can analyze the ROIs of different discount percentages and launch their campaign using the discount rate which yields a better ROI.

 

2. Incrementality Testing : Incrementality testing measures the incremental impact of a D2C discount campaign by comparing results from a test group (exposed to the discount) with a control group (not exposed to the discount). This technique helps determine the true lift in sales and other metrics attributable to the discount campaign.

For instance, an electronics brand targeting college students can divide their target group into two sub-groups. After that, they can test how the sub-group with discounts behaves vis-a-vis the sub-group which buys at undiscounted prices.

While the method works on the assumption that customers in the same target group will behave similarly (which may not be entirely true), the limitation is overshadowed by the fact that the technique helps in easily putting a number to the behavior of customers by comparing sales and other metrics between the two sub-groups.

 

3. Competitor Benchmarking : Competitor benchmarking is based on the principle that while some brands might make mistakes in their strategies, not all of them will make mistakes at the same time. Hence, comparing the brand’s ROI with a collective industry-wide ROI benchmark will give an objective insight into whether the campaign was on the correct track.

The technique is widely used to compare non-marketing business functions, such as profitability, growth trends, or shrinkage, too.

But, how do you find the ROI of competitors? While it is almost impossible to get hands on the ROI of your competitor’s discount campaigns, brands often estimate a ballpark range based on market intelligence and inputs from industry veterans and consultants.

Marketing ROI varies based on the product, industry, customer demographics, and demand triggers. For a general estimate, Shopify states that a marketing ROI of 200% is acceptable, 200-500% is good, and above 500% is excellent.

 

Popular Tools for Analyzing ROI of Discount Campaigns

 

1. Google Analytics : While not specifically designed for discounting, Google Analytics can provide valuable insights into website traffic, conversions, and customer behavior. Moreover, it’s free.

2. Business Intelligence tools like Power BI, Tableau : Tools like Power BI and Tableau easily integrate with spreadsheets and CSV files, and can be used to create custom dashboards and reports to analyze discounting data.
   Ecommerce Marketing Analytics: A Beginner's Guide to Data-Driven Success

3. E-commerce Platforms : Platforms such as Shopify offer built-in analytics that can provide basic insights into discount performance. Platforms like Shopify also provide custom analytics reports to get deeper insights into buying patterns and campaign performance.

4. Excel or Google Sheets : For businesses just starting out, spreadsheets can be sufficient for basic ROI calculations and data analysis, as most ERPs and e-commerce platforms provide the option of exporting data to spreadsheets.

5. CRM Systems : Tools like Salesforce or HubSpot can track customer interactions and purchase history, helping to assess metrics like customer lifetime value and incremental sales.

 

Final Words

Analyzing the ROI of discount campaigns is important for understanding their effectiveness and reoptimizing future strategies. By using the right tools and techniques, brands can use data to gain valuable insights into their discount campaigns and make data-driven decisions to scale their D2C brand!

At Seventh Triangle, we help e-commerce brands amplify their digital presence with end-to-end MarTech solutions. Be it digital marketing, online store optimization, or data analysis, our team of seasoned D2C founders and professionals helps with all of it!

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