The Danger of Relying on Price Promotions to Boost Conversion Rates

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Today’s Yahoo Store Blog post comes from Scott Smigler, president of Exclusive Concepts, a Yahoo Merchant Solutions developer partner that specializes in conversion optimization and advanced SEO. Scott is one of the first visionaries to specialize in online retail marketing and has dedicated over half his life to the study and practice of converting online shoppers into loyal buyers.

As online retailers, I’m sure that few things frustrate you more than the matter of conversion rates. Most online retailers experience conversion rates below 2%, meaning that less than 2 out of every 100 shoppers actually make a purchase. While many dream of a magic bullet that will get that conversion rate number up, I’m here to tell you that no such "easy button" exists – except for one. It’s a two-word phrase that should send shivers down your spine: price promotions.

In the context of retail marketing, price promotions, typically in the form of coupons, have proven to be highly effective marketing tools for retailers hoping to attract new and existing customers to their store. That, after all, is the role of a promotion – to stimulate activity by making special offers to your target customer base.

The problem occurs, however, when these "special" offers become the status quo such that customers expect them 100% of the time. Thus they become "expected" offerings, rather than "special" offerings. Not only does this impact future conversion rates negatively as promotions lose their luster, it can also impact your branding as customers begin to think of you as "the place people go to when they want the cheapest price." For those of you snickering, "That would be a good thing!," I implore you to think about the long-term consequences of holding such a position in the minds of your customers.

There are many ways to boost your conversion rates. For example, you could spend your time optimizing the usability of your site, personalizing its content to users using segmentation strategies, or make long-term investments in branding. These are marketing strategies that complement and enhance your existing business strategy.

Quick Tip: Merchant Solutions Standard, Professional, and Yahoo Store merchants can use Yahoo Web Analytics to start improving conversion rates today. Using YWA, you can identify the most popular pages on your site that have poor bounce rates and look at the keywords and navigation paths that bring people to those pages. Then, you can use this information to improve the content and messaging on the pages in question to improve conversion rates and quickly increase revenue. See below for several screen shots from Yahoo Web Analytics.

Bounce rates shown in a Yahoo Web Analytics report

Keyword performance shown in a Yahoo Web Analytics report

When you rely on price promotions to boost conversion rates, however, there are implications not just to your marketing strategy, but to your overall business strategy as well. The harsh reality from a business strategy point-of-view is that most retailers cannot consistently offer price promotions without eroding their margins and jeopardizing their long-term viability.

Yes, Wal-Mart mastered the art of always offering their customers the best deal by making the low-cost promise and keeping it, but unless you can become the Wal-Mart of your category, you’ll soon learn the perils of price competition. Wal-Mart, in fact, put thousands of retailers who relied on price as their sole differentiator out of business, and online retailers who do not learn from those lessons may face a similar fate.

Looking forward, if you put all or most of your eggs in the price promotions basket, a time will probably come when you will have to raise your prices in order to stay in business and make a healthy profit (unless your business strategy changes such that you can consistently undercut your competitors on price – which few companies can pull off). When that time comes, your customers will have been trained to look for special promotions. Failing to offer these promotions will in fact alienate a portion of your customer base that enjoyed shopping your site for deals.

In response, you may use another tactic that has become far too common in the world of retail: the fake promotion. For example, you may list the sale price for an item on your site as being 5% higher than it normally would be, only to allow customers to bring that inflated price down 5% by using one of your price promotions. These tactics worked very well 20 years ago, but given that you’ve built a business by catering to "deal shoppers," you can count on them to do their homework and find that your bottom-line prices are no longer the most attractive.

Then, your customers will abandon you – not because the only thing they value in a merchant is price, but because the only thing you’ve taught them to value about you is price.

A brand is all about the promises you make to your customers and the consistency with which you keep those promises. Thus, if you make the decision to use price promotions as the dominant tactic through which you improve conversion rates, you will undoubtedly begin to brand your company in a way that relates to low prices. That low price position becomes your promise, and when you fail to keep that promise, your customers will have no other reason to be loyal to you.

At the end of the day, yes, price promotions are powerful tools to stimulate revenue. Used appropriately, they could be a boon for your business, but if used hastily, they could lead your business to bust. Unfortunately, I’ve seen a trend among small business retailers of becoming over-reliant on price promotions to boost conversion rates when so many other techniques are just as effective, or more effective, and are certainly more friendly to the bottom line.

Quick Tip: One way to be smarter about your price promotions is to utilize single-use coupons, a feature that is offered through your Yahoo Store. Single-use coupons allow you to target your promotions to specific users or groups of users more precisely than "all time discounting."

Also, be careful about using coupon codes in ways similar to the example below where the coupon can be distributed throughout the Internet such that you don’t know which promotion is responsible for which sale. Single-use coupon codes solve this problem.

Example of a coupon code that can be distributed freely throughout the Internet

If, as a small business, you have an opportunity to compete by offering some value other than low prices in a way that allows you to grow profitably, I suggest turning that opportunity into a reality. You can start by improving your site’s usability; the fastest, most sustainable approach to improving conversion rates that I’ve found in 12 years of optimizing online retail stores.

My Recommended Approach: A Roadmap

Hopefully by now I’ve convinced you that indiscriminately using price promotions as a conversion lever is not the right approach. Here’s the approach that I do recommend.

Step 1: If you haven’t already done proper business planning, now is a good time.

Analysis and Strategy

Analysis is critical to planning your business and marketing strategy. I recommend that you start by asking yourself questions like:

  • Who are my most profitable customers?
  • What is the opportunity to grow sales by focusing more on these customers?
  • Why would one of these customers choose me over one of my competitors?
  • Who are my least profitable customers?
  • Should I continue targeting them?

It’s also valuable to conduct a "SWOT" analysis whereby you assess your business’s Strengths, Weaknesses, Opportunities, and Threats.

It’s critical that you have concrete business goals and a specific strategy for growing your business. After you’ve identified your most significant opportunities for growth, you can focus your attention accordingly. Over the long-term this is critical to boosting your conversion rates.

Step 2: Focus on tactics that will further your strategy while boosting conversion rates.

Now that you know your target customers and what benefits you can offer them that differentiate you from your competitors, you can focus on implementation and execution.

If you’re an established online retailer, a good place to start is multivariate testing.

Through multivariate testing, you will be able to systematically improve aspects of your store inclusive of, but not exclusive to:

  • Messaging
  • Usability
  • Merchandising

If your store caters to multiple customer segments, you can cater to each segment with the optimal combination of messaging, usability, and merchandising techniques for that particular segment.

If you’re just starting out, you will want to adopt best practices in conversion optimization.

Multivariate testing is only a viable option if your site generates enough traffic to test multiple aspects of the user-experience and get "statistically valid" results. If you’re just starting out, you won’t have enough traffic to run these tests. In this case, you’ll want to rely on best practices or advice from consultants.

Here are some quick tips:

  • Keywords are not just for SEO: If a shopper performs a search on Yahoo for "wheeled luggage" and they visit your website, they are more likely to stay and shop if your site mentions "wheeled luggage" high up on the page. Make sure that the keywords sending the most traffic to your site are mentioned prominently on your site, and that you offer valuable content to shoppers who find you using those keywords.

    Place the keywords sending the most traffic to your site high up on the page

  • Take advantage of conventions: Customers expect to find the "view cart" button on the top right of the page, and they expect the "add to cart" button to stand out. They expect to find your phone number either in the header or the footer, and they expect the site to load quickly. Make sure that your site is not breaking conventions like these, unless it’s for a very good reason. For a deeper look at conventions and why they exist, you may want to check out Mike Ober’s blog article, "Don’t Dare to Be Different in Ecommerce Basics."

    "Add to cart" button

  • Use the tools that Yahoo gives you: Yahoo merchants have access to tools such as Cross-Sell’s Auto-Suggest feature, which utilizes Yahoo’s behavioral targeting technology to make product recommendations based on your store’s sales and navigation histories. This tool keeps track of what shoppers tend to view and/or buy in combination, taking the work out of creating relevant product suggestions. Installing tools like this takes only a few minutes, and can have a big impact on conversion rates.

Whether you’re an established merchant or you’re just getting started, investing the time to devise a strategic approach to improving your conversion rates will pay significant long-term dividends.

Scott Smigler
President, Exclusive Concepts, Inc.
Guest blogger for Yahoo Small Business
Follow Scott on Twitter

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