Why you should use gift cards instead of discounting

Everyone reading this at some point has most likely used a discount code or jumped at a 50% off sale promotion. Throughout the year, 93% of customers will at some point use a discount or coupon code. Whether that’s over Black Friday weekend, or just a new customer bonus, discounts are a normal part of shopping online. And why wouldn’t you take that opportunity when it’s presented to you? It’s money back in your pocket, after all. 

Discounts are an obvious favorite for both retailers and consumers, and have been for a long time. They’re an accepted norm of events like Black Friday/Cyber Monday; the idea of grabbing a bargain is enticing to almost anyone. 

The attraction for retailers is in that immediate return on investment. You put up a discount code for new customers, and you boost acquisition. You run a 40% off event over BFCM, and your total sales soar. However, that’s just in the short-term. When you start to look at the long-term impact and diminishing returns of discounting, the attraction starts to wear off.

Today we’re going to look at one of ecommerce’s most popular strategies - the pros and cons - and why you should consider gift cards as a higher value alternative.

What are the pros and cons of discounting?

The popularity of discounts is pretty straightforward to understand. For the merchant, discounts are: 

  • - Low barrier to entry
  • - Very easy to implement and distribute
  • - Proven to be popular with customers
  • - Tried and tested acquisition strategy  

It doesn’t take a lot of effort for a merchant of any size to offer discount codes or start a promotional campaign focused on discounts. They’re also widely understood by customers which makes them eye-catching and simple to promote. So much so that 70% of millennials will look for a coupon code before making a purchase online. In the short-term, you’ll see a good return on discounts, with new customer acquisition and order volume during major promotional events. 

So that’s the pros, what about the cons?

The ease of discounting does come at a price in the long-term. When a new customer makes a purchase with a discount code, it immediately devalues your product. Their perception of that product’s “true” price will forever be what they paid for it the first time, and they’ll be less likely to want to purchase it at full price. Moreover, the quality of those customers will too be lower - you’re far more likely to see customers in search of a bargain, rather than those truly interested in your brand. They’ll be more likely to buy a product from a competitor if they have a better deal. All of this culminates in low brand perception, as well as a lower potential for retention - or at the very least, a much more difficult path to retention. You’ll not only be convincing customers to make another purchase, but also convincing them the regular price is worth paying rather than just waiting for the next discount code to show up in their inbox. 

This can result in an over-reliance on discounting on behalf of the merchant. In order to retain those customers who came via discount code, you may need to offer another one to convince them. This means some customers will never pay full price, and you’ll lose out on that additional revenue. Unless you build potential discounts into your product pricing, this can be difficult to counteract. 

But when customers are so used to discount codes, what else can you offer them that will be as eye-catching or interesting?

Why gift cards are a good alternative to discounts

It always feels great to get a discount, but it feels even better to be given a gift. Gift cards work as a strong alternative to discounting, in a way that gives the merchant greater control. Instead of 10% off an order, you can offer $5 or $10 off.

Gift cards function largely the same as discounting and are easy to implement, while balancing the negative effects. The customer is still essentially getting money off their order, but it doesn’t devalue your brand in the same way. The products still effectively cost the same amount of money to the customer, but they’re using a gift card. You’re then giving the customer something of value, rather than taking value away from your products. The customer doesn’t perceive the “true” price of the product to be lower, they simply understand that they’re redeeming a gift card against the cost of the product. 

This in turn is better for your retention strategy. You’ll have less trouble convincing a customer to buy at full price, and they won’t have that hesitation that tells them they should just wait for another discount code. It’s also better for revenue - customers will frequently spend over the value of a gift card anyway, so if offered as an acquisition incentive it’s likely they’ll spend more than they may have with a discount code. You can then swap out discount code rewards for loyal customers or as membership perks, instead offering gift cards which feel more like a reward. You don’t want your products being devalued to be seen as a reward, after all. 

Plus, during key events like Black Friday, standing out can be difficult. So while everyone is busy trying to deepen their discounts, your store will instead have a more unique offering that stands apart from your competitors. You can also test different gift card incentives with different promotions or audience segments, to find the most effective offer for every customer. 

In short, gift cards make such a strong alternative because they’re about as easy and widely understood as discount codes, while balancing some of the long-term impact discounting often has. 

The world of ecommerce has always been competitive. As that competition grows especially around key periods like Black Friday weekend, the pressure is on for merchants to do whatever possible to snag those new customers and grow sales. Discounting may be the tactic minds go to first, however gift cards could be the key to long-term success while reaping the short-term benefits of discounts.

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