Podcast 02: How to Get Started with Discount Ladders

Hey, this is Drew Sanocki. Welcome to the Nerd Marketing Podcast, the only podcast where Drew Sanocki gives you actionable, data-tested strategies to grow your ecommerce retailer. I can guarantee this is the only podcast where you’re going to get this, the Nerd Marketing Podcast. We’re talking about discount ladders. The title of this podcast is My Proven Retention System Revealed. In essence, I am going to walk you through a retention system that I’ve used to literally generate millions of dollars for my retailer and for other retailers. That’s no exaggeration. I’m not going info product on you here. I’m not going Mr. Salesman on you here. This is just a great strategy to use.

In the last podcast, we talked about the idea of discount ladders and how most retailers are not doing promotional activity properly. They are either running blanket promotions to their entire list or, on the flip side, they’re never running a promotion. I think the solution is somewhere in the middle.

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It’s to ratchet up your promotional activity over time, in particular with the likelihood that a customer will never come back to your retailer. That’s what a discount ladder is. In this podcast I am going to walk you through four steps to creating your own discount ladder; in particular, one we will use to retain defecting customers. You can use a discount ladder for a lot of different things; for example, to encourage a first purchase or to encourage someone to read an article or something like that. In this case, the discount ladder is to retain customers. These promotions will go out to your existing customers.

Step One: Determine Discount Intervals

The first step out of four is to determine your discount intervals. If you have existing customer data, if you’ve been in business for, say, a year or more, I want you to look at the average time between your typical first and second purchase, your second or third purchases, and so on. It’s very easy to do in Excel.

You export your transactional data into a spreadsheet and you can run a histogram analysis on that to find just your typical first and second purchase, second to third purchase, what are called latencies, some of the average time between purchase.

Wanted this average time between purchase because these are the rungs on our discount ladder. This is how often we will set tripwires at these time intervals. After each tripwire, we’ll increase the discount. If you’re just starting out, 30/60/90 days works great. For the typical retailer selling apparel, for example, a 30/60/90-day promotional ladder is a great place to start.

It worked at my retailer, which was a home goods retailer. Now I am the CMO at a retailer called Karmaloop, a street wear retailer. There the timing is skewing a little bit later so we’re using a 60/90/120-day ladder. In other words, customers typically don’t come back to buy again until after 60 days, so we start the first rung at 60 days. That’s step number one: determine your intervals.

Step Two: Set Promotions

Step number two is to set your promotions. Your promotions are really going to depend on your business and margin structure. I have used a 10/20/30% promotional ladder in the past. At a drop-ship retailer like the one I ran, maybe it has to be a little bit lower: 10/15/20%. If you own your own merchandise or you’re manufacturing your own merchandise, you’ve got bigger margins, you can go deeper. Try the 10/20/30 one. For those of you who don’t want to associate discounts with your brand, you might want to try non-discount promotions such as free shipping or free gift with purchase.

Whatever they are, I want you to come up with three in ascending value amounts. Let’s say 10/20/30 is the example. That’s your promotional ladder. For each of the intervals you came up with in step one, you’re going to have an according promotional amount. If I chose 30/60/90 that means after 30 days that customer gets a 10% off promotion. After 60 days that customer will get a 20% off promotion. After 90 days that customer will be eligible for a 30% off promotion.

I would recommend at this step you can also do something sexy like carve out a 10% control group. It’s not necessary, but I really want you to see the impact of using this kind of discount ladder. It’s fairly easy to do. You can do something like choose everybody who has a customer ID that ends in zero. Call that the control group. These customers are not going to get any promotions. I like carving them out and doing all this manually using something like MailChimp because it just allows me to see how much better my lift has been after I use a discount ladder.

The other thing instead say about control groups is that they help you identify what’s called a halo effect. A halo effect means if you have re-engaged a customer who is going to leave your brand, if he or she was going to defect and never come back again, if you’re successful in bringing them back to you, then oftentimes they start a whole new lifecycle and they start buying from you again and again and again with no promotions required. That’s called a halo effect.

In other words, I might send you a 20% off coupon. You use that coupon so there’s going to be a certain ROI in that coupon. Then because you buy again and again and again from me, there’s a halo effect on that coupon. The impact is going to be more than you can measure in the, say, initial couple days after you receive the coupon. You really only can measure this if you do carve out a control group and compare those who get the promotion to those who don’t get the promotion. That’s step number two. Set your promotions.

Step Three: Test Monthly

Step number three is to start testing this monthly. You set the first day of the month, the last day of the month. Carve out a couple hours. That’s going to be your retention time. In those hours I want you to every month pull a list of your customers who have not purchased in the past 30/60/90 days. You put them in buckets based on those tripwires and then send them the promotions you came up with in step two. I want you to measure the results then, measure the response to the promotions. Every time someone checks out and uses a coupon code on your cart, you’re going to count that. You’re going to put it in a spreadsheet and measure the overall impact of each of your promotions that you came up with in step two.

It’s fairly easy to do, but in case you need a spreadsheet template, I’ve included one in the show notes here. If you sign up for the Nerd Marketing Mailing List, I also send you a template that you can use to really measure out your promotional activity and assess who well they’re doing. That’s step number three. Again, it should take you and hour max every month once you get in the habit of this.

Step Four: Automate

Step number four is look at that spreadsheet after a couple months and identify your most profitable offers. Then go over to your mailing software and automate them. Say we’re testing a 10%/20%/30% promotional ladder. Maybe we want to test that against a 10%/15%/20% promotional ladder. Every month we’re A/B testing one against the other. One is going to emerge the victor, and that’s the one that we take and after a few months we’re going to etch it in stone and put the emails into our mailing software so that we don’t even have to spend that couple hours a month sending out these promotions.

Again, if you sign up for my mailing list, I’ll send you a quick little tearsheet on how to do this in MailChimp or Klaviyo, which are two really popular email solutions that I see a lot of small businesses using.

Those are the four steps to how to implement my proven retention system. Again, I use it Karmaloop. I used it at Design Public. I use it at almost every client I consult for. Step number one is determine your intervals. Step number two: set your promotions and your tests. Step number three is to carve out the time to test these promotions monthly. Step number four is once you’ve identified your best promotions, automate them in your email marketing software. Four easy steps. If you follow them and automate them, they’re going to grow your business guaranteed. They’re going to pull back customers who otherwise would have defected.

What I just laid out here is four steps to easy customer retention. You can also use these discount ladder to encourage other kinds of activity on your site. For example, try to get a new subscriber to buy from you or someone who has just added an item to a wishlist to buy that item. Really, if you roll discount ladders out across your business with various triggers, then your business can become unstoppable. In the next podcast, I’m going to lay out other ways you might use this discount ladder approach across not only retention but conversion and acquisition. Something to look forward to. Again, sign up for my mailing list. I’ll give you the complete playbook on how to implement promotions at your own retailer to really grow the top and bottom line and pull back your defecting customers.

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My name is Drew Sanocki, and this has been the Nerd Marketing Podcast. Talk to you next time.