GD Topic | Are online discounts killing e-commerce?

India’s e-commerce market has crossed USD 28 billion in 2019–20 due to the rise in the number of online buyers. In fact, buyer penetration has substantially increased to 18% in 2020 from 12%. Discounts have been a major contributing factor towards a massive rise in the e-commerce segment.

Discounts are tried and tested marketing strategies that lure customers. From large e-commerce giants like — Amazon, Flipkart, Myntra etc. to smaller e-commerce apps, this strategy is used by everybody to rise above their competitors. A lucrative impetus to attract customers and capture greater market share, a recent survey conducted by Lab42 revealed that 7 out of 10 respondents shop online for better promotions and 2 out of 3 respondents shop online because it is cheaper.

But does this “race to the bottom” actually work in the long run? Sometimes discounts can completely kill the product and the loss due to discounts is ultimately borne by the seller leaving very meagre margins to sustain business competition.

A topic that piques the interest of many, it might turn up as a topic for group discussion during your admission or placement interviews. So, let’s critically analyse the impact of discount on the e-commerce business:

Advantages of discounts on e-commerce platforms

1. Increase AOV (Average Order Value)

AOV calculates how much revenue (on average) you generate per checkout. Bundling multiple products together helps the seller in generating sales for the product segment which is running into losses. Heavily reduced prices entice customers to buy the product. This is one reason why discounting strategies work for e-commerce giants.

2. Long term discounts for regular customers help in sustaining them

Discounts are also a better way to sustain old, regular customers. It helps in building customer loyalty, encouraging them to keep shopping from your website. For eg — providing multiple benefits to Amazon prime members from Prime music, Prime video, free delivery etc. is one of the many ways to retain customers in the long run.

3. Increased sales turnover and market share

The ultimate reason for offering such an exorbitant discount and using multiple promotional strategies is to increase the sales turnover and increase the market share. Discounts help in attracting customers and developing a strong consumer base who later turn into loyal customers of the platform.

4. Encourages new shoppers to spend money

Discounts not only help in retaining the old customer base but also help in increasing customer base by attracting new customers. Discounts lure new customers to shop on e-commerce platforms wherein they not only get heavy discounts but also free home delivery. According to shoppers, 73% of the audience make online purchases due to free shipping.

Disadvantages of discounts on e-commerce platforms

1. Initially appears beneficial but harmful in the long run

“Regular deep discount is a near-fatal self-inflicted wound that e-commerce firms have inflicted upon themselves,” said the CEO of 20dresses.com. In India, 95 percent of sales are generated through physical retail. Without any innovative marketing strategy, discounts won’t work out in the long run.

2. Unrealistic discounts hurt the profit margin

In the race to build the brand name, e-commerce companies are adopting unrealistic pricing and e-tailers are selling their goods at unexpected high discounts. For eg- During Amazon’s Great Indian Sales and Flipkart’s Big Billion Days, extremely high discounts were offered. It might affect the brand image of the company later.

3. Ends customer confidence

Customers might eventually start losing confidence in the brand and the products owing to the extremely high discounts. Constant discounting, especially at increasing rates, can begin to raise eyes over time. Customers might grow suspicious regarding the quality of the product.

4. Vicious cycle of constant discounts

When products are sold at huge discounts, their profit margin shrinks. But once a product is sold at a low price it becomes extremely difficult to raise the price, thereby reducing the profit margin once and for all. The seller needs to make a tough choice between customer retention and profit margin.

5. Products don’t meet the quality standards

The products that are under huge discounts often do not comply with the quality standards. The products under huge discounts usually do not come with a warranty. This in turn affects customers and erodes their confidence in the product and the company.

6. Difficult repair and renewal

Even if the product comes with a warranty, it becomes difficult to replace and renew the product. The time gap between the filing of complaints and repair or renewal is too long which disappoints customers.

Concluding remarks

Providing discounts is a good strategy in initial stages to increase customer base and increase the audience. But mere discounts tend to eat up the value of the e-commerce market. Once a strong market base is established, one should work on innovation and diversification of the product. Prolonged discounts might tarnish the image of the e-commerce incumbents. One must constantly work on the quality of the services offered and other marketing strategies instead of completely relying on discounts.

What is your take on the topic?

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