How to Make Promotional Offers Work

by Stephen Lett

Free Shipping! 50% Off! Save! Free Gift with Order. These are all common statements which inspire people to order. And, order they do. Obviously, promotional offers work. They increase orders and gross revenue. Which offers work best? When and how to use offers effectively? Should you make the same offers to both customers and prospects? These topics and others are the subject of our column this month.

Free Shipping has been used so much that it is difficult to tell the control from the test. In fact, for many catalogers, free shipping is the control! That could be both good and bad for the bottom line. In order to know how to use offers effectively, it is important to know what you should avoid when making a promotional offer to customers and to prospects.

First of all, avoid conditioning your customer to an offer every time they buy. Also, try to guard against a decline in your response rate from over promoting an offer. And, be careful how you use order minimums which can actually work against you. Some firms, for example, offer free shipping twice a year to prospects and to their house file. Often, the house file starts to hold off ordering from regular mailings because they know a free shipping offer will no doubt come around soon. This can have a negative effect on ALL drops. The more offers are used, the less impact they have. There is no real call to action since offers became run of the mill, i.e., free shipping. Buyers are smart. The house file and prospects know that there will be another offer again soon therefore, they may tend to wait. Making an offer, i.e., $20 off your order of $50 or more to your best customers during your best season will most likely increase the revenue per catalog. However, there is definitely a trade off. It can cheapen the catalog and give away the profit by more than the resulting increase in revenue and gross margin. Customers that normally spend well over $100 per order will actually lower their spending to hit the $50 minimum, for example. To avoid conditioning, limit offers to prospects, catalog requestors, reactivation groups, bounce backs and "end-of-season" groups. If the offer appears event driven or based on an action, there seems to be less of an expectation that the offer will happen repeatedly. And, be careful when making offers to your “best” customers. Don’t give away more than you need to.

In survey after survey, consumers say that having to pay shipping and handling fees is one of the major reasons why they dislike buying by mail. Therefore, it is no surprise that “free shipping” is a strong (if not the strongest) offer you can make.  We have conducted many A/B split test, i.e., free shipping vs. no offer (the control) and we see a lift in response every time. In the testing we have done, an offer of free shipping increases the RPC (Revenue per Catalog) by 25% to 30% consistently.  Chart “A” shows actual results from a recent test designed to reactivate previous customers.

LETT Direct, Inc.
PROMOTIONAL OFFERS - FREE SHIPPING vs. CONTROL
    Chart  A          
  OBJECTIVE: Reactivate old buyers.            
DESCRIPTION
SELECTION
NET
MAILED
ORDERS
RECEIVED
GROSS
DEMAND
AVG
SALE
%
RESP.
RPC
Control Group - No Offer:
 
 
 
 
 
 
  Sub-Total - House File: Control Group
65,974
1,413
$85,073
$60.22
2.14%
$1.29
   
 
 
 
 
 
 
Test Group - Free Shipping:
 
 
 
 
 
 
  Sub-Total - House File: Test Group
65,958
1,596
$106,374
$66.66
2.42%
$1.61
   
 
 
 
 
 
 
  Variances
 
183
21,301
$6.44
0.28%
$0.32
  Percent Variances
 
12.96%
25.04%
10.69%
12.98%
25.07%

 

 

 

 

 

 

 

 

 

The test group (received the free shipping offer) generated 25% more revenue than the control (no offer group). The RPC also increased 25% from $1.29 to $1.61. The offer increased the average order size about 11% with a 13% increase in the response rate. There was no minimum spending level attached to this offer. The offer caused more people to order and those that did order spent more.

We know free shipping is a powerful offer. But, what other effective offers can you make to customers and prospects?  Here are a few that you might want to try:

  1. A dollar amount off an order.
  2. A fixed percentage off an order.
  3. A free gift with order.
  4. Graduated offer, i.e., the more you buy the greater the savings.

From our experience, a dollar amount off an order will generally out pull a percentage off an order. A free gift with order is normally the least effective offer you can make. This is not to imply that a free gift with order offer does not work, however. If you test a free gift with purchase, be sure the gift is not an item in your catalog but something totally different for best results. It is always good to test different offers to see what works best for you.

Keep in mind that there needs to be a purpose and objective behind ever offer you make. For example, do you want to increase the average order size? Or, are you more interested in increasing the response rate? And, be careful of making unilateral offers to all customer groups and prospects. It is best to target certain groups to receive your offer. For example, offers can be used effectively as follows:

  1. To reactive previous buyers.
  2. To convert buyers (one time purchasers) into customers (two and more time buyers).
  3. To convert prospects to buyers.
  4. To convert inquiries to buyers.

These are all worthwhile purposes for making promotional offers. You’ll notice that we have not included the core R-F-M house file segments, i.e., 0-12 month buyers, in our list.  That’s because a large percentage of this group will purchase regardless. Yes, an offer will cause the response rate and/or average order size to increase. But you will be giving away profit dollars to the largest percentage of your customers who are going to purchase with or without the offer. The incremental dollar increase as a result of the offer will not be enough to off-set the cost of the offer to your “best” customers.

Offers to prospects should be designed to increase the rate of response in order to grow the buyer file.  But, which is better. To have an order that increases the average order size or the response rate? Building the house file and moving buyers into the most recent R-F-M cells is critical to the success of a cataloger. Response rate is key.

For example, please refer to chart “B” below.

RESPONSE RATE vs. AVERAGE ORDER
Chart B
QTY.
RESP.
RATE
AVG
ORDER
NO
ORDERS
SALES
RPC
100,000
1.73%
$75.00
1,730
$129,750
$1.30
100,000
2.00%
$65.00
2,000
$130,000
$1.30

The results shown in Chart B are identical in terms of the revenue and RPC. But the response rate and average order sizes vary. From an operational viewpoint, you might say it is better to have fewer orders and the same dollars. However, from a marketing standpoint, the higher response rate is preferred because of file growth.

As we have said many times before, testing is the key to success. Common rules for testing promotional offers are as follows:

  1. Always have a control. Generally, the control is a “no offer” version but it does not have to be. A control might be another offer. For example, if you have frequently used a free shipping offer, this might be your control by which other offers are tested.
  2. Only test one variable at a time.
  3. Be certain to select a cross section of any list for both the control and test groups. Test panels must be selected the same way.
  4. Mail dates must be the same for all panels.
  5. Be careful when using dollar minimums to qualify for the offer.

In summary, avoid conditioning your customers to an offer every time they buy. Try to guard against a decline in your response rate from over promoting an offer. And, be careful how you use order minimums which can actually work against you. Use offers carefully and have a purpose in mind for every offer you make.