Promos... What Really Works

by Stephen Lett

Over 50% of all catalogs offer some type of promotion. Approximately 20% offer free shipping as an incentive to get people to order. Promos have become a regular part of doing business and something the consumer expects today. This month, I want to review what really works and best practices with regard to promotional offers. This will include a review of the most effective offers and the setting of dollar thresholds to qualify.

Promotional offers are used to motive consumers to buy. They help a prospective buyer overcome any resistance to purchasing your product or service. An offer can encourage a buyer to order more of a given item (or items). Offers are used effectively to increase sales. But they need to be used correctly and viewed as a selling expense.
In order to effectiveness, the most common offers are as follows:

  1. Free (or “flat”) Shipping
  2. A Dollar Amount Off (can be a tiered amount off)
  3. A Percentage Off
  4. Free Gift with Purchase

A free shipping offer will typically increase the RPC (Revenue per Catalog) by 20% or more. Obviously, there is a cost associated with offering free shipping and not all catalogers can afford to make this offer. If you have used a free shipping offer, I suggest you test “flat” shipping as an alternative. This is where you charge a flat amount for shipping regardless of the order size. I have tested flat shipping at $2.95, $3.95 and $4.95. I have seen no difference in response at these various levels and in most cases, flat shipping works as well as free shipping. (At least with flat shipping you are covering some of your freight costs.) A dollar amount off the order will generally out pull a percentage off (consumers can relate to an actual dollar amount easier than they can calculate a percentage amount). A free gift is the least effective offer (but it can work). This offer will work better if the gift is not a product you are selling but something else that has a “perceived” value.

RESPONSE RATE vs. AVERAGE ORDER SIZE

Which is better, offer “A” or offer “B” (see chart A below)? The results shown are identical in terms of the sales and revenue and RPC. However, the response rates and average order sizes vary. An operations person might prefer offer “A” since there are fewer orders to pick and pack. However, offer “B” is better from a marketing view point because the higher response rates results in a greater number of buyers in the 12-month bucket. Increasing the average order size is not as important as increasing the response rate. Offers should not be structured to increase the average order because these offers are generally at the expense of the response rate.

RESPONSE RATE vs. AVERAGE ORDER
OFFER QTY. RESP.
RATE
AVG.
ORDER
NO.
ORDERS
SALES RPC
A 100,000 1.73% $75.00 1,733 $130,000 $1.30
B 100,000 2.00% $65.00 2,000 $130,000 $1.30

ORDER THRESHOLDS

If you want to maximize the response rate, be careful not to set the dollar minimum to qualify for the offer to high. For example, if your average order is $75 it means that approximately 80% of your orders fall below while 20% are above the average. Setting the threshold at $99 or even at $75 means only a small percent of buyers are going to be attracted to your offer. Let more buyers qualify! Consider testing NO dollar minimum. This will encourage more people to order. Not having an order minimum will increase the response rate and average order size from the testing I have done. Customers who often spend more than the order minimum will lower their spending to hit the minimum if there is one.

MY TEN SIMPLY RULES WHEN USING OFFERS

  1. Know why you are making the offer. Use offers strategically.
  2. Prepare a pro-forma; do your financial analysis.
  3. Test the offer against another offer.
  4. Don’t over test offers within a drop.
  5. Don’t make the offer during peak season (if you don’t need to).
  6. Don’t over use an offer; Re-test against a control or another offer.
  7. Know what your competition is doing.  You might have to use offers just to stay competitive.
  8. Make sure your sample size gives you statistically valid results.
  9. Expect some decline in the impact of the offer over the control if the offer is repeated.
  10. Read the results and act on what you see!

Promotional offers are an important part of the marketing tool box. Customers often shop for the company who has the best offer. Follow these simple rules and determine which offer works best for you.