How to turn returns management into a profit center in eCommerce

Introduction

Be it the business owner or the customers who don't love discounts? Discounts are a great way to boost sales, attract new customers and keep the existing ones loyal.

But having said that, it's also important to implement them appropriately as it can significantly impact customer lifetime value. It's time to learn about discounts and their impact on Shopify customer lifetime value. Let's dive deep into the topic!

Positive impacts of discounts on Shopify customer lifetime value

1) It will encourage customers to return

The customers already have a positive outlook on the store thanks to discounts. Every time they purchase something from the store, they will remember how much money they saved and will likely return it for another purchase. This significantly increases customer loyalty which is good for Shopify customer lifetime value.

2) It can attract new customers

Discounts can also be used to draw in potential customers who may not even know about your business yet! When customers come across attractive discounts, their curiosity naturally increases, which encourages them to explore your store's offerings more thoroughly.

3) It will increase customer loyalty and satisfaction

Discounts are a great way to show your customers that you appreciate their loyalty and business. By offering discounts, you can make them feel like they're getting extra value for what they're paying for, and this will result in greater customer satisfaction, leading to more loyalty from your customers.

It can also help increase the Frequency of their visits to your store as they would be motivated to come back for more offers.

4) It can boost sales and revenues

Discounts are a great way to attract new customers and encourage existing customers to spend more. Offering discounts helps bring in customers who may not have purchased from you, encouraging them to try out your products or services at a reduced cost. You can also use discounts as incentives for certain purchases, leading to higher sales and increased revenues in the long run.

5) Effective customer retention

Retaining existing customers is essential for any business; offering discounts can be a great way to achieve that. By creating loyalty programs or offering exclusive discounts to repeat customers, you can forge strong relationships with them and keep them coming back. This helps ensure your customer base remains steady and allows your business to maintain its position in the industry.

6) Improved brand reputation

Discounts are an excellent way to create positive word-of-mouth about your business since everyone loves a good bargain!

Offering discounts on products or services will help boost your brand's reputation as people who take advantage of the offer will feel valued, which leads to increased trust in your brand.

In addition, when customers share their experiences online, other potential customers may also become interested in your business.

Negative impacts of discounts on Shopify customer lifetime value

1) It will erode your brand's value

While discounts can attract more customers to your store, they can also make it difficult for you to increase prices in the future, as customers may expect a lower price based on prior discounts. This could lead to reduced profit margins and decreased customer lifetime value.

2) They could create a 'discount-driven' culture

When discounts are offered too frequently or at too high of a rate, customers may begin expecting them and only purchase when there is an active discount code available. This will reduce overall sales and create a "discount-driven" shopping culture that will devalue your brand over time.

3) It might create an entitlement mindset among your customers

When customers are used to getting discounts all the time, they may start feeling entitled to them. This entitlement mentality can result in customers expecting more than what you're offering and setting unrealistic expectations you cannot meet.

4) Can encourage customers to wait for discounts before making a purchase

If your customers know that discounts are coming at regular intervals, then they may start to wait for a discount before making any purchase decisions.

This affects your sales and customer loyalty as it encourages price comparison and shopping around, leading to fewer repeat purchases.

5) Can lead to stock management issues

Discounts can deplete inventory quickly if you're not careful with how much discount you're offering and how long the promotion runs.

If you offer too many discounts or run them for too long, you may run out of stock faster than normal, resulting in disappointed customers who can't get the products they want when they want them.

6) Can lead to lower profits

When discounts are used to drive sales, there's always a chance that you might not make as much money from each sale as you had initially anticipated. Discounting too much can mean your profit margins suffer, leading to lower profits and less money in the bank account.

7) Your most loyal customers might feel taken for granted

Some of your most loyal customers might feel they're being taken for granted if you offer discounts to new customers but not them.

This could lead to frustration and resentment towards your brand, which is bad news as these are the people who probably have the greatest influence on promoting your business.

8) It can distract from other marketing activities

Promotions take time and resources to create and manage, so if you're running many of them, it can mean other valuable marketing activities get neglected or forgotten. This could mean your overall marketing strategy isn't as effective as it could be.

How to find the right balance with your Shopify discounts

1) Offer discounts sparingly

You don't want to be seen as a business that offers discounts all the time, so be sure to offer them sparingly. It will make them feel more special, and customers will jump at the chance to get something extra when it's available.

2) Use discounts strategically and in the right place.

Think about when you can use discounts most effectively. For example, if there's an event that you know your target audience will be interested in or if there are industry trends that you want to tap into, then offering discounts at these times could work well. It will also help you stay ahead of your competitors, as they may not have noticed the opportunity.

3) Use time-limited offers to create a sense of urgency.

Time-limited offers can create a sense of urgency, making customers feel they must take advantage of the deal before it's gone forever. This can be done by offering discounts for limited periods or setting time frames where customers must redeem their discounts.

It could also involve creating flash sales with special prices that only last for an hour or two. The key is to make sure the offer you are putting out there is attractive enough to get people's attention and compel them to act quickly.

4) Make sure your discount offers are easy to find

The last thing you want is for customers to miss out on your discounts because they can't find them. That's why it's important to ensure your offers are easy to spot and that customers know exactly where to take advantage of them.

This could mean placing prominent banners around your website or including a section dedicated to discounts and sales on your homepage. You should also consider highlighting special deals on social media and other channels where people might be looking for discounts.

How to calculate Shopify customer lifetime value

1) Average Order Value x Purchase Frequency = Customer Lifetime Value

Through this simple formula, you can determine a customer's lifetime value. To do this, start by taking the average order value (the total amount of money customers spend on each purchase) and multiply it by their purchase frequency (how often they make purchases). This will give you an idea of what customers spend in their lifetime.

2) Average Order Value = Total Revenue / Number of Orders

The average order value is the total revenue generated from your orders divided by the number of orders placed. For example, if you've had 500 sales with a total revenue of $20,000, your average order value is $40 ($20,000/500).

3) Purchase Frequency = Total Number of Orders / Number Of Customers

Purchase frequency is determined by taking the total number of orders and dividing it by the number of customers. For example, if you have 100 customers making five orders, your purchase frequency would be 5 (100 x 5).

4) Customer Lifetime Value = Average Order Value X Purchase Frequency

Once you have these two pieces of data (Average order value and Purchase frequency), you can calculate the customer lifetime value.

The CLV is determined by multiplying the average order value with the purchase frequency. For example, if your AOV is $40 and your PF is 5, then the CLV of each customer would be $200 ($40 x 5).

Conclusion

The Shopify customer lifetime value (CLV) is a key metric that you should track to understand your business's overall health and profitability. It is calculated by multiplying the average order value by the purchase frequency (PF).

Knowing your CLV indicates how much each customer is worth to your store over time, allowing you to better optimize marketing activities and customer service operations. So, pay attention to this important metric and use it to your advantage!