How to Decrease CAC & Improve Unit Economics Using Discounts

Most brands don’t realize that offering a larger discount is one of the easiest ways to make more money on each customer.

In this blog post, we'll explore how brands can strategically use discounts to lower Customer Acquisition Costs (CAC), improve overall unit economics, and increase sales. We’ll dive into the math and case studies to help you evaluate different discount strategies, enabling you to optimize profitability and boost sales.

Table of Contents

1. Key Definitions
2. The Unit Economics Framework
3. Discount Strategies and Scenarios
4. Impact on Conversion Rates and CAC
5. Calculating Profitability
6. Optimizing Your Strategy
7. Conclusion

Key Definitions

Before diving into the strategies, it’s crucial to understand some key terms:

• Discounts: A reduction in price offered to customers as a promotion to encourage purchases.
• Customer Acquisition Cost (CAC): The average marketing or advertising cost to acquire a new customer for the first purchase.
• Unit Economics: The financial metrics that describe the profitability of a single customer, including revenue, costs, and profit.

The Unit Economics Framework

The unit economics framework helps businesses evaluate their relationship with a single customer. This includes:

• Revenue per Customer: The total income generated from a customer.
• Cost of Goods Sold (COGS): The direct costs of producing the product.
• Contribution Margin: Revenue minus COGS, representing the gross profit per customer.

Discount Strategies and Scenarios

To understand the impact of discounts on CAC and profitability, we’ll explore three scenarios:

1. Scenario A: No discount.
2. Scenario B: $30 discount.
3. Scenario C: $60 discount.

For each scenario, we assume:

• $100,000 ad spend.
• $1.50 per click cost for website traffic.
• An undiscounted product price of $200.
• COGS per customer: $50 for manufacturing and $25 for fulfillment.

Impact on Conversion Rates and CAC

Let’s see how discounts affect conversion rates and CAC:

Scenario A: No Discount

• Website Sessions: 66,667
• Conversion Rate: 1.5%
• Purchases: 1,000
• CAC: $100

Scenario B: $30 Discount

• Conversion Rate: 2.2%
• Purchases: 1,433
• CAC: $70

Scenario C: $60 Discount

• Conversion Rate: 3.8%
• Purchases: 2,500
• CAC: $40

Calculating Profitability

Now, let’s calculate the profitability for each scenario, considering both discounts and CAC.

Scenario A

• Revenue per Customer: $200
• COGS: $75
• Contribution Margin: $125
• Post-CAC Contribution Margin: $25

Scenario B

• Revenue per Customer: $170
• COGS: $75
• Contribution Margin: $95
• Post-CAC Contribution Margin: $25

Scenario C

• Revenue per Customer: $140
• COGS: $75
• Contribution Margin: $65
• Post-CAC Contribution Margin: $25

Optimizing Your Strategy

While the unit economics per customer remains consistent across scenarios, the total profitability varies. To find the optimal strategy, consider the overall impact on your business.

Total Business Profitability

• Scenario A: $25,000
• Scenario B: $36,000
• Scenario C: $63,000

From this analysis, Scenario C, despite the higher discount, generates the highest total profit due to increased sales volume.

Final Thoughts

Using discounts strategically can significantly impact your CAC and overall profitability. By analyzing different scenarios, you can find the optimal balance between discounts and marketing spend to maximize profits. Remember, from a profitability standpoint, giving $100 to Facebook via ads or $100 to a customer via a discount has the same impact on your contribution margin. Often, brands get a better sales lift by giving a better discount to customers than by spending the same amount on ads.

If you’re running larger discounts, don’t just do flash sales. Instead, tie your best discounts to loyalty programs or subscriptions, ensuring higher customer lifetime value.

Think of your marketing and discount budget as one pool. Allocate funds strategically to maximize sales and profitability.

For more insights and strategies on scaling your eCommerce business profitably, follow Ordergroove on LinkedIn to stay tuned for our latest updates.