Discounts Are Not Killing Your Business, Advertising Costs Are

Discounts keep getting a bad rap in direct-to-consumer businesses and what we have discovered over time and experience is a fundamental misunderstanding of what exactly discounts do for a brand. A discount, for a brand that knows the principles of IMU pricing, is an opportunity cost. You have the opportunity to keep that discount because it is already in your pricing. So a full markup customer eschews the discount and your profits soar.

That same discount might be consumed by another customer in the form of an order, item, shipping discount, but the profit markup for the items is still whole.

But the advertising cost is a direct hard cost straight out of your bank account whether the customer converts or not. So if you have $20000 in ad spend and 5000 clicks and 100 buyers, your CAC is $200 on an AOV of $150 and you are officially toast. But discounts have the ability to form your product to different consumers and get them to convert and that higher number of buyers reduces the CAC.

Let’s explore how to increase customer conversion from ad clicks to reduce the CAC and convert clicks to buyers.

CAC is the cost to acquire a customer.

Generally speaking the formula is the sum total of marketing expenses in a period divided by the number of new customers. There are critical flaws to this approach. One being that not all marketing expenses or advertising expenses are about acquisition. It also depends on how you define “acquisition” where advertising targeting and retargeting, marketing and remarketing are used to capture demand often for existing customers.

Discounts are financial levers to drive conversion.

The fundamental disconnect on discounts is that they injure margins. And they do and they do not. The number one rule in pricing is that everything you give to a customer must be in your price. If you offer discounts, an allowance for discounts must be in the price. If you offer “free” or discounted shipping, an allowance for shipping must be in the price. The purpose of allowances are two-fold: 1\. They unlock price elasticity of demand; and 2\. They move discounts from being a hard cost to an opportunity cost and shield profit markups.

Discounts vs Cost to Acquire a Customer

Discounts are often a part of customer acquisition and retention, but often decried in direct-to-consumer brands as injuring margins. And they do and they don’t. Here is a head to head comparison on discounts and CAC and why discounts get a bad rap.

CAC Source: EightX Average Customer Acquisition Cost by Ecommerce Vertical

AOV Source: Triple Whale 2026 What is Average Order Value

Organic vs Paid | Stacked vs Unstacked | Discount Optimization

The number one business activity in direct to consumer brands is customer acquisition, has been and always will be. Organic vs paid. The platform taxes from Meta, Google, Amazon, TikTok are all only going to increase. Now Organic is under fire as “agentic organic” is coming with a 4% price tag. NOTE: All of these platforms are charging a percent of sales, every single time. Percent of sales as a rule, scales their money at your risk. And when you string enough together, you have an unprofitable business. Here is how to go to market in 2026:

Focus on Consumers

• Would you rather give Meta $68 or a consumer $18? That is a no brainer. And the way to reduce the $68 is to CONVERT AT A HIGHER RATE ON AD CLICKS.
• Assuming your targeting is correct, stacking a discount on the ad click will reduce the CAC if you convert at a higher rate.

Increase Paid Traffic Conversion Rate

• CAC is marketing spend / number of new customers. You must convert new customers to reduce the CAC.
• If you spend $20000 a year to acquire 100 customers, the CAC is $200
• If you spend $20000 a year to acquire 500 customers, the CAC is $40
• If you stack an $18 discount on a $40 CAC you are still head of the game.

Lean Into Strategic Pricing with Allowances

• Use allowances in your pricing. Allowances become an opportunity cost that shields your profit markup \+ COGS while allowing you to engage a wider array of customers.
• Minimum MMU \= (COGS \+ Profit Markup) / Selling Price
• ($30.00 \+ 60.00) / $159.98 \= $90.00 / $159.98 \= 56.2%
• If you retain 56.2% of the selling price as net proceeds, you should hit your profit goals.
• Profit Markup \= fixed operating expense / unit \+ variable operating expense / unit \+ profit / unit

Lean Into Customer Generated Offers (CGO’s)

• Customer generated offers allow the consumer to make an offer on their cart. Here’s why they should be a key component in your arsenal
• CGO’s unlock the consumer value equation value=fn(price, quality, service) and based on the price point they offer, you can now assess how the consumer sees the value of the products in their cart.
• This reveals price point sensitivity \- a key to price elasticity of demand
• It also reveals the efficacy of brand and product brand efforts to protect pricing at a customer level
• Your generic offer will over discount on some and under discount on others. CGO”s force the customer to express the value in dollars, not percent off.
• Most customer portfolios have 20% of buyers at full markup, 40% at about 80% of markup and 40% at 60% of markup. CGO’s identify and sort them to improve marketing effectiveness

Discounts are not killing your brand or your profits. Excessive discounts are. Misplaced and misallocated discounts are. And your CAC is destroying your profitability because your click yield to order ratio is too low. You can reduce your CAC by converting more customers and the tool to do that is improved brand and targeting efficacy, and targeted and refined offers.

FAQ

What are Customer Generated Offers?

Customer generated offers are offers made by the buyer to the seller to buy the shopping cart. They shift the offer orchestration to the consumer to enable sellers to identify consumer prices points and how they value the products the seller is offering.

Will My Shop Be On Sale All The Time?

This is a classic retail issue. Customer Generated Offers are “not on sale” all the time. In fact, CGO’s are directed at your full markup. CGO’s are not about “a sale” but about selling, value discovery and profit optimization. You should be selling at every minute of the day.

Don’t Discounts Hurt My Brand?

No. Discounts do not hurt your brand. Discounts reveal price elasticity of demand. Having worked with over 85MM consumer records and 2 billion sku item transactions over 10 years, there are clear distinctions in customers: 20% buy at full price, 40% buy at 80% of markup or more, and 40% buy at 60% of markup. You can build your brand around the 20% but never achieve a unit volume that drives profitability in COGS.

Is There Another Way to Reduce My CAC on Ad Platforms?

100%. Customer Generated Offers reveal the price point identity at a consumer level. When that information is fed into ad platform algorithms, you can improve the offers to them and customers like them which should increase the click to conversion ratio and increase the yield of new customers from ads. Imagine knowing the exact price point every customer in your audience converts at. That is what CGO’s do for your customer portfolio and advertising efficacy.

If you want to learn more about discount optimization, offer orchestration, price elasticity of demand and customer generated offers, schedule a free consultation with I Want That\! And we can show you the levers to improve CAC and customer acquisition.