It's that time of year again, #LaborDaySales (because everything has a hashtag these days). Every consumer is chomping at the bit in expectation of the abundant money saving opportunities. And just about every retailer, e-tailer and service provider are finalizing their sales promotion materials, so why shouldn't you? I mean, It's a quick way to increase revenue and you have to get rid of the extra inventory anyway, right?... Wrong.
OK, well, not 100%, but perhaps there is a better way to go about it. Don't get me wrong, I love a good sale, but not at the expense of brand equity and customer affinity. In a world where entrepreneurship is the new black and everybody and their mama is a side hustler, you must protect your brand equity at all cost. Unfortunately, sales promotions do less to differentiate your product offering and more to harm your brand perception.
So, you want to know, is discounting bad for business? And why should you opt out of the holiday sales game?... I have three good reasons why you should at least reconsider.
1. Your Bottom Line
I get it, sales promotions are a way to quickly increase revenue, and we can all agree that revenue is good. But what is the actual cost to your business? For instance, let’s say you sell a product for $100 and you decide to discount this product by 10% for #LaborDay. Your overhead costs for this product are $40. With the discount, instead of selling a $100 product to make $40, you now have to sell $120 in product to make $40 (all things being equal). And that is only for a markdown of 10%, imagine what the profit gap would be on a 20 or 25 percent discount, and we know marketers tend to get crazy during the standard sales periods, such as #LaborDay.
2. Consumers Don’t Believe You
And therefore, they don’t trust you. When you discount your products it activates a trigger in the mind of consumers to devalue your brand. In essence you are saying to a consumer, “My product is only worth $15, but I usually try to get away with selling it for $20. But when you don’t buy it at $20, I have no problem reducing the price, because it’s cheap.” I know, that was a lot, but really, that’s how consumer generally perceive discounts. Think about it, the best brands almost never discount their products, and thus, are able to sell them at a premium price, think Louis Vuitton, Tiffany, Hermes, Apple (with a couple strategic exceptions).
3. Your Brand Integrity
Sales promotions train your customers to expect discounted pricing and to only shop with you when there is a sale going on. At this point you've effectively turned your company into a discount brand and permanently decreased your profit margins. And that sucks!
Now you may be saying, Tiana, so what am I supposed to do to compete with the impending onslaught of price reductions and end of summer sales extravaganzas? What options do I have as alternatives to product discounts to increase my sales?... The answer is simple: CREATE VALUE.
1. Create value by leveraging your brand promise
Understand that price is only one product attribute and if your branding is working, your customers patronize your business for multiple reasons other than price. What are those reasons? What do you offer that your competitors don’t? How are you creating additional value in your customers lives? These are the things that powerhouse brands are built on. If you don’t have answers, it’s likely that you don’t have customers.
2. Create value by using data to understand your customers
If you are collecting the proper data, you are sitting on a goldmine. I cannot stress the impact of good data enough. Use behavioral and purchase data to fully understand your customers. With a complete understanding of your customers lifestyle, wants and pain points, you can deliver the right messaging at the right time, using the right methods. And that’s what marketing is all about, right? Right.
3. Create value by offering complementary services for free
You're probably thinking, "how is offering products free better than discounting, at least I will make some profit from a discounted product." First, let’s be clear, I would never want you to offer up your main source of revenue for free. But, if you offer a service or product that goes well with your primary revenue stream and is not a profit center for your company it creates value for all parties, and can potentially lead to an additional revenue source through future sales. If you are an e-tailer, try offering free shipping or a $10 gift card with purchase. If you are a service provider, try offering an initial consultation at no charge or a free evaluation of sorts.
I understand, this is a lot for chronic discounters, but trust me, this is for your own good and the good of your profit margins. The impact of discounts on brand equity can be insurmountable. If you don’t believe me, just ask Google. I’m not the only one saying that discounting is bad.
If you must discount, I suggest you adopt an extremely strategic approach and stick to it. Perhaps first time customers will receive a 10% discount, or you will provide special offers on black Friday. Whatever it is, be clear about your reasoning, how it will impact your bottom line and most importantly how it will impact your brand perception. Don’t, by any means jump on the seasonal sales band wagon without a plan, and if you do, don’t say I didn’t warn you, when profit centers turn into profit suckers.
For more information on how to quantify discounts check out this article.
If you’re interested in a really in depth study on the effects of sales promotions on the consumer mindset, read this.
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