Black Friday or bust?
This winter, Black Friday boosted online sales across Europe by 509%.1 Black Friday is typically a discount lead phenomenon. This year a few retailers like Fat Face in the UK, bucked the trend refusing to discount and still managed to increase sales volume and revenue.
Does discounting actually work?
The answer is yes – and no! Retailers choose to discount for a variety of reasons – to attract new customers, lift sales targets, shift stock or take advantage of peak buying times.
Applying a price reduction can certainly increase sales volume. However, it can also eat away at profit; condition customers into expecting lower prices and de-value goods as well as cannibalizing future-purchases.
Even too much success can be an issue. Exceptionally high sales volumes can squeeze product supply and, subsequently, merchant cash flow. Huge visitor spikes such as those on Cyber Monday can also crash systems and freeze revenue completely.
In addition, the inevitable flow of impulse, gift and duplicate returns can create negative ripples that last well beyond the discount period.
Figuring out sales success.
Whether discounting works for your business depends on the size of the discount, your gross margin (after shipping, returns and cost of sales are taken into account) and sales lift achieved.
It’s also important to monitor transaction reports to establish the longer-term impact. Using discounts to boost end of quarter figures can simply create a lower sales base for the next quarter, resulting in the discount being repeated. This leads to a profit sapping discount cycle.
But sales keep shoppers happy!
People have been haggling about price for thousands of years. Securing a deal makes us feel like a winner. There’s an intangible force called price-elasticity – the difference between perceived value and what we’re prepared to pay. If perceived value is greater than the price, it leads to an irresistible impulse to buy.
However, overexposure to discounts can shift perception, reduce brand value and make products seem inferior. Consumers can become bargain-orientated and unwilling to pay full-price. In addition, those who bought pre-sale can feel angry, ripped off – and embarrassed – especially when buying gifts for others.
Is there a smarter approach?
Luckily, consumers have moved on since cave-days. Today, value relates to more than the price-tag. For online sales, this can include postage costs, click and collect, one-click purchase, delivery times, financing and pay later. Online retailers have the scope to experiment with any or all of these in their discounting mix.
Love them or hate them, discounting is now an inevitable part of e-tailing and will probably be around for the foreseeable future. So, it’s important to make sure price reductions work for merchants as well as consumers:
Here are our top tips for successful discounting:
- Understand the impact
Make sure you don’t slip into a loss situation – calculate your gross margin, mark-up and breakeven figures and how the discounted price impacts profit.
- Set a limit
Before starting a promotion, calculate the lowest discount price that will still return a viable profit level – and don’t drop below this.
- Make sure web and mobile checkouts are frictionless
A smooth experience will see customers through the stress of a sale, encouraging new customers to spend more.
- Do your homework
Check out competitors and their pricing strategy. This can stop you slashing prices more than necessary.
- Look for alternatives
Consider other options for adding value without reducing the price, for example, bundling, flexible financing, faster delivery, free returns or pay later.
- Set a timeframe for your promotion
Decide how long the sale prices will be offered and make sure customers are aware of this.
- Synchronize timings
Make sure you identify your own seasonal shopping dips. Discounts may be more successful if they are timed to coincide with these.
- Think long-term
It’s easy to focus short term volume boosts, but what’s the real impact of discounts on your business and are they sustainable? Can you grow without discounting?
- Remember one-size doesn’t fit all
Take time to test discounting strategies and monitor the outcomes. Use learning points to adapt future discounts to maximize revenue AND profitability.