Best Practice of the Week: 2.3.3. Discounts
When the pandemic first hit, many businesses were stung by low demand and even store closings. This hurt most for discretionary items such as travel, apparel, household durables and cars. Although retail sales recovered some in June and July, a new decline will occur as the $600/person/week government unemployment benefit burns off.
One response to contraction and uncertainty about recovery has been a reduction in inventories through discount selling. But there are long-term risks: reducing profits to an unsustainable level, cheapening the brand, creating habituation to lower prices, or starting a price war.
Definition of discounts: “Short-term price changes to all or targeted customers or prospects.”
Practice Summary
Pros
- Customers feel good about your business
- Customer choose your products, less comparison shopping with competitors
Cons
- Customers hooked on discounts
- Lower perceived value
- Loss of profits
- Possibility of a price war
- Need for additional supply, and fluctuation in amount to be produced/procured for sale
Decide on goals
- Acquire new customers
- Retain customer base
- Increase sales
- Gain repeat customers
- Liquidate inventory
Discount strategies – try to segment potential new buyers
- Bundled discounts – increase sales volume, sell less popular products, customers exposed to new products
- Prepayment discount
- Volume discount
- Warehouse sales
- Event or seasonal discounts – usually lower-end brands sought by bargain-hunters
- Free shipping – minimum purchases can also enable upselling
- Buy one, get one free
- Points- good for retaining customers
- Offers – weekly/monthly discounts, referral promos, first-time, customer loyalty, on-line only, coupons, milestone discounts
- Promotions – coupons, point of purchase displays, rebates, premiums (giveaways)
Key Metrics
- Margins
- Customer acquisition cost – add lost margins, additional marketing expenses
- Targeted sales volume – with effect on total profit
- Tracking – discount codes, coupons (easier to do on-line)
3 Good Questions (discuss in a management meeting)
- How could a price reduction hurt our brand?
- Which market segment is most price sensitive?
- What other incentives should we offer with the discount?
Since the pandemic is might last through 2021, very short-term steep discounting may be the best way to move inventory while maintaining brand loyalty. Some effective short-term methods are warehouse sales, event/seasonal discounts, and promotions. But watch your numbers: don’t give away the store.
