In January 2019 I published a blog here and on LinkedIn titled ‘Retail Discounting – The Road to Ruin) http://www.genesisdm.co.uk/blog/index.php/retail-discounting-the-road-to-ruin/.
It discussed the ease at which retailers feel pressurised to reduce prices across all platforms when competitors start discounting. Why wouldn’t you when, the guy down the street must surely be winning a larger piece of that pie? The blog also referred to the fact that all businesses, not just retailers are creatures of the environment, each is influenced by the economic, technological, social, legal, environmental and political pressures of the day and that brings us onto the pressures being experienced now during this terrible Covid pandemic.
Never have any of us ever experienced anything like we’re experiencing right now. Even putting the dreadful effects that Covid can have on ours or our loved one’s respiratory systems to one side, the economic effects are also becoming increasingly obvious. Every day there are millions of people around the globe whose lives have changed and will remain changed for the foreseeable future, not from the direct effects of the virus, but the indirect effects caused by the loss of their jobs or the risks to others jobs that may still arise. In their position, buying things at a lower price is what will drive the vast majority of their decisions, so yeah, why wouldn’t you offer discounts?
Well the first reason may not be so obvious. As I’ve said, Covid will affect the earning potential for a huge swathe of society, but this huge swathe of society will have lots of demographic and geodemographic customer types within it. It will certainly have those who may not have benefitted from a good education; or who may be as a result working in low skilled positions, where basic living needs, low incomes and large outgoings may have rendered savings and investments something they see only others achieving. BUT it will also include many other groups where older, wealthier ‘empty-nesters’ also exist. It may also include young people (like my sons for example) who remain at home with parents whilst they invest their own savings in their careers. It may also include plenty of others whose incomes may be down through a reduction in overtime levels, but where this extra income was treated as a bonus and not essential for living. Then of course there are those who have legitimately profited from Covid, such as those selling tech solutions to support homeworking. So, when you introduce discounts they benefit everyone, even those who can and are willing to pay full price for your goods and services.
The second reason is that discounting creates a reason for people to see your business in a different light. Sure, it’s possible that those consumers looking for a bargain will migrate towards your competitors if you don’t compete, but as footfall and sales increase, this sudden reason for optimism amongst your competitors can often create misplaced confidence by signalling a false dawn. As these companies feel buoyed by an upswing other issues that have a financial cost to them will create an additional level of discomfort and reducing their resilience.
Discounts might be fine in some specific situations, such as disposing of outdated stock that will only become a bigger problem to you at a later date. Generating cash against this is fine, but you will need to be disciplined and only apply it on the right lines and in the right manner. For example, encouraging people to purchase something at full price and receive a ‘redundant item’ at a fraction of its advertised price, or limiting the period where the offer is available.
If you’re reading this and you’re an SME retailer or manufacturer and you use discounts to increase sales, you need to be aware of the negative connotations that you may inadvertently create amongst customers who are willing and able to spend more with you. Have you ever heard the term ‘Veblen Goods’? If not, it would be well worth checking-it out before you introduce your next level of discounted products!
If after reading that discounts are still for you, then it’s important to consider what effect this ‘generous tactic’ will have on your bottom-line. Take for example a situation where you would yield a 30% gross profit and you decide to offer 10% discount on these same products. At the outset this may seem reasonable but the effect on sales could be dramatic as it will require you to sell 50% more products in order to cover that loss of revenue. I think you’ll agree that’s a huge increase over most firms normal trading conditions. So, when you hear people say discounting can be the start of a downward spiral, you know why.
But there’s another option too, which doesn’t seem to have as much of place in retail or manufacturing as it should do, and that’s to offer tangible benefits that are in addition to the full (undiscounted) price. A leisure retailer might for example offer a free annual service on critical pieces of equipment and in doing so will provide an additional peace of mind that the equipment is reliable and that you’re a company of integrity that they can trust. This might also identify other earnings opportunities as they present themselves to you that further underpins your professional credentials too; if you’re a food retailer you may include recipe suggestions which you provide as part of a developing theme, thus encouraging your clientele back to extend their purchases; or you may be able to find a complimentary partner who is willing to offer your customer’s introductory trials on their products and services. In each of these cases it’s clear that adding value can do far more than just selling an item for less to a customer and who you might not see again or at least until you have another sale.
The thing is, in retail (or manufacturing), consumers don’t buy on price 100% of the time. Understanding buyer segments and behaviour can help you maximise your profit and reduce your costs, allowing you to deliver an improved service (and profits) to those who want it. Alternatively, you could always try and sell twice as much!
If you are a bricks and mortar retailer (or manufacturer) and would like to speak to me about any of the issues raised in this post, please email me, Nigel Davis for an informal conversation.
Nigel Davis was voted ‘One of Britain’s Top 50 Small Business Consultants’ & is a Fellow of the CIM and a Chartered Marketer.