December 14, 2016

Discounts / Promotions In A Rebuilding Project

Tell people on Twitter that discounts and promotions are bad for business, and you'll get the reaction of the lady featured here. Don't you find it fascinating that vendors who don't even bother to publicly post their prices for public consumption demand that you offer discounts and promotions to "tickle the buying bone of today's fickle customer"?

When I've analyzed the long-term impact of discounts/promotions on a business, there is a consistent trend. The relationship tends to be "quadratic" in nature.
  • No discounts/promotions = Healthy Business.
  • Very modest and infrequent discounts/promotions = Healthiest Business, but one that is "riskier" to manage due to the temptation to follow discounts/promotions down the rat hole.
  • Constant discounts/promotions = Unhealthy Business.
Across my projects, there tends to be a quadratic-style relationship between level of discounting (annually) and pre-tax profit ... your mileage will vary.

Notice that the most profitable businesses have just a teeny-tiny modest amount of discounting. These companies tend to run specials on key items coupled with liquidation of poor-selling items. These companies tend to offer discounts/promotions on specific items at infrequent intervals. These companies seldom run continuous discounts/promotions, and these companies almost never take 40% off of everything, much less for three consecutive months at a time.

I know, I know, you are about to point to JCP as the shining beacon in the "YOU MUST DISCOUNT OR LOSE 30% OF YOUR BUSINESS" thesis.

Discount-centric brands get caught in a trap that is terribly hard to get out of.

Think about it this way ... let's say that you retain 50% of last year's customer file (which is a silly-high rate ... my overall client average is 37%). After three years of discounting, only 12.5% of your customer file remembers what it was like to buy at full price, and, these customers have been tainted by the stink of discounting for three years.

What happens if you take drugs away from a drug addict?

What happens if you take discounts/promotions away from a customer who only purchases when discounts/promotions are offered?

Once you go down the discount/promotion rabbit hole, you are going to have a hard time working your way back. The process takes about three years, and most important, you must work your way back to full price at a measured pace while absorbing sales declines. If you aren't willing to absorb sales declines, then gravity pins you deep in the discount/promotion rabbit hole.

In a rebuilding project, your discounts/promotions shift from "we're filled with panic - please take 40% off" to "take 30% off key items" to "15% off on existing items and pay full price for new items because they're new and exciting". Discounts and promotions support events (think Nordstrom Anniversary Sale) instead of supporting inventory management practices.

As you plan your rebuilding project for 2017, think carefully about how you apply discounts/promotions to your business. If 2016 was awful, it's gonna be awfully hard to pull way back. If 2016 was great, strongly consider discounts/promotions that align with events or key items. And if at all possible, try selling at full price and absorb the sales hit. Model what happens if you are selling at full price and sales decline by 25%. Do you generate more gross margin dollars? If so, you have something to think about, don't you?