November 07, 2018

Discounts

Let's evaluate discounts / promotions within the context of the "Great Eight".

There's no greater temptation than to offer 20% off (or more) when business is not accelerating.

Your vendor partners love it when you discount, because you use their tools to sell more units in the process. Your merchandising team "might" appreciate the discounts as long as they move enough units to open up their buy for more new merchandise in the future. Your CFO likely doesn't enjoy discounting for obvious reasons.

Within the Great Eight, here's where discounting plays a role.

AUDIENCE:  Discounting fundamentally changes the audience. Ask Apple / Google if you want to understand the dynamic ... Apple owns affluent customers and most of the profit ... Google/Android owns a large swath of customers and the scraps of profit associated with a lower-priced category. Discounting pushes you into the "scraps of profit" audience. Full priced selling is MUCH harder and MUCH more profitable.

AWARENESS:  How are you going to communicate to those who don't buy from your brand that you are discounting?

ACQUISITION:  Google/Facebook want you to discount because that drives more traffic their way, which fattens their bottom line. The less profit you make, the more profit they make. Fun business, huh?

WELCOME PROGRAM:  Here's where your existing vendors love you ... now you leverage their tools (databases, campaign management systems, social, print, television, radio, billboards, retargeting) to communicate your wonderful 20% off opportunity.

ANNIVERSARY PROGRAM:  Again, your existing vendors love you ... you leverage their tools to communicate your version of Amazon Prime Day, and you give discounts to customers who haven't purchased in a year.

OPTIMIZATION PROGRAM:  Again, your existing vendors love you ... you might optimize your discounts using their tools, you might optimize customer long-term value, you might optimize the number of annual print pieces to send to a customer, you might optimize the number of email campaigns per week featuring discounts. In most cases, you'll be using vendor-based tools to get to a theoretical "optimal" outcome.

NEW MERCHANDISE:  Discounts can be used to move merchandise that isn't working, though there are many other ways to achieve a more optimal outcome (smarter inventory buys, using marketing spend to move units instead of discounts).

EXISTING MERCHANDISE:  See "new merchandise".

As you can see, discounts touch most areas of the "Great Eight" ... and are of particular value to the vendors selling solutions to you ... because smart discounting either requires you to use their tools or drives more units which results in their tools being more profitable to them. Vendors win when you discount. That's why you read so much about discounting and (in particular) loyalty programs.

Tomorrow, will talk about the other side of discounting ... profitability.

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