Let's face it, many products and services are not essential for survival. When all around you are slashing prices, it can be hard to resist the lure of the sales you could make from 'special offers'.
But not every special offer is good for business. Heavy discounting can be harmful as it may shift products but it can drastically reduce profit. It can also devalue your product leaving customers wondering why they should ever pay full price.
How do supermarkets do it?
Many people don't realise that when a supermarket slashes prices it is the suppliers who take the hit.
The 50% discount comes straight off the supplier's bottom line.
Also the reason that the famous BOGOF (Buy One Get One Free) is so popular in supermarkets is that it makes you spend more overall.
You buy products you don't need because the offer seems too good to miss. So do you spend less the next week? Of course not.
How does heavy discounting damage your profit?
If you knock 30% off your product you may sell a few more but overall you will lose out. This type of offer does not encourage people to spend more and that is the KEY to a good special offer.
Let’s look at the figures.
Analysis of the cost of discounting
Cost of item
|
£20.00 |
|
Retail price of item @ 45% mark up
|
£29.00 |
|
Gross margin (profit before fixed costs)
|
£9.00 |
|
Discount 25%, item retails at
|
£21.75 |
|
Gross margin
|
£1.75 |
So now you have to sell 6 items at the discounted price to make the same as you would on one at normal price.
If the widgets are perishable e.g. organic duck and going to go off if you don’t sell them, then the discount at least gives you some margin, but for non perishable stock, you are simply giving away profit.
Also note if your business is already operating on slim profit margins, then heavy discounting can be catastrophic.
The only other time you might consider discounting is to help your cash flow. If you have a lot of money tied up in stock that is not moving and you need to convert some of that into cash, then slashing the price can give your cash flow a temporary boost, but you will feel it at the end of the financial year.
The whole point of a special offer is to attract more sales.
Special offers are tools to help you attract more sales. You need to make sure your special offer is sustainable financially and that you follow it up with actions that encourage further purchases.
Special offers are often used in email marketing, direct mail and e-newsletters. If your offer is going to hurt your business then your whole campaign is flawed. A well crafted campaign needs a compelling special offer but you need to think about the best offer for you and the customer.
How to make special offers work
It works like this. You give the customer something they value (e.g. a discount or free product) but in return they either:
• spend more with you than usual
• or your offer encourages repeat business
• or it introduces a new customer that you can turn into a regular purchaser
Take a look at these examples:-
- Encourage a higher spend e.g. spend £20.00 and get a free item – this works well if your customers' average spend is £17.00 or £18.00. For the freebie choose an item that you can buy cheaply e.g. mug. The idea is the increase in spend is greater than the cost of the freebie. So overall you increase your profit.
- Commit a customer to repeat purchases e.g. book 3 treatments and get one free. This works well for alternative therapists who may rely on the client contacting them to book further appointments. If the alternative is one treatment, then nothing – the free treatment pays for itself.
- Introduce a new customer offer an M&S voucher or similar for you and your friend when they book a hair colour treatment. This is a good example of where you need to have a follow up strategy in place. If the new customer books the hair colouring treatment, make sure you are ready with the up sell on products or offer a loyalty scheme where they collect points towards the cost of a hair appointment.
Special offers play a key role in your marketing but you need to analyze what works and what doesn't.
Special offers, well done, can lure customers away from the competition and provide you with a boost in sales. Done badly they can hurt your profit margins and devalue your product.
