With many businesses doing half their annual revenue in the holiday season and many of those holiday sales taking place at deep discounts, effective promotional spending becomes critical for actually making money. As merchants discovered when they signed up to run Groupons and other deeply discounted promotions, simply offering big discounts to drive traffic is not a guaranteed path to riches. In fact, it often destroys profits. Each year, the retail industry claims it will sell based on value and avoid the deep, destructive discounts of past seasons. And each year, at some point, panic sets in, and the race to the bottom is on.
As you prepare for the holiday shopping season, do you have a promotional strategy? And do you have mechanisms to measure whether your promotions are helping or hurting? Simply measuring the change in sales during the promotion is not enough. You have to consider the impact of the following:
1. Time-shifting from periods before and after promotions, especially if customers know that promotions are coming. If customers time purchases in anticipation of discounts, the promotion may appear effective, when, in reality, it may only be shifting sales from full prices to less profitable discounted price points. This problem compounds itself if you train your customers to expect discounts, leading to a vicious cycle of delayed purchases and deeper discounts (a problem in the B2B world, as well).
2. Substitution of one product for a (less profitable) promoted or discounted product. Note that effective loss-leaders can increase the sales of other products.
3. Lifetime customer value of buyers who purchase on promotions versus buyers who tend to purchase at full price. The goal may be to bring in new customers who will then buy your other offerings, but as Groupon’s merchants found out, many buyers are only interested in the bargain and have no interest in the “real” value. You also run the risk of converting your loyal customers, who do see the value in your offerings, to price buyers who know they can wait to get a better deal (see 1).
With so much riding on successful promotions, make sure you can measure how they work. Promotional discounting may be one of the biggest expenses your business incurs, but because it doesn’t show up in the budget like inventory or salaries, many businesses don’t manage it the same way. Scrutinize your promotional spending (discounting is absolutely “spending”) just as you would your other expenses.
(We’ll discuss some techniques to maximize the bang for your buck in the next post).