Why read this? : Price discounts divide opinions in sales and marketing. We share why sales teams like them, and marketing teams don’t. Learn the basic finances of a price promotion, and why context drives how you should use them. Read this to learn how price discounts fit into your sales and marketing planning.
This time of year sees us drowning in a tidal wave of Christmas advertising. But it’s also one of the biggest sales promotion periods of the year.
Click Frenzy, Singles Day, Black Friday and Cyber Monday all come along in flurry of media coverage and hype.
As per our sales promotion guide, you have 3 main ways to drive short-term sales.
First, you can drive visibility with displays and shelf-strips (in-store) or banners and flashes (online).
As we wandered round our local supermarket earlier, merchandising teams had clearly been hard at work. We were practically tripping over displays of Ferrero Rocher and Lindt chocolates.
Next, there’s sales team support. For example information and education materials. Giveaways and presentations. These can be less visible to the public than well, the visibility items we mentioned above. But, you can guarantee sales teams were presenting to buyers 4 to 6 months ago to get those displays and banners in place today.
Lastly, and our focus this week, is price discounts. Because, let’s face it, customers love a good bargain. We all get a nice endorphin rush, when we think we’ve got something cheaper than it’s meant to be. But what’s the impact, when it’s your brand, or your store offering the price discount?
Price discounts - sales view vs marketing view
Price discounts divide opinions. Sales or account management teams generally love them. When your target is to hit a sales number, lowering the price to shift more units just makes sense, doesn’t it?
It’s nice and simple to explain.
Everyone gets it.
In most categories, it’s expected you do a price deal at some point.
You get to talk to the buyer about volume uplifts. Rates of sale. Funding for the offer. You get to negotiate other trading benefits for the money you put into price discounts. And of course, it helps you hit the sales target that drives your salary review and bonus pay-out.
We’ve been there.
We get it.
But, there’s a but. There’s always a but. Because, there’s another way of looking at price discounts. It usually comes from the marketing team.
Because every time you cut the price, you’re handing money to the customer. You “pay” them something towards buying your product if they don’t pay full price. You devalue the brand. The message you send is that not enough people buy at the regular price. So you’re cutting the price to move product. And, when it goes back up to the regular price, won’t people just wait until the next round of price discounts?
So, who’s in the right here? Do you price discount, or not?
To answer that, you first need to look at the finances of price discounts. And then, you need to look at your brand positioning and competitive strategy.
The finances of price discounts
Price discounts and sales promotions affect your profit and loss. Less revenue per unit sold, and also usually extra selling costs. You need to calculate if the price discount is going to have a positive impact on your bottom line.
Let’s say for example, your sales team propose offering a 20% price discount next month. And it’ll double your unit sales.
Sounds good, right? Double the number of sales has to be good, doesn’t it?
But finance people would quickly tell you, you need more information to work out if it’s worth doing.
Let’s look at 2 different scenarios to show why this could be a good, or a bad idea.
Scenario 1 - Good idea
You sell 100 units a month. Each product sells at $100. You make $50 profit per unit. Total sales is 100 units x $100 = $10,000. Total profit is 100 units x $50 = $5,000.
With this 20% price promotion, you now sell 200 units. Double sales, remember?
Each product sells at $80. You make $30 profit per unit. Total sales is 200 x $80 = $16,000. Total profits is 200 x $30 = $6,000.
In this scenario, both your total sales (+$6,000) and total profit (+$1,000) are better than a “normal” non-promotional month. This price promo is clearly a good idea.
Scenario 2 - Bad idea
Now let’s change one number in this scenario.
In a normal month you still sell 100 units at $100 each. But this time, you only make $30 profit per unit.
Total sales is still 100 units x $100 = $10,000. But now total profit is 100 units x $30 = $3,000.
The promotion still drives sales to 200 units. Each product still sells at $80. But, now you only make $10 profit per unit. Total sales is still $16,000. But total profit is now only 200 units x $10 = $2,000.
In this scenario, your total sales is up at +$6,000. But your total profit is down $1,000 versus a normal month. That sounds like a bad idea.
So, in scenario 1 you’d do the promotion. Scenario 2, you wouldn’t, right?
Well, mostly, yes.
But this calculation is only a starting point. You need to think a bit harder. Because, depending on context, sometimes you would NOT do scenario 1. And sometimes, you WOULD still do scenario 2.
The importance of context for price discounts
Let’s look at what some of those context areas could be.
First, you there’s the source of volume for those extra sales.
If those units go to existing regular users, who just buy more at the lower price, you’ll find the month after the promotion, those regular buyers don’t buy again. They’ve still got the units from the previous month.
In the grocery business, this is often called “pantry fill”. People buying 2 items at a discount, and then not buying again until they need to. This could result in a lot less sales and profit the next month, and an overall net loss, even under Scenario 1 above.
So, rewarding customers who’d have bought anyway, would make Scenario 1 less attractive.
On the other hand, if those units go to new users or switch users from a competitor, those units are incremental. You wouldn’t have got those sales any other way, and you use the sales promotion to drive trial of your product.
Once people try a product, they’re more likely to buy it next time. Not guaranteed, but more likely.
So, this lag effect, might add to your pool of future ‘regular’ buyers. The value of these ‘acquired’ user sales might longer-term cover the temporary reduced profit you made in the month of the price discount.
So, bringing in new customers, would make Scenario 2 more attractive.
Key lessons from the financial analysis
First, you have to think about the impact of price discounts and sales promotion over the longer-term. Sure, they might have short-term benefits to pull in more users when they run. But, think about what happens longer-term.
How does that change in sales impact future time periods, when you don’t run a price discount? When a shopper buys from you at a price discount, it’s not the same as when they pay full price.
Which, then also bring us to consider the type of customer. Are those who buy your product at the price discount likely to stick around on the brand, once the price discount is over?
In most categories, you find a ‘price conscious’ segment who aren’t brand loyal. They don’t believe there’s much difference in brands. So, they always buy the one which seems the best value. You need to work out if this segment suits your brand positioning.
The role of price discounts in your brand positioning
Your brand positioning is usually summed up with a positioning statement you pull together at the end of the segmentation, targeting and positioning process.
It covers target audience, frame of reference and your point of difference, based on the key benefit, the reason why and the reason to believe.
Every brand will have a different positioning. But academic studies suggests they’re heavily influenced by 3 main competitive strategies. These are known as Porter’s generic strategies after the academic Michael Porter who first proposed them.
You can use and adapt these to fit any type of category. The approach you choose influences whether to include price discounts as part of your marketing and sales promotion plans.
(Also, check out our e-Commerce positioning article to see how this works for e-Commerce brands).
These types of brands aim for mass market appeal. They aim for scale, and use both their regular price and price discounts to drive more sales. Their rationale is the more they sell, the more they spread their production costs and improve their margins.
Brands who want to compete on cost leadership should clearly use price discounts as part of their marketing mix. They should run more sales promotions, more often. These brands aren’t overly concerned if they pull in price conscious shoppers who switch around based on price.
These types of brands aim to identify one or more key product attributes where they can offer uniqueness or superior performance. They identify specific segments who value these attributes. And, they usually justify a price premium to more mainstream (cost leadership) type brands.
These types of brands will usually do much less in the way of price discounts compared to cost leaders. They may need to do them occasionally to hit short-term sales targets. Or, to fit in with traditional or online retailers marketing activity. But, the price discounts will be less frequent and less deep.
The aim with these types of brands is to build up a pool of loyal customers based on the quality of the benefit or service. It makes less sense to do price discounts on these types of brands, unless something in the context of the brand demands it.
Focus (Niche) brands
The final choice is to create unique or niche offers.
In this case, there’s no scale. It doesn’t usually make sense to run price discounts. The people who buy these types of products will buy them anyway. They aren’t particularly sensitive to the price, since its the uniqueness or rareness of the products that’s appealing.
The only real exception to this would be where there is a need to drive trial by new users. So, these types of brands might run a price discount for new users only for example. But for regular customers, there’s no incentive or benefit to do so, unless they want to drive more word of mouth.
Should you use price discounts as part of your strategy?
Marketing purists will tell you price discounts aren’t a good thing. But sales pragmatists will tell you they’re a necessary tool to shift products when you need to.
For us, these views are at 2 ends of a spectrum. You adjust up and down that spectrum depending on the context of your category and business.
If you play in a category, where there’s already a lot of price promotion, and your product doesn’t have a significantly different feature, you may need to suck up more price promotions just to keep sales growing. There’s no shame in that. It’s a normal part of doing business.
But if it’s your brand and your business, the idea of “giving away” profits to drive sales can be tough. In an ideal world, your brand positioning is strong. Customers will buy you at any price. We’ve worked on a few brands like this, who never offer price discounts. But, they’re the exception rather than the rule.
For us, it really comes back to your market research and your understanding of what drives choice in the market. If trial is important, price discounts can be a great way to drive it.
Think about “lock-in” products like razors and blades, for example. The razors often come with heavy price discounts, so those businesses then make the money back on the sales of the razors.
Look at streaming services like Netflix, and Spotify. They often offer big price discounts for new users, because they know once people try them, they’re unlikely to drop out.
Price discounts - not always your choice
Of course, when you sell through traditional or online retailers, it’s not actually your decision on what the regular or price discount should be. In order to comply with government fair competition pricing laws, you can only set the (trade) price you sell to the retailer. And, you can then only recommend or advise on both regular price and price discounts.
The exception to this is when you set up your own online store.
Here, you are both maker and seller. You can set regular price and price discounts to your heart’s content. Marketing technology can even help you target price discounts to specific shoppers. For example, those that added to cart, but then didn’t complete the purchase.
Price discounts - if they were part of your Christmas dinner
Like Christmas dinner, price discounts have their place in your marketing planning. They’re probably not something you’d want all the time. But in the right context, they can be very effective.
If your product is something similar to everyone else, price discounts can give you a competitive advantage and a temporary point of difference.
Think of them in this case like the gravy you pour on to your Christmas turkey. Price discounts add extra flavour to relatively “standard” products.
But, if your product is more distinctive, then go more carefully with price discounts. Ask yourself, if the product is differentiated enough, wouldn’t shoppers buy it on that basis alone? Like an After Eight or a Ferrero Rocher, the price discount might help, but you know they’ll buy it eventually anyway.
And, if your product is niche, and only a few loyal customers ever buy it anyway, there’s no point in price discounts. You won’t attract new customers, and will lose money selling to customers who will happily pay full price.
In that case, they’re more like the Brussel Sprouts on your Christmas dinner. Some people love them, and will eat them anyway. But for most people, it doesn’t matter what you do, they’ll never be a fan.
Check out our marketing plan guide, to see how price discounts fit in with the other parts of the marketing mix. And contact us, if you need help planning price discounts in your business.
Price Discount Photo by Artem Beliaikin on Unsplash
Sale : Photo by Justin Lim on Unsplash
Coins in small piles : Photo by Ibrahim Rifath on Unsplash
Calculator : Photo by Ray Reyes on Unsplash
Wrapped gifts : Photo by freestocks on Unsplash