Effects of Discount and Consumer Promotions on Businesses

As regular consumers of the vast range of services and products the market has to offer, you have definitely come across these ever-attractive and eye-catching phrases — “50% off”, “Buy 2 get 1 free”, “Clearance Sale”, “Gift Vouchers to be Availed” — that compel us to go on a shopping spree. However, as customers, these thoughts have definitely crossed your mind: how is this beneficial to them? Aren’t discounts a loss for the company? Am I or am I not getting quality products for these discounts? Let’s delve into the strategy behind these flashy discounts and offers and understand why they are so prevalent in nearly every sphere of the market.

Understanding the Mathematics Behind Discounts

Before you determine if a discounting price is right for your business, you should understand the impact it will have on your bottom line: so, do the math. Start by examining the effect of reducing price on a single product and then expand your thinking to the effect on your entire business. One reason you might need to reduce the price on an item is for the hope of selling enough additional units to offset the margin you lose because of the lower price. It would be helpful to know the number of additional units you’d have to sell to break even. A really good cost accountant will give the company the exact statistics that may influence the overall decision.

However, there is another potential benefit to discounting. With appropriate publicity, discounting may result in more footfalls, development of new clients or existing clients buying products or services other than the discounted product or service.

Discounts and deals, while generating traffic and customers, can also lower profit margins. On the flip side, running them too often may diminish your brand image and attract shoppers who never want to pay the full price for anything. Hence, discount strategies have to be smart. Contrary to what some may think, it is possible to offer discounts while maintaining a healthy profit margin and brand image.

1. Reward profitable customers instead of deal-hunters.

Rather than sending offers to deal-hunters, determine who your best customers are — like your top spenders and frequent shoppers — and send them targeted offers. Doing so not only maximises profitability but also helps in increasing loyalty amongst the shoppers who matter most.

If you’re planning to run a sale, go through your customer database and offer discounts to those who are likely to spend more. It’s also a good idea to analyse the types of customers who come through different marketing channels. From there, you can determine what offers to craft and how to promote them. It will be prudent for merchants to offer deals using marketing channels that attract customers who come back through free or cheap channels such as organic search, email, or brand keywords.

2. Do not put flagship products on sale.

Avoid discounting your flagship or most desired products. Being selective with the items you put on sale protects the margins for your best merchandise. Keeping specific items at full price enables you to continue driving revenue through sales without diminishing brand value.

3. Avoid falling into a discount pattern.

Being predictable with when and how we offer discounts trains customers to wait for deals.

Your company should not be identified as a discount-oriented one. You need to segment your top customers, then send them unexpected offers, such as exclusive offers or a generous discount or gift.

4. Offer conditional free shipping.

A ComScore study found that 58 percent of shoppers purchased more items to qualify for free shipping and 83 percent do not mind waiting for a couple of days for delivery if shipping is free. Clearly, free shipping can strongly drive e-commerce purchases. Shipping incentives can increase average order value, and if implemented correctly, could protect your margins at the same time. The key is to create an enticing offer without killing your profit margins.

5. Implement promotions that add value.

Deals are not just about discounts — you can run promotions that add value to the sale instead of slashing product prices. For instance, you can offer a free product with every purchase. This is an excellent way to move inventories of items that you’re unable to sell. You can also add value through personalisation. If you’re selling jewellery, why not throw in a free inscription? Have a clear idea about why your customers are buying a particular product. What do they want to do with it? Is there any offer that would complement the item or would help customers get the most out of it? Find the answers to these questions, and use them to craft your value-added offer.

Advantages of Offering Discounts

Offering discounts on purchases is an effective way to quickly draw people into your store. Whenever you tell a customer that he can save money, you’re likely to get his attention. From increased sales to improved reputation, discounts may be that one ingredient that can bring success to your business.

1. Attracts New and Repeated Customers

Because people prefer buying things on sale, discounts serve as a ploy to attract more people to the store. If your discount is only good for a certain amount of days, clearly mention that when you advertise the discounted items. People are more likely to rush in and look around if they know they only have a few days to do so (your store will experience more traffic, so you may need to schedule more employees during the discount period to ensure smooth service).

2. Increases Sales Across the Board

With increased traffic comes increased sales — and not just of discounted items. Because the discounts attract more people, there will be more potential buyers for other items in the store, as most people will look around to see what else you offer before making a purchase. For example, if your clothing store discounts your entire jeans collection, people may also buy other clothing items or accessories to go along with jeans, such as jackets, shirts and belts.

3. Frees Up Room in your Stores/Warehouses

Discounting items enables you to free up room in your store. Items that aren’t selling anymore may sit in your store for months. By discounting them, you increase the chances of them getting sold and in turn making room for new products.

4. Boosts your Reputation

A business that offers discounts to certain groups of people — such as the elderly or those enlisted in the military — may improve its reputation. When a business gives discounts to people who are in difficult situations or who may have financial troubles from a lack of income, the business shows that it’s making an effort to help people. Many people regard businesses as money-hungry, so any deviation from that perception can improve its reputation.

5. Helps to Meet Sales Goals

Many businesses have weekly, monthly, quarterly, or yearly sales goals. If a business is in danger of missing those goals, offering discounts can help the business meet and surpass planned sales figures.

6. Cash Discounts Save Money

In addition to more sales, discounts may help your business save money if the discount involves payment methods. Credit and debit cards result in additional fees to process, so you lose some money in comparison to cash transactions. By offering a small discount to customers who pay with cash instead of credit or debit, you help both the customer and your business.

What Else Can Discounts Do?

Here are a few more benefits a business can get from running a discount campaign that most people don’t think about:

  • Brand Exposure: Some studies have shown that people need 30+ brand exposures before making a purchase. Whether they make use of your deal or not, discounts are a cheap (sometimes free) way to introduce your brand to strangers or re-expose it to those who are already familiar.
  • Brand Association: The best marketing comes from partnering with rewards and incentive companies. For example, many brands and retailers in India are partnered with local and international credit cards, financial institutions, massive employers and associations with thousands of members, among many others. But they also connect merchants to local nonprofits, teacher associations, farmer associations and other groups that strengthen communities.
  • Community Involvement: By being selective about who you offer a discount to, you can aid specific people and businesses in your community.
  • Build your Database: Studies have found that people who purchase with a deal are more open to sharing their contact information. A database of customers is one of the most valuable assets a business can have and discounts make people far more likely to join yours.
  • Connect with Specific Audiences: The best offers are limited and targeted. Maybe it is people in a specific geographic area or a certain profession. Discounts enable you to get in with these specific groups at a minimal cost.

SUMMARY

Money is scarce, and competition for consumers is fierce.

You can always toss a deep deal out to the public and draw a pack of wolves. They’ll take what you offer, then scavenge their way to the next deal. If you just need a short term influx of customers and cash, then go for it. But if building long-term relationships is what you’re looking for, then you’ll need to be strategic with your offer. You need to know your goal, work with a partner who knows how to manage discount marketing, and craft a great offer together. This way, you’ll reach your financial and customer goals and avail many incremental benefits as well — more than you probably expected.