A sale might seem like a good way to get stuff out the door, but what does a discount strategy mean for your business in the long run?
Imagine the scenario: You have a great idea about a new product or service that you want to launch. You work incredibly hard for a long time to get the product to market and when it eventually arrives, no one is buying.
For many people the gut reaction is to think that the price point is too high. Then you go on for a few months with low or no sales and you begin to think that it’s time for a sale.
You might have new products coming on the market and want to make some cash back on your initial stock investment. So you go ahead with it and launch your first ‘SALE!’ event.
Things pick up, the money starts to flow, albeit at a smaller profit margin now that prices have been slashed. But it worked and you have some money coming in.
Now you begin thinking that if one sale worked, another is bound to do the same. So you plan your next sale.
Teach your customers about value
This is the trap that many retailers find themselves in. Huge fashion brands like Michael Kors started to teach their customers that if they wait long enough, a sale will arrive and they’ll get discounted pricing. So customers wait. They stop spending and save up for a sale event. Then the sale comes and the habit is reinforced: If you wait for it, the sale will come.
Related: Harry Welby-Cooke on understanding the dangers of discounting
In this situation, customers have learnt that their favourite brand that was once premium is now accessible if they wait. After a while, the brand lowers its pricing and eventually the customer wins out and the brand is now more affordable. Can you guess what happens next?
The customer has been trained to wait for sales. In spite of the price point coming down, sales don’t increase, customers aren’t shopping and profit isn’t increasing. So the brand goes on sale again, discounting its newly lowered price to move stock.
This is a retail cycle that doesn’t end well for most brands. If you have the ability to play the volume game, you can go for more outlets, more product and cheaper price points because you’ll be selling more products to more people. Even at this point you think you’re winning, but the problem is that you’ve now pitted your business model against the giant in the room.
Globally that giant goes by the name of Amazon. In South Africa, Takealot is doing something similar. Unimaginably low profit margins that lead to huge customer acquisition and competitive advantage. Once they acquire all the customers and destroy all their competitors they will be able to adjust prices to create more profit.
You don’t want to play that game. Trust me. You want to play a game of quality and big margins, not volume and low margins.
Price defines brand
It’s important to understand your brand positioning and target market. Once you identify what you sell and who you sell it to, stick with it. It takes time to build momentum. Just because people aren’t buying what you are selling now doesn’t mean they never will.
There might come a point when you realise that your competitors are cheaper and provide better quality. This means you’ve made a mistake somewhere along the line. Either you are overvaluing your product or service, you have incorrectly priced your product or your cost price is too high which means your retail price is too high. Then you can assess and move to solve the issue at hand.
If you’ve decided that you’re going to be a sale brand and offer discounts, then that’s great. Stick with it and plough ahead with your strategy.
If you’d like to be a premium provider then set it up that way and again, stick with it. Chopping and changing your strategy and approach to your customer too frequently can leave them confused and frustrated.
Related: How to better manage your money in your business
Purchase sets price
When you set a price then discount it and someone buys the product at the cheaper price, that’s the price they have decided your product is worth forever. It’s a tough sell to then get them to pay an extra 30% to 50% once you’ve told them it’s okay to pay a discounted rate.
Self worth applies to brands, not just people. It’s key to know what your product is worth, know what your brand is worth and then find customers who agree with you and are happy to pay.
If you can’t find customers with your current product or service, with your brand positioned the way it is and your price point established, one part of the equation has gone wrong. Stop, reassess things and make a change if need be.
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