As the shops plan to reopen, they are going to be looking to entice us, Customers, back in?
So what are the carrots that they are going to advertise that are going to have us beating a hasty path to their front doors to satisfy the pent up demand we have for retail therapy?
What level of discount would it take to get you off the sofa? 10% does not really cut it, 20% might just cover the cost of fuel and parking unless it is a big purchase. 30% now we are talking, 40% I’ll get my coat, let’s go.
The problem is discounting is a race to the bottom. Just because you discount the retail price, the cost of goods remains does not reduce, the overheads stay the same, all you are giving away is the profit margin.
Let me give you an example:
I have set myself a target of making a £300 profit today.
I sell widgets for £30 a pop. The widgets cost of goods and overheads total £20, leaving me £10 profit per widget. So to make £300 in profit I need to sell 30 widgets.
I have a genius post-pandemic sale to drum up business and to get sales moving again, so let’s not go mad a 10% sale. So my widgets are going to be a bargain for £27 a pop. Costs are still the same so I am making £7 on each one.
To make my £300, I now need to sell 300/7 or 43 sales. So a 10% sale that probably is not going to cut it has increased the volumes of sales I need to make to buy 13 widgets or 43%.
At 20% discount, I am only making £4, I need to sell 75 widgets to hit the target for the day. It would need to be something really in demand for a 20% sales discount to give rise to a 150% increase is sales volumes.
There are better ways to entice Customers that will not eat into your margins but will you a compelling unique offer that will differentiate you from the competition.
If you have excesses of stock that might date or spoil, the volume offers such as 3for2, Buy one Get One Free is great, 4 for £x are a great way to reduce stock.
Prelockdown we used offers like this when we had recovered our costs at full retail price. NEXT for example sell a skirt at the full retail price until they hit their break-even point. They then put it into a sale and whatever they clear their stock for is their margin. So even if it only sells for £5 in the boxing day sale it all adds to the profit. Great strategy if you know you can clear the stock and you have volume sales at the full retail price.
If we are closing a business or dropping a supplier then 3for2 is great for shifting volume.
But there is one concept for me that is used in the Restaurant sector but underutilized in other areas, that is perceived value. If I can give something away which costs very little to make but has a high perceived value to the Customer, I can replace the discount and protect my margin.
Restaurants generally have a net margin on 10 to 15%, so % discounts tend not to be a great idea. So they tend to use a different offer. A free starter or dessert with every main course.
In a restaurant, the Soup of the Day on a Monday is the carrots, vegetables, and the stock made from yesterday’s Sunday roast with a few herbs et voila Carrot and Coriander soup.
The cost of making the soup including chef time is less than £1 per portion, it retails for £4.95 normally. So a Customer ordering the “free” starter feels that they are saving £4.95, yet it only costs me. If your free starter menu is full of expensive starter options such as Prawns or Smoked Salmon then perhaps a free dessert is a better option.
How do we apply this to retail, we gift the Customer something useful with a high perceived value.
If I was tiling the bathroom I could spend £300 on the tiles. If the retailer offered a 10% discount then it costs the retailer £30 in profit. However if the retailer gave me £30 worth of grout, that cost him £15 to buy, then he has halved the cost of the discount. The Customer is happy with the free grout perceiving that he has saved £30.
Here is a slightly more advanced and more impactful way to deliver the exact same offer but one that will have the Customer waxing lyrical to friends and family.
Let’s say I spend £300 on a nice Business Suit, within a few days of making the purchase a silk tie arrives in the post that compliments the suit with a message saying “Just after you left the shop, I saw this tie and thought it would be perfect with your new suit.” Now the silk tie had a retail value of £30 but probably cost me £6. The customer perceives that they have had a £30 tie for free, equivalent to a 10% discount.
Giving away perceive discounts will protect your margins and give you a compelling offer to Customers.