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The Perils of Discounting

The Perils of Discounting

With the Christmas season upon us and a constant wave of discounts being offered both on line and in the high street, I have been left surprised by some of the promotions and offers that big, traditional business have run through December.

Being a supplier of warehouse system to the Sage market, we see some of the ripple effects that these offers cause to the IT and Warehouse systems and whilst IT systems are there to help, volumes that fluctuate by 10 fold or more overnight test the best of systems to near destruction.

 black fridayTo give a couple of examples, when the Black Friday weekend at the beginning of December was announced, many on line retailers appeared to feel that they “had to discount, otherwise we will miss out” –or at least that’s what marketing told them to do.

My belief is that many of those purchasing would have bought the products anyway, particularly the “Branded” products that business have taken years to develop the branding. Take myself, I was looking at a couple of pairs of Levis Jeans, I knew what I wanted as I always buy Levis (please don’t comment on the fashion statement) and know what the sort of price I expected to pay for them. Along comes Black Friday and suddenly I can get 20% off the price. How can this be good for the business, as I would have bought a pair anyway.

Levis were by no means unique on this. The week after Black Friday, I was talking with a couple of our clients who are in the retail world, and for whom the Black Friday Weekend caused a lot of strain in the business. They had extra IT staff in place to ensure the websites kept taking orders, the Warehouse Staff all were working overtime at premium rates, and senior managers were all working longer hours than normal, and all this to get orders out the door that had been highly discounted. When asked what it had done to profit on the products and sales the response was “the Jury is still out” at the moment.  For Branded products has a business just devalued or crossed a line where the client now expects a lower price? Was there a real increase in orders or did it just have the effect of forcing all the orders to arrive at once at a lower price?

Flash saleAnother example I saw in the last month; I needed to spend some £350 in a well-known Car Part and Accessory retailer, their products were good and already appeared to be highly competitive in the market place, but I had noticed via the email marketing that once or twice a week they would mail me to tell me that between 12 – 2pm that day they had a “flash sale.” I was in no hurry, so I waited! Sure enough along comes the mail, so with product codes in hand from my earlier research, off I went and placed the order, sure enough saving an additional £47.

From an IT systems point of view, their system was clearly “under stress” with the increased website order traffic during this period as the normally smooth check out system on Click and Collect was slow and failing to load.

From a delivery point of view, the “Click and Collect” came in 3 different deliveries, all missing the promise date. I do not even want to think about the additional courier cost that they incurred as two of the items were some 16Kg each and delivered by overnight courier, on a Saturday morning to try and allow for the previously missed delivery promise. I can see the marketing report now, “Look at all the orders the flash sale promotion has created.” Personally I would like to know if it had an overall business benefit.The perils of discounting

My final observed event of discounting was when I went to buy a Dilbert Calendar as a Christmas present – rather apt actually! I went into the store, picked up the calendar and went to pay. At the checkout the product was rung into the till and I put my £15 cash on the counter for the £12.00 item. The receipt printer on the counter chirruped and out came a discount voucher – I am sure you have seen the type – get 25% off the next purchase (I understand that type of discount to sell up). But this was different; the cashier read the voucher, scanned the barcode and off came 25% of the product I was buying. How can this help the business? I had made the choice to buy the product at the price marked on the item (if I knew about the product being cheaper elsewhere I would not have selected to buy it there and then); I had actually placed my money on the counter to complete the transaction and was happy with the price! And then they gave me £2.75 off the price. Where is the benefit to the business for the discount?

The big concern that I have here is that marketing and promotions are being driven by fear and the concern that we must offer a “promotion” to persuade people to purchase. Yet the underlying costs to deliver that item to the consumer is not added into the cost of sale and I am not sure that the businesses are even measuring or aware of this as marketing can show what their promotion has created in a number of sales which can take the focus away from the overall picture.

The phrase that comes to mind is “Turn Over is Vanity, Profit is Sanity”. Whilst I like saving money, I am concerned that the outlets and brands that I like to buy from will not be there tomorrow with the way things are going – and I have not even been asking for discount.

So as we approach 2015 and the January Sales, if you are selling anything in your business, do you really know the full costs of supplying the product to the client? Of course, it may be that the profit margins are just so large that none of this matters, but in the world today with aggressive competition I do not see this, unless you are one of the very small percentages of business that work in a highly specialised market.

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