Are you the type of person who loves a good sale or promotion? Or do you only buy when you need things, and not worry about waiting around for discounts?
If you are retailing your own products, deciding whether or not you will offer promotions and discounts is an important step. It should be decided in the price/volume planning stages. Often businesses forget to account for sale times and end up making losses at those times of year. You want to ensure that if you plan to discount your product, that the business can handle the price reduction.
The alternative is to stick strictly with your retail price. This sounds like a great strategy but doesn’t work for all products. It does however, eliminate customers waiting for a sale before purchasing from you and reduces that ‘expectation’ that something will be discounted at certain times of the year.
Planning to Discount or Promote your Product
When business owners first start a product business they’ll usually build a basic P&L to understand the profitability they want to achieve. They set out their planned retail price, and volumes, along with costs. However, a common error is to build a P&L planning all of your sales at full price. Very few product business never offer discounts or promotions.
When setting prices for your product you need to take into considerations discounts and promotions. Common times to discount could be black Friday sales, big holidays (Easter, Christmas), end of season clearances. Write down all the times you think you might offer a price promotion and how much you might offer off the price. Now that you know when and how much your promotion will be, you need to work out your margin on the lowest sell price as well as average sell price. Here’s a working example to explain it a little easier:
Let’s say you sell t-shirts. They retail for $30, but you discount them 8 weeks a year for $22. The t-shirts cost you $20 to make.
- Your product retails for $30, 44 weeks of the year. Your gross margin (GM) at this price is $10.
- You sell it at a discount for 8 weeks a year at $22. Your GM at this price is $2.
- You think you will sell 100 t-shirts a week at $30. But on promotion you might sell 200 t-shirts per week.
- You sell 4,400 t-shirts and make $132,000 with a GM of $13,200 when you aren’t on promotion.
- You sell 1600 t-shirts and make $35,200 on promotion with a GM of $3200.
- Your average sell price is [132,000+35,200] / 6000 = $27.87
To see if your business can in fact afford the promotions you want to offer, figure out your GM on $27.87. You should also be aware of your margin on the lowest price you plan to use $22, to ensure you aren’t making a loss those weeks.
The gross margin you make on those $27.87 t-shirts will need to be able to pay all of your business expenses, and hopefully allow for some net profits to be left over.
Building a product business without any discounts and promotions
As mentioned earlier you may want to build a product and retail business, where you plan to never offer a price discount or promotion (such as buy one get one free etc.) I think this is tough for very competitive items, such as clothing. However, if your brand is unique enough and you build loyalty it is possible. The major example which comes to mind is Apple. They are known for rarely offering discounts on their products (they occasionally offer discounts in their stores on older products when new ones are released, however this is apparently rarely advertised, even to employees). It’s unique, but their brand loyalty is one of the strongest of any brand.
Other exceptions of no-discount products, are things that are high value or unique. You would hardly expect to find a classic Chanel or Louis Vuitton bag on sale. Again they have high value and have built strong brand loyalty. The other exception is unique products which may only be found in 1 or 2 places. They really have an advantage and don’t need to worry about driving sales.
Beware that heavy or frequent discounting can also damage a brands value. Consumers will continue to wait for those discounts (as they’re expected now) and the volume of product bought on sale will climb, dropping your average sell price. Have you heard someone say, “I really want X product, but I know they’ll be on sale in a couple of weeks so I’m just waiting!” You don’t want to build that expectation.
Other promotional ideas
Another way to get around price discounting is to offer random promotions. Changing it up will reduce the consumer ‘discount expectation’. Offering ‘free shipping’ for a limited time is a good way to drive new customers, who may be turned off shipping costs. Things like buy one and get the second half price, could increase the volume of product existing consumers are buying. It’s a good way to clear products when you have too much stock.
Whether you offer discounts and promotions is entirely up to you, but should suit your business model and type of product. The main thing is to ensure if you do offer any type of promotion or discount on your product that you can AFFORD it. Do your numbers upfront and keep track of the results when you run the promotions.