As we emerge from lockdown and resume trading, many entrepreneurs will be tempted to organise discount promotions to boost demand. Should you do the same?
The obvious concern with discounts is that they trade revenue for margin, and the volume of additional sales needed to offset the loss in profitability is often under-estimated. An analysis of Dutch grocery stores, using almost four years' worth of financial data, confirmed that there are many contributing risk factors.
Some of these are obvious. Predictable promotion trends can habituate regular customers to delay purchases until the next offer becomes available. Furthermore, while discounts may attract new customers, many of these may be bargain hunters who move on when prices return to normal.
Some of the risks are more subtle. For example, discount frequency has a greater impact on customer perceptions than discount size. Brands that offer regular, small discounts are more likely to cultivate a low-price image than those that make bigger, infrequent offers. This is problematic for small enterprises that can't afford to compete on price and want to attract customers who are willing to pay a premium.
In general, discount promotions should be used sparingly. If you can't afford to be selective and have to choose between drumming up any business you can get or closing your doors, then the choice is obvious. However, lacking such urgency, think carefully about how you can get more value out of your promotions to offset the potential cost to your bottom line.
One possibility is to brand your promotions around distinctive themes. This has the immediate benefit of differentiating your campaign from all of the other lookalike promotions. A vibrant theme can also serve as a distraction so that the focus is not exclusively on low prices. Finally, strong themes are highly memorable, which can maintain brand awareness long after the promotion ends.