With the imminent arrival of Black Friday it’s become common to see consumers lash out against overconsumption and the lack of true value to be gained from shopping the bargain bin year in, year out.
But retailers who are battling increased competition, the high price of materials, dwindling profit margins, and coaxing consumers with less disposable income to part with their hard-earned case may feel they have no choice but to hold a Black Friday sale.
And who could blame them, when there is so much noise around how retailers are planning their upcoming Black Friday deals. It’s a big time for a lot of businesses, but retailers need not fear the backlash from opting out – in fact there are many good reasons for them not to.
- Businesses must protect their profit margins to survive tough economy
Small businesses are especially vulnerable to losing out when competing with bigger retailers on price alone. Facing off against the massive margins and volume of Amazon is particularly unwise if your business has nowhere near the same amount of resources in reserve. The truth is profit margins are already extremely low in most retail situations but labour costs are high.
According to the Australian Retailers Association profitability benchmarks, food & liquor has the lowest EBIT margin at 4.7%. Meanwhile takeaway food sits at 10.9%, recreational goods at 12%, and fashion and jewellery 18%. At the same time wage growth mandated by the Fair Work Commission’s mandatory minimum wage increase, high inflation, and stalling immigration has eaten into these margins.
When profit margins are wafer thin, the last thing you want is to trigger a price war with the competition. The cost of living crisis has caused retailers to host a string of near-constant sales but businesses are hardly better off for it.
- Discounting without a proper basis devalues your brand
Every dollar counts when business conditions are competitive but does participating in a sale help bolster profitability? The truth is sales do not always equal profit – in some cases the more you sell, the more money you lose. And you also lose out on brand equity which is the essential ingredient to surviving a tough economy.
Offering constant discounts creates the perception that your product or service holds no intrinsic value. Research shows frequent monetary sales promotions “run a greater risk of devaluing a brand than similar frequency of non-monetary sales promotion” which explains why you rarely see high-end brands offer discounts. Among these are Chanel, Peloton, Lush, Louis Vuitton, Cartier, and Canada Goose.
The result is these brands are always in demand and never lose out on their perceived value. Retailers need to be confident in what they’re offering and instead opt to adapt and improve their processes to exceed customer expectations.
Rather than give products and services away for a discount, build value by focusing on the service elements, getting the products right, and ensuring every aspect of the customer experience is tailored. Even in a tight economy customers are more than happy to pay if they feel assured of the calibre of service they receive and believe they get good value.
- Too many sales leads to lower consumer spend
An overlooked downside to holding sales at set times during the year made worse by the fact that everyone else is having a sale too is that customers become accustomed to waiting for the sales period to spend money. A survey found that 64% of online shoppers will wait for items to go on sale before taking the plunge. It’s bad for cash flow and overall a bad business strategy simply because it fails to bring in money year round.
On the flipside some businesses are cutting into their own profit margin just to jump onto the sales bandwagon with the goal of bringing in a wider customer base. Yet a case study presented in the Harvard Business Review found that for one company 20% of customers brought in 225% of the profit. Retailers need to ask whether the sacrifice is worth it – if their strategy caters to this core group and if it will bring in more like them who will be willing to purchase outside of the sales periods.
They need to make sure they don’t run the risk of alienating their core customers who aren’t necessarily shopping based on price and may feel short changed by paying retail only to find the same product or service discounted by half a month later. Are retailers ignoring them in favour of bringing in sales from people who would otherwise never buy from them anyway?
In deciding whether or not to participate in Black Friday businesses need to remember that making customers happy doesn’t have to be about discounts and there are many options to run promotions without drastically slashing prices. Drilling down on experience, service, and product is key as is implementing a rewards program which offers perks for loyalty and referrals.
Retailers should keep in mind price is important, but so is value and quality. In the end, no amount of money paid is worth it if the customer is unhappy with what they get.
Kristy Bannister is co-founder of Dr Dough Donuts.