Deals and Discounts: The Five Ws of Temporary Price Reduction
On the face of it, consumers look at price reductions as a great way to save money, getting ‘more bang for their buck’, or simply an opportune time to stock up. But why exactly might a brand or retailer slash their prices (if not out of the goodness of their hearts)? The answer can be more complex and calculated than you think!
I asked Hubba’s resident expert, the venerable @RetailPhil, to walk us through how to make temporary price reductions work for you.
Like anything else in the world of retail, decisions are primarily based on who you consider your target demographic. When it comes to reducing their prices, there are usually two types of people brands tend to go after. As per Phil, “You’re either after driving new people to try your product or you’re after getting the same people to buy more product.”
Sure, most anything can go on sale but believe it or not, the category of your wares plays a major part in when and how often you can reduce your prices. Phil can think of one especially good example of this, “[Temporary price reductions are] really common in food. With food, you pretty much know how a person consumes your product.
Ever wonder why 6-packs are so popular? Phil breaks down the science behind it, “Six is a really common number because that means that if [a consumer] eats one a day they’re back in the store once a week to buy your product. With that in mind, you have to be careful about not discounting too often because then the customer will think, ‘Why is it always on sale?’ or they’ll get so used to seeing an item on sale, they’ll wait until the next time it’s on sale to buy it.
Typically, we see food get discounted once every three weeks or so. That’s once every three or four trips [to the market]. That way, the consumer gets a reward and you get a bump in sales but you’re not always discounting your product(s) either.”
Seasons are not just relegated to the weather or cycles in fashion! The ‘when’ is a particularly important aspect of price reduction because there are definite cues that no brand or retailer wants to miss if they want to keep up with their competition. Phil states, “You should know your seasonal boundaries for promotions. For example, for the Kids/Babies/Toys industry, Back-to-School is that time of year. August, July and the beginning of September would be when you see major sales. If you’re a Pens and Paper brand, you probably want to sell a lot [during this period], so you’ll be discounted as well. If you’re a Shoe or Apparel brand, you probably just want to discount enough that a mom will notice and think about buying your products. If you sell back packs, you’re probably only selling one bag a year to that kid [going back to school]. You want to discount that bag but you don’t want to give it away, otherwise you wont make any money.”
The Why of the Buy definitely comes into play here as the type of consumers you’re targeting directly impact your strategy for reducing prices and getting them to buy your product. As per Phil, “[One reason for price reductions is] you want people to buy more because you have a lot of inventory. You also know if they buy more they’ll consume more. That’s really common with things like allergy medication; you only need one pack but you can get people to buy more by saying, ‘If you buy three packs, you can keep one in your car, one in your house and one in your bag.’ They still only take one pill a day, but because you got them to think it’s more convenient, they bought more.
“The other [reason] might be, if they know their competition is launching new items, it’s very common for brands to go out ahead of time and try to get consumers to load up on similar items. That way, when the new launch happens, consumers are not really in the market to buy more. That’s really common in cosmetics, particularly staple items and colours like [brown and black], before the beginning of a season. Let’s say Maybelline is already in market but they know that Revlon will be launching a fall colour palette. Three weeks earlier they’ll offer a ‘Buy 3, Get 1 free’ deal. Shoppers will go out and buy all those staples and by the time Revlon launches their new product, they think, ‘I don’t actually need anything yet maybe I’ll wait a couple of weeks/months before I buy more.’ They’ve completely interrupted their competition’s launch cycle.”
Regardless of if you are a brand or a retailer, you have to know what your pricing threshold is. That is, how much of a discount can you comfortably give your customers and will it be worth it? Phil elaborates, “As a brand, you want as much analytics as you can get so that you can tell how much of a spike in sales you’ll get for your discount. At some of the brands I’ve worked on before, I knew that a 10% off gave me the same spike as 25% off. So then I knew I wasn’t going to deep discount because I wasn’t going to get any extra sales.
If you’re working with a retailer, big or small, you have to know how to then sell your discount to the retailer. The way pricing works, you have the cost as a brand but you also have a cost that you sell to the retailer. They in turn have a price that they buy it from you for and then they mark up that price to whatever margin they want. As a brand, when you recommend to a retailer that they reduce the price of a product for however many days, they’ll always ask you to protect their margin.” Make sure you can confidently sell your retailer on the pros of temporarily reducing your sale price. For example, maybe they’ll lose a bit in margin but they’ll see an increase in profit due to the volume of sales.
With this arsenal of knowledge comes one caveat however, as there are often rules for how long a product can be on sale before the discounted price is considered their new regular price. If your product is on the sales shelves for far too long, a consumer could legally argue a case for false advertisement. Most countries have guidelines around what’s considered regular price and what’s considered a temporary price discount. Make sure you follow the laws in your country and your state and that you’re in line with your competitors.