DISCOUNTS BASICS Motivating customers to buy more, Part One

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13. DISCOUNTS BASICS Motivating customers to buy more, Part One

• Avoid ‘cannibalization’ ―selling the same number of units as before the discount, but for lower unit price • Do not simply make the discount symbolic e.g., 5; make it significant e.g, buy 2, get 3rd for free while still ensuring overall positive margin • Buy 3 bags, get 1 for free • 30 percent off between 2-4pm WHAT WHEN HOW E.g. • Have large quantities of a product that need to be sold • These products have high enough margin price minus cost to enable lowering price and still be profitable • Sometimes, selected items can be sold below cost to help in selling other items through, e.g., cross-selling • Lower per-unit price if more units purchased, or • Catchy low price on a selected items to ensure they sell IN-STORE PROMO 13 245 Discounts are meant to make customers buy more, but at a lower price. Think through and make some calculations before you give discounts. Then review your decision and calculations again after customers use these discounts. This is to ensure you are not actually making less money overall with discounts than without them. You also might want to determine the best discount amount to offer. These are similar to the pricing calculations. Make sure a discount is consistent with your product’s positioning. For example, if you have a premium luxury product, offering a buy-one-get-one-free discount for a month might cheapen the consumer’s perception of the product. You also do not want to give discounts to people who will buy the same amount whether there is a discount offered or not, or to those customers who might only be marginally influenced by a discount offer. – 2.3 PROMOTION: In-store Promotions – An example of how to calculate the effectiveness of discounting is presented on the next page. 246 EXAMPLE OF CALCULATING DISCOUNT PROFITABILITY Selling Price per Rug of Rugs Sold of Rugs given away Cost per rug Margin per sold rug Loss on rugs given away Total Profit Option 1 40 100 10 30 3,000 Option 2 40 200 100 10 30 1,000 5,000 In this example, you are selling rugs for 40. It costs you 10 to make each rug. You know you can sell 100 rugs at this price. However, you know that you could also make 300 rugs. If you gave a “Buy two, get one free” discount, would you make more money? IN-STORE PROMO 13 247 Review these calculations step-by-step. In this scenario, you are a weaver and it costs 10 to make each rug that you can sell at your own shop for 40. You can either plan to make 100 rugs or 300 rugs. At the current price with no discount, you believe you can sell 100 rugs, so you would make 40-10 x 100 = 3,000. If you offer a “Buy-two-get-one-free” discount, you believe you can sell 300 rugs 100 of these would be given away as part of the discount, however if everyone takes the “Buy two-get-one-free” offer no one buys just one rug. If that works, you make 40-10 x 200 + 0 - 10 x 100 = 5,000, which is more than the 100 rugs at the current price. Therefore, in this example, it is worth while to offer a discount in the form of a “Buy-two- get-one-free” offer. What discounts are applicable to your business? – 2.3 PROMOTION: In-store Promotions – 248 DISCOUNTS EXAMPLES AND POPULAR TYPES USED Time-limited: ‘Today only’ creates perceived urgency and gives customers a reason to come in now ‘Special low price’: Low price attracting customers, who will also buy other higher-margin products e.g., drinks ‘3-for-2’: Make people buy more, thus increasing the spend-per-customer over what it would be without the promotion ‘Conditioned’: Lower price if you talk to a cashier and come inside, thus possibly making another purchase IN-STORE PROMO 13 249 Above is an overview of a few basic types of discounts. Before you go ahead with discounts, think hard about what type you should use depending on what you want to achieve through them. Are you trying to eliminate products because otherwise they will soon become spoiled or obsolete? Get people to try a particular product because you know they will like it and buy more? Do you want to make people come in to buy something inexpensive because you believe you can sell them other more profitable products very much like ‘hook’ products from the section 2.2? These are just some examples of your potential goals. For each of these goals, a different type of discount from the above list should be used. For example, if the goal is to get rid of products quickly, then motivating consumers through a “Buy-two-get-one-free” type of offer might be best to motivate them to purchase more. However, if you want customers to try a particular product now, in the hopes of getting them to make repeat purchases later, having a special low price might be best. – 2.3 PROMOTION: In-store Promotions – What comes to mind when you hear ‘product bundling’? 250

14. PRODUCT BUNDLING BASICS Motivating customers to buy more, Part Two