On Friday last week, I had to go into the city. About 10.00am I turned up at Town hall station, and the shopping precinct around it was crowded, people lining up to get into shops that a few days previously were deserted.
It took me a while to realise that it was ‘Black Friday’.
Retailers were making extreme offers to generate a sale, and seemed to be succeeding. When I got back to my home office and opened my computer, it was deluged with digital ‘Black Friday’ specials from everyone to whom I had deliberately or inadvertently given my email address since 2010. ‘90% off Black Friday Special’ was not an uncommon header.
‘Black Friday’ is the wrong description, coming as it does from the US where it joined Mother’s Day and Father’s Day created by Hallmark cards, as a marketing construct. In contrast, Black Friday should be called ‘Stupid Discount Day’ or ‘The day we went broke’.
The attraction of deep discounts does a few things to a retailer’s sales numbers:
- Generates volume, (hopefully) sometimes at a loss on the discounted item, so retailers are hoping you buy something else at the same time to recover margin. This volume comes, if it comes, with the advertising costs. For a small retailer, these costs might be just a few banners in the window, and someone outside the store spruiking, but are more likely to include some email marketing, and social media posts, and usually some of which are paid to generate reach.
- Rewards non-customers who buy once, try, and you hope come back. Rarely happens, especially in the madness of a mass discount.
- Attracts the worst customers, those who never buy anything at full price, who only chase discounts. It is often these same customers who create most customer service costs.
- Rewards existing customers who would have bought anyway at full price This usually results in a ‘pantry stock’ that kills sales and margin in subsequent periods.
- Erodes brand positioning, sometimes built up over years, establishing a new ‘base price’ for their products and brands.
Most of the offers in my computer were for digital products, where the marginal cost is zero, so they can give away 90% price and not go into the red. Bricks and Mortar retailers, the ones with queues outside them in the QVB, Town Hall station underground mall, and the giant Westfield next door do not have the luxury of zero marginal cost.
I suspect many of these retailers are desperate after 2 years of struggle, and desperation often leads to very poor decision making.
Hopes that deep discounting will increase volumes sufficiently to recover margin are almost always in vain. When you do the numbers, depending on the gross margin, and additional promotional expenses, volumes have to increase by a factor of at least 3 or 4 in order to break even. The more frequent outcome is a very nasty shock when the P&L is done at the end of the month.
Anyone can sell anything at a deep discount. It does not make you successful, just thoughtless, desperate, stupid, or a bit of all three. The lesson should be, not to go broke being successful.
