Black Friday, discounting and eroding your margins
It's that time again. 20%, 30% even 50% off. It's Black Friday discount bonanza week.
I am not going to get into whether or not Black Friday is a good thing, but I want to talk about what it means to your margins.
Every time you discount your prices, you eat into your margins. The challenge for most is that margins tend to be smaller than ideal before you even think about discounts. Most consumer goods companies need margins above 40% to give them a platform for growth. If you have a 35% margin and feel you need to offer a 25% Black Friday discount, then while your customers might like it, your bottom line will not thank you.
In my book, The Direct-To-Consumer Playbook, I was given some great advice on margins and pricing.
First, Brie Read at Snag told me that from the get-go, she made sure there was enough margin to direct 25% of revenues straight into marketing. She also stayed clear of discounting to always maintain this investment.
Then these wise words from Dan Murray-Serter from Heights:
“You don’t have a business unless you have a reasonable margin to play with. Without a good margin, you can’t surprise and delight your customers, invest in growth or hire exceptional people. We learnt that without a healthy margin, you don’t have a business model that works. So we make sure our customers respect that we make a high-quality product and need to charge a fair amount for it.”
The other trap it is easy to fall into is being too generous with your discount. Not only does this destroy your margin, but it is also often unnecessary. Research has shown that smaller deals, e.g. 10-15% are just as, if not more motivating than larger offers. Us humans are a funny bunch.
If you want to understand how we make choices and why we are all slightly irrational, I heartily recommend the books at the end of this piece.
The last thing I would like you to remember is that Black Friday is meant to be a special one-off event. If you discount in this period and see good results, it is tempting to want to use frequent discounting to repeat the trick. The challenge is giving regular discounts creates the expectation your products are only ever worth buying at your reduced price. This means customers will wait for your next sale period rather than buying immediately and also permanently reduce your margins. Both are horrible outcomes.
Good luck with your Black Friday strategy, but be mindful of those unintended consequences.
Here are the books to read for pricing strategies that will serve you better than any seasonal promotion.
1) The Choice Factory - Richard Shotton
2) Decoded - Phil Barden
3) This is Marketing - Seth Godin
4) How Brands Grow - Byron Sharp
and of course
5) The Direct-to-Consumer Playbook