Watch your Margin!

The classic balance of promotions is conversion vs profit. You have to have margin targets for your products that factors in marketing expenses and discounting. This can be quite tricky, which is why most buyers are responsible for their own promotional strategy. 

Set your margin target and understand what kind of sales you can realistically apply. The goal is to find the lowest discount that drives sales. Test this to see what compelling offers drive engagement in ads and conversion in your store. There is a lot of data and research out there on pricing strategy, some rules of thumb.

What is the maximum discount you can apply? Think Black Friday or Boxing Day, what is the lowest price you can sustain? Keep that number on the shelf for those marquee events. 

What is the competition promoting/pricing at? Can you realistically compete toe to toe with them and match those promos? If you can’t, you’ll need to double down on your value propositions otherwise you’re racing to the bottom with no profit.

A president of a large retail company once told me they had ‘the shot in the arm’. The sales team had become so reliant on promotions to close customers, that margin targets weren’t being met. It took years to correct the ship out of relying solely on discounting to drive sales.

There's a more detailed breakdown of margin calculations and promotions at the bottom of this article.

Product Integrity

A big risk of always discounting your product is it decreases the perceived value of the product. If it’s worth $1000, why are you always selling it at $500? The questions I always try to answer is:

“Why is your product on sale?”

If you’re not a clearance center, there should be a reason.

• There's seasonal buying cues like Black Friday, back to school, Christmas, etc.

• There is excess inventory

• A new product launch offer

• A loyalty play for existing customers and past-purchases

• Seasonality (spring, summer, fall, winter) related items

If you don’t have a good reason, but you know promotions are effective, you might want to try promotions that don’t diminish the price of your product.

A group I worked with never discounted their primary product. They only offered discounts on accessories and complimentary products. In their mind, and I agreed with them, the perceived value of the product is too great, and to diminish that is to risk losing out to competition in the long run.

Training your Customer for the Sale

Promotions are a slippery slope. They are one of the most effective tools to drive conversion, but it can also change the behaviour in your customer. As retail companies, we want customers to shop with us as often as possible. 

With the web it’s easier than ever to pop by and see what’s going on. That means it’s easy to see that you’re always on sale, and to know that a better sale may be just around the corner.

“Well Sean, what’s the solution here?”

This is a tricky one, but something being employed by a lot of major retailers that I haven’t seen as much in smaller ones is price guarantees. This doesn’t just have to accommodate competition, a good price guarantee also tells the customer you’re getting our best price today, no matter where. 

What we’re trying to avoid is a customer being ready to buy and putting it off for the right offer. That means we could be losing margin, or worse, losing them to the competition. The compelling message is to buy today with confidence.

Other ways to reduce the ‘always on promo’ appearance:

• Create email signup and first time customer offers

• Encourage pre-orders through special offers

• Use referral promotions as partnerships with advocates and social personalities

• Create a loyalty program 

• Implement personalized offers

• Abandon cart offers

The above list has some pretty advanced tactics in it, but there are some great tools and walkthroughs out there on each. 

Not Testing and Evaluating

Just because something is working today doesn’t mean it can’t be better. If promotions are a key part of your marketing strategy, it should be tested and evaluated versus previous events. I spent so much time tracking and comparing data points on promotions to help us improve.  

Think about how many elements can factor into the purchase path: advertising, creative, copy, offer, duration, seasonality, availability, competition, web design. To understand if your promotion was effective and not some other variable, you have to be thorough, and track the performance in each variable.

Data Points of Interest

Traffic - Users by channel

Revenue - Written and delivered sales

Margin - % of COGS (cost of goods)

Conversion - Overall conversion and conversion by channel

Promotional uptake - % of orders that used the promotion

AOV - Average order value

IPO - Items per order

These can all be dumped into a nice spreadsheet where you compare YoY (year over year) and have it side by side with previous weeks. Measure year over year if possible to remove seasonality from the equation. If possible, try to run the same event the same time every year (unless it was a dud), so you can incrementally improve.

YES, this is a LOT of data. I have found without it, you will struggle to answer questions intelligently about how your events did.

Not Understanding Cost of Acquisition

Expanding a bit further on understanding your margins, you have to have a clear picture of all your costs to understand what you can afford to discount. A discount is the last thing you factor in before calculating profitability, and if after all your costs you have no profit, discounting doesn’t often make sense.

This in itself is another article I encourage you to read. CPA is a bit outside of the basics realm, but it is a critical thing for a business to understand in the pursuit of profitability.