Labor Day, the holiday originally instituted to celebrate workers everywhere, now coincides with the start of the U.S. school year and signals the change from summer to fall. It’s a time of year to pack away our summer clothes and pull out warmer gear. But what if those sweaters and shoes don’t fit anymore? Therein lies the pull of Labor Day shopping.
Combine the Labor Day holiday with our attraction to discounts and you get a recipe for increased revenue. As of a 2018 Inmar study, consumers cashed in on an estimated 2.84 billion coupons. VoucherCloud reports that over half of consumers are driven to first-time purchases with a coupon.
It’s clear that discounting has an effect on consumer behavior, and Labor Day is prime time to take advantage of that effect. However, businesses of all shapes and sizes need to consider the impact before slashing prices. Here are a few questions to answer before setting any Labor Day promotions.
What Types of Businesses Typically Offer Holiday Discounts—And Why?
Retailers that sell products like apparel, appliances, electronics, home goods, outdoor gear, mattresses, and even cars are some of the highest-profile businesses that offer holiday discounts. What do all these products have in common? Many of them are highly seasonal (clothing and outdoor gear), are replaced with new models frequently (cars and electronics), or are large-ticket purchases (mattresses and appliances).
There are many reasons to offer discounts on Labor Day, including moving outdated inventory to replace with new products, driving sales for discounted and full-price products, and bringing in new shoppers as well as returning customers. Those 2018 model year cars have to go to make room for the 2019 models arriving soon, and customers purchasing discounted clothing might also find things they like on the full-price rack.
However, just because the retailers mentioned above benefit from discounting doesn’t mean that other businesses can’t get in on the discounting action. Yoga studios could offer discounted passes to drive increased class attendance once school starts up again. Landscaping companies might decide to offer “prep your yard for winter!” discounts to drive increased business just ahead of the winter lull. Opportunities abound for businesses to get creative with discounting strategies.
How Do Business Owners Determine How Much to Discount Products or Services?
Before implementing any discount strategies, it’s important to know a handful of metrics on your business’s current performance. These metrics will provide a yardstick for how much you can discount and what the impact will be.
For each product or service you are thinking about discounting, determine how much you currently profit from the sale of that same product. You’ll need to know the total cost you incur to produce and sell the product and the sales price of the product.
Let’s say you own a mattress store and you’d like to discount a specific brand, size, or type of mattress. According to Consumer Reports, the typical markup on a mattress is between 40 and 50 percent. So maybe for the type of mattress you want to discount, the cost to sell it is $500 and the sales price is $750, giving you a $250 profit on the mattress.
Here’s a great place to create some scenarios using a pro-forma income statement. Choose a discount to experiment with and make some projections based on the use of that discount. If you offer shoppers $50 off or 15% off the purchase of each discounted mattress, and you sell through 80% of those mattresses during the sale, how will that affect the company’s profit margins across the board? In order to have the most informed perspective (and reduce potential losses), it’s critical to evaluate a discount’s impact on the overall business.
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What Other Factors Should Businesses Consider When Evaluating Discounts?
Evaluating the impact of discounts is about more than just the discounted revenue itself. Sometimes it’s imperative to move products at a low- to zero-profit rate, or even at a loss. There could be an expiration date after which your business isn’t legally permitted to sell the product anymore, so it really has to go.
And don’t forget: you’ll need to communicate to shoppers that the discount is available, otherwise the offer may not have the desired effect. Traditional marketing efforts like direct mail can get expensive quickly, but there are ways to reduce costs and still get the word out. Take advantage of low-cost, online methods like email, social media, and website promotions.
What Are Some Tips When Preparing for a Discount Sale?
Let’s say you’ve evaluated a number of discount scenarios, weighed all the financial inputs, and you’ve decided on a discount strategy. What can you do to ensure everything runs smoothly?
Make Sure You Have Enough Products and Services to Meet Demand
As a consumer, there’s a unique frustration in receiving an offer, getting excited about it, and going to redeem it – only to find that it’s unavailable. Not only is it a missed opportunity for a sale, but the negative impact on shoppers may turn them away from your business for good. Consider what happened to Deciem, the Abnormal Beauty Company, during Black Friday 2018 – and the message they had to convey to consumers:
The same goes for service businesses as well. Offering a discount on yoga passes and then having every class overbooked will turn off existing studio patrons and newbies alike. If necessary, staff up to meet demand.
Continue Promotional Efforts for the Duration of the Discount
Beyond the initial marketing push to make shoppers aware, it’s important to continue marketing for the entire discount period to keep the momentum going. Use social media and email campaigns to share product photos or customer stories as purchases happen. Drive urgency throughout the discount window by reminding consumers of the end date. Keeping the discount on everyone’s mind will make it that much more likely that shoppers will take advantage of it.
Monitor Your Cash Flow to Ensure That Projected Profit Margins Are on Target
Those pro-forma projections of your business’s financial state with the discount are one thing, but what happens when customers start buying is another. Make sure to review your cash flow statements with increased frequency during the discount period. If profit margins are dipping too much, you’ll have the chance to phase out the discount before your business incurs too much of a loss. Alternatively, if the discount is driving increased sales on full-priced products, that’s good to know as well.
Effective Discounting Requires a Well Thought-Out Strategy
Any business can offer a discount, but that doesn’t mean it will drive the intended results. Businesses must evaluate all the inputs before making any decisions. Setting a goal, brainstorming product and service types, generating offer ideas, and then running through a “what if” scenario will demonstrate projected profits. That way, business owners have an informed perspective before deciding to discount (or not).
Learn more about how ScaleFactor gives you visibility into your finances and helps you plan for upcoming events like Labor Day here.