No matter how deep their pockets, everybody wants a deal. However, as the current UK market highlights, for sellers, attracting consumers via a downward spiral of price cuts can have a dramatic impact on profit.
Rather than being drawn into an unending cycle of competitive price reductions - and risk damaging brand image in the process - in today’s market, there’s more reason than ever for smart brands and retailers to take a more scientific, risk-managed approach to sales promotions. When executed correctly, they have a far greater opportunity to stand-out even in the most crowded markets, drawing buyers in and giving sales a much needed boost.
Managing the risk
One of the most effective ways for a brand or retailer to break from constant discounting is to construct compelling, headline offers. The aim is principally to create a reason for buyers already thinking of making a purchase to commit to buy, as well as attract those who were not even thinking of buying.
The main reason many brands have shied away from this method is because of a long-standing fear of over-redemption – if the promotion is a runaway success, they could end up giving away more revenue than they make. This is where risk-managed sales promotions really come into their own.
The main difference is that a risk-managed offer gives brands, retailers and promotions agencies access to the scale of promotions that their P&L couldn’t usually afford. This means using new types of promotions they might not have considered before – or ruled out altogether, such as cash back, prize-draws, instant wins and guaranteed satisfactions, as well as trade-in, trade-up and buy-back deals.
Rather than face a substantial bill at the end of the campaign, the combination of predictive analytics with a specialist insurance policy guarantees the firm will achieve the result or objective it aimed for at the start. For example, using data from previous promotions, it is possible to calculate likelihood of redemption and cap the potential exposure before the campaign launches. This is achieved through underwriting the risk of over-redemption. If a promotion turns out to be too popular, the brand incurs no additional costs or fees because the financial risk is covered by the policy.
Backed with what is essentially an insurance policy for promotions, brands and retailers can begin to get creative. Here, cash back offers are a particularly smart way of boosting sales, especially when it comes to premium brands. Rather than following the traditional route – i.e. selling new items at the recommended retail price then lowering the price over time – buyers are instead presented with a compelling reason and timeframe in which to buy. Crucially, this more effective strategy enables sellers to move inventory and maintain a price position for longer.
In a retail environment such as an electronics store, for example, if a laptop drops in price from £299 to £249 then its value has simply changed, albeit becoming more affordable for those already thinking of buying. As a result, the retailer is likely to see a marginal uplift in sales. However, if the price remains at £299 and customers are offered a one-week-only £75 cashback deal, they have a one-off chance to buy something they want for less. The fact that both the price drop and cashback propositions cost the same illustrates why smart sales promotions are a much more efficient and sustainable way to drive sales.
Rather than getting priced out of the market by competitors, more and more brands are taking a more strategic view of sales strategy and promotions. In doing so, they have the opportunity to stand out from the crowd with deals that speak to and excite prospective buyers. Using these tactical propositions, they also have a far more effective means of growing profit.
By Steve Gales, Sales Director, Opia.