Hey!
Kevin Hillstrom writes about “inflection points” this morning and the number of inflection points that will come up over the next few days with Black Friday, Cyber Monday, and the onslaught of SALES for the holidays.
Kevin’s point is a great one that reminds me of the thing your mom probably told you at some point: “If everyone jumped off a bridge, would you?”
Most marketers would answer, “Yes” right now…
Or, it feels that way.
The truth is that there is a fallacy that retailers don’t really make money until the period between Black Friday and the New Year that isn’t backed up by data.
In truth, what the maxim means is that the 4th quarter is typically the highest sales volume for retailers.
I mean, duh!
There are a bunch of gift giving holidays at that time of the year. You’d expect more sales when there are celebrations and gift giving opportunities, but the numbers underlying all of the sales point to the issue of discounting/profits/revenue.
- Revenue: That’s top line.
- Is it good or bad? It all depends.
- Discounts: Are supposed to drive demand?
- Do they?
- In my work, I see discounts pull demand forward, stealing profits because a lot the sales would have happened anyway without the discount.
- Do they?
- Profits: This is what you keep.
- This is the most important number. If you don’t make money, you don’t have a business for long.
In 2014, a UK retailer, Argos, tested the Black Friday assumption and found that they had a 45% increase in sales on Black Friday.
The problem: the bottom line wasn’t helped at all.
In the Mini-MBA in Marketing, Mark Ritson teaches that discounts can cost your business up to 40% of your profits from just 1% of discounting.
That’s high, but it gets your attention.
HBR has numerous articles that point to around a 10-11% decline in profit for each 1% you discount.
In my work, I’ve seen both numbers happen and if I had to peg a number to the negative impact of discounts, I’d say it has been consistently between 20-25%.
You pick your number.
The directional point is that discounts steal profit.
You can make a boatload of revenue and no profit.
That’s something to consider this week and into the holiday season.
Let me know what you think:
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BTW, thanks for reading. You’ve made it to the bottom, can you share this with one person that might be running a discount on Black Friday because they “have to”?