Retailers love promotions. They generate excitement, increase store traffic, move merchandise, and, when everything goes according to plan, produce a welcome bump in sales.
But there is a problem that too many retailers overlook.
Every promotion teaches customers something about your business. The question is whether you are teaching them what you want them to learn.
When retailers continually advertise 20% off, 30% off or even 50% off, they may be doing more than sacrificing gross margin. They may be conditioning customers to believe that regular prices are negotiable, that merchandise is overpriced and that purchasing anything without a discount is foolish.
In effect, retailers may be spending their advertising dollars teaching customers not to buy at regular prices.
That is an expensive education to provide.
The Dangerous Cycle of Discounting
Consider a specialty retailer generating $3 million in annual sales with a 50% gross margin. Management decides to stimulate business by offering a storewide 20% discount. Assuming merchandise costs remain unchanged, the gross margin on discounted merchandise falls from 50% to 37.5%. That is a 25% reduction in gross profit dollars per unit sold.
To generate the same gross profit dollars, the retailer must increase unit sales by approximately 33%. How many promotions actually produce that kind of sustained increase in unit volume? And that calculation doesn’t include additional advertising expenses, increased labor requirements or the possibility that customers who would have purchased at regular prices simply waited for the sale.
A successful promotion should be measured by incremental gross profit dollars, not merely by increased sales. Unfortunately, many retailers celebrate the sales increase without examining what they sacrificed to achieve it.
Customers Are Better Trained Than We Think
Consumers are remarkably good at recognizing patterns. If a retailer conducts a major sale every holiday weekend, customers eventually learn to wait for holiday weekends.
If a store regularly distributes 20% off discount coupons, customers learn that the advertised selling price isn’t necessarily the real selling price.
And if customers discover that asking for a discount usually produces one, they learn that negotiation is part of the shopping experience.
None of these behaviors necessarily benefits the retailer.
I spent approximately 40 years operating an independent footwear business. During that time, I learned that customers remember far more than retailers sometimes give them credit for. They remember whether sales are genuine. They remember whether advertised specials represent meaningful values. And they certainly remember when the merchandise they purchased last week is suddenly advertised at a substantially lower price.
Customers don’t need to understand retail mathematics to recognize when patience saves them money.
The Difference Between a Promotion and a Strategy
Promotions aren’t inherently bad. In fact, well-designed promotions can be extremely effective. The distinction lies in their purpose.
A promotion designed to liquidate discontinued merchandise serves a legitimate inventory-management function. A promotion introducing a new product category can encourage customers to explore merchandise they might otherwise overlook. A promotion rewarding loyal customers can strengthen relationships and increase repeat business.
But a promotion created simply because sales are running behind plan often represents something entirely different. It is frequently a short-term response to a problem that may require a longer-term solution.
Perhaps the merchandise assortment needs improvement. Perhaps customer service has deteriorated. Perhaps advertising isn’t reaching the appropriate audience. Or perhaps competitors have developed a more compelling value proposition. Discounting may temporarily disguise these weaknesses, but it rarely corrects them.
A sale can bring customers through the door. It cannot, by itself, give them a compelling reason to return.
Protect the Integrity of Your Regular Prices
One of the most valuable assets a specialty retailer possesses is pricing credibility. Customers should believe that regular prices represent fair value, not merely inflated starting points for future discounts.
This doesn’t mean retailers must always charge the lowest prices in the marketplace. Independent specialty retailers often provide knowledgeable employees, better merchandise selection, personalized service, convenient shopping experiences and assistance after the sale.
Those benefits have economic value. The challenge is communicating that value effectively.
When advertising focuses almost exclusively on discounts, retailers inadvertently tell customers that price is the primary reason to shop. That message can undermine everything else that makes the business special.
If the retailer’s greatest competitive advantage is knowledgeable service, why isn’t that advantage featured prominently in its marketing? If its merchandise assortment is carefully selected, why isn’t that story being told? If its employees help customers avoid expensive purchasing mistakes, why isn’t that benefit emphasized?
The more effectively retailers communicate their value, the less dependent they become on discounting to generate traffic.
Better Ways to Promote
Retailers should consider promotional approaches that stimulate business without undermining their everyday pricing structure. Limited-quantity offers on selected merchandise can create excitement without discounting an entire department. Vendor-supported promotions can improve customer value while protecting retailer margins. Gift-with-purchase programs may encourage transactions while maintaining established selling prices.
Special events, educational demonstrations, exclusive product introductions and customer appreciation programs can generate traffic for reasons other than price reductions.
Even clearance sales can reinforce pricing credibility when customers understand that discounts apply to discontinued styles, broken assortments, or merchandise being removed from inventory.
The objective should be to give customers a compelling reason to purchase today without teaching them that tomorrow’s regular price is meaningless.
Measure What Matters
Retailers frequently evaluate promotions by comparing sales during the promotional period with sales during the previous year. That is a starting point, not a conclusion.
A more meaningful analysis should examine gross profit dollars, average transaction value, units per transaction, advertising expense and the percentage of promotional sales that were genuinely incremental.
Retailers should also examine what happens after the promotion ends. Did sales return to normal? Did the promotion attract new customers who subsequently purchased at regular prices? Or did the retailer simply borrow sales from the following weeks?
A promotion that generates an impressive weekend while weakening the following month’s business may not have accomplished very much.
The cash register tells you what sold. The gross profit statement tells you whether the promotion was worthwhile.
Think Beyond the Next Weekend
Retailing requires balancing immediate financial needs against long-term customer relationships. There will always be circumstances when aggressive promotions make sense. Excess inventory, seasonal transitions, competitive pressures and cash-flow requirements sometimes demand decisive action.
But those decisions should be deliberate rather than habitual.
Before approving the next promotion, management should ask one additional question: What behavior are we encouraging customers to repeat?
If the answer is purchasing more frequently, discovering new merchandise, developing loyalty or appreciating the retailer’s unique advantages, the promotion may be building something valuable. If the answer is waiting for the next discount, the retailer may be creating a problem that becomes increasingly difficult to reverse.
The best retail promotions don’t simply produce today’s sales. They help build tomorrow’s business.
And tomorrow’s business is where the real money is made.
Alan Miklofsky is a semi-retired retail business consultant and former owner of Alan’s Shoes, an award-winning independent footwear retailer in Tucson, Arizona, which he operated for approximately 40 years. He founded Shoes.com in 1998 and served on the National Shoe Retailers Association Board of Directors for 29 years, including as Chairman from 2009 to 2011. He was named NSRA Retailer of the Year in 2015 and has received numerous industry awards recognizing excellence in retail operations and customer service.
