The True Costs of Black Friday on Small Businesses – and what to do about it!
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Black Friday as we experience it today is surrounded by urban myths.
Most commonly, the history of Black Friday is attributed to the shopping spree retailers in America started after the Thanksgiving holidays.
As the story goes, after an entire year of operating a business at a loss, or “in the red”, stores would make a profit for the first time, or head “into the black” the day after Thanksgiving because holiday shoppers would spend like crazy on discounted goods.
I’m sceptical about the details – Thanksgiving sitting on the fourth Thursday of November each year would mean that a company would struggle to break even for 11 months of the fiscal year.
Interestingly, Thanksgiving, similar to our Harvest Festival in the UK, marks the change of seasons in both the agricultural world and the business calendar.
For many businesses, the weeks from harvest time to Christmas are when sales boom, and they ‘harvest’ cash reserves to take them through the winter months. Retailers historically see lower footfall in January and February, but still have operating costs to cover.
Events like Black Friday, Cyber Monday and Christmas all provide sales opportunities, that the well-prepared business owner can benefit from. The opportunity to free up cash tied up in old or slow-moving stock or even the last seasons’ fashions is welcomed by many.
Tens of thousands of businesses each year however are doing it wrong.
Damaging their business and potentially endangering their finances by discounting goods.
The laziest way for a small business owner to try and generate some fresh sales is normally by dropping the cost of goods, products or services by 10, 20 or even 50%.
20% off. It’s a cracking deal, right? Bound to create some sales for our business.
As professional business owners, we take the time to understand the numbers in our business and discounting can have a massive effect if not done correctly.
Let’s look at why discounting is dangerous.
Discounting can damage our brand.
Savvy customers are getting to know the same marketing tricks most business owners use to drive that temporary leap in sales.
When you last bought a sofa or carpet, I’m sure you saw a brand having a closing down sale, a warehouse clearance or another event. Heck, some companies seem to be clearing the warehouse every week.
It doesn’t instil confidence in the buyer about quality – we are likely to compromise quality to get a ‘deal’ or aftercare, and again we’d forfeit a guarantee for a ‘deal’.
That could be a deal breaker for the long-term values of our brand as we are trying to build it.
Brands like Apple, Louis Vuitton, Hermes, and Chanel steer clear of discounts.
It’s not something they want to be associated with, because smart customers come to expect discounts, once you start.
If you can give that margin away on Black Friday or Cyber Monday, why can’t they negotiate a deal at other times of the year?
Worse still, discounting could create more of a rollercoaster effect on your sales, as they wait for the promotional events to buy your product or service.
A rapid boost in sales can give us challenges in all areas of our business – sales, operations, finance and fulfillment.
Creating the very problem you are trying to solve, by boosting sales.
Let’s come back to the figures.
How much does discounting really cost your business?
Many business owners have learned to price their products or services by adding a percentage to their costs.
And so they discount on a similar basis taking off a percentage of the sell value.
If we add 30% to our costs to sell something, a 10% discount doesn’t reduce our margin by 10%.
Yet this is the logic many use.
Let’s take a look at this properly.
We run a small business selling electrical goods and have a promotion on Televisions.
A TV costs us £700 and we generally sell it in-store at £1000.
If we sell 10 at full price we make £3000 of profit.
Next look at our profit if we discount those ten by 10%. It drops to £2000.
So if we need to achieve £3000 profit this week in our sales extravaganza, we end up needing to attract more customers and have to sell 15 units instead of ten.
|Sales||Discount||Gross Sales||Net Cost||Profit|
|10||10% to £900||£9000||£7000||£2000|
|15||10% to £900||£13500||£10500||£3000|
Truth be told, we might need to sell even more, as we would accrue even more marketing costs to attract those new customers.
We actually have to work twice as hard in our business, to make the same profit, as selling those original ten.
Every business can be different, depending on the value of the goods and services and margins.
So can you work this out for your business? Take a look at this helpful chart to see where your business is. Along the top is the gross margin, whilst the discount amount is down the left.
If you enjoyed a 40% margin on your products, to make the same money during a discount, you’d need to double sales.
It’s an eye-opener isn’t it? We can become busy fools.
So what can we do instead of discounting?
The beauty of small businesses is they can adapt quickly and do things that big corporates can’t. But we can also learn from them. Big companies spend thousands of pounds testing ideas and investing in marketing intelligence. Way outside our budget.
So lets look at some clever ways to build value in our small businesses.
Stand out in a world of poor customer service.
It’s a given right? Small business = personal service.
So many small businesses hide behind a website or social media, when in fact, simply answering the phone and providing real customer care can win orders and customer loyalty.
Customers are such an inconvenience though always calling at the worst time!
If you are a family-centered business, I get it, feeding a baby or school run interruptions aren’t a good look.
Simply, get a low-cost call-handling service to ensure your clients are cared for and you can call them back at a better time.
If you offer a service that’s a substantial investment, then a personal consultation can help reassure the customer they are choosing the right product and help secure the sale. Why not add a booking system to your website so they can schedule that consultation at a time that suits them?
Likewise, a follow-up call after the sale can really add value and remind the customer you care.
Making our business personal, with photos of staff and clear contact details also provides peace of mind and help us build those relationships. When things go wrong, clients know where to come.
Remember Apple, the guys that don’t discount? They do offer free classes, workshops and aftercare, to ensure you get the best out of their products. Would a VIP programme for your customers make
Glass Slippers and Cinderella.
Great footwear shouldn’t be reserved for fairy tales.
One of the great lessons we can learn from the e-commerce footwear store Zappos was around how they built their business and bucked a market trend.
Zappos focused its product offering on good value-for-money products, not necessarily the cheapest.
They backed these products with amazing customer service, at one point closing a warehousing fulfillment centre that accounted for 25% of their revenue, just so they could take more control of the way their customers received their orders.
By concentrating their business on good quality products, with good margins they were able to have the profits to market and grow their business.
They even expanded from just footwear into accessories such as handbags that have a desirability alongside their existing ranges and increased average order value.
Understanding their average order value of around $100 and their average margin of 50%, they were able to do something unprecedented in their sector at the time.
Free shipping was offered to clients, both for orders and returns.
Understanding they made a $50 profit on each order, they could afford to spend part of that on free shipping, which in turn removed a barrier to placing an order and increased sales.
Nothing compares to you
Now you have Sinead O’Conner as an ear-worm, let’s talk about clever ideas that cost us very little even if we are a micro-business.
Christmas gifts in department stores are a great lesson for us as small businesses.
From beauty products to alcohol gift sets are a great lesson in marketing and how to shift customer value perception.
Bundling products together with a piece of promotional merchandise and packaging them for a special occasion takes the focus off the core product price and moves it to a gift/bundled perceived value.
Come Christmas, Dad gets a package of beers with a promotional glass that couldn’t normally be purchased separately. This adds perceived value to our customers that they stack up against the normal off-the-shelf products. The promotional packaging and beer glass have minimal cost but hike order value.
Could offering a complimentary gift-wrapping service add value to your offering?
Could pairing products or changing pack sizes for a promotional event increase profits and order value, rather than discounting?
Could you include a gift with orders over a certain value?
Most of all can you create something that customers can’t compare to buying normal products during a promotion.
Understanding our margins and costs also helps us deliver in other ways – can we reward regular customers with complimentary expedited shipping, product customisation or VIP events? Keeping an existing customer returning really is cheaper than finding new ones.
There are hundreds of ways we can add value to our business during the year, without fighting for advertising views during Black Friday and other events.
They just require a bit more creativity than a 20% discount.
If outstanding customer service is something you are passionate about, why not book a call and let see how business coaching could help you stand out in a crowded market place.