Promotions are Killing Your Profits.
How and Why Marketers Need to Stop Relying on Promotions.
When I say DFS, what is the first thing you think of? It’s probably not their breadth of quality home furnishing but instead, that DFS sale you’ve seen advertised every week for the past 10 years. I can’t help but wonder whether the brand has now got themselves in a situation where no consumers would consider paying full price for any of their items. It’s a situation we see time and time again as a Luxury Ecommerce Agency.
Why Promotions are Killing Your Profits.
For marketers, we would assume that most of your KPIs are going to centre around ROI or revenue generated. But how many of you are actually aware of your profit margin and the businesses actual profits. Because when brands decide to run end of month, payday sales to try and boost their revenue figures in line with targets, it’s going to be affecting your margin.
Let’s take a look at some maths.
If you decrease your prices, how much must your unit sale volume increase in order to keep the same gross profit?
Taking the worst case scenario of your products having a 30% gross margin; when you are frequently offering 20% for new customers or 20% end of month sales, you’ll need to be selling 200% more units in order to maintain the same profit than if you were selling products at full price.
If you’re sitting within Luxury Retail, you might already find it a little trickier to acquire new customers in comparison to FMCG for example. So imagine having to convert 200% more customers. If you’re conversion rate sits at 1%, you’d be aiming for 20000% increase in traffic.
Hopefully by now, you can start to see why relying on sales can start to be problematic.
So how should brands go about encouraging customers to pay full price?
How you can break the promotion cycle.
The answer is pretty simple; it’s all about brand value.
Your customers, new and existing need to be able to see the value of your product at the price its retailed at. Building a strong brand and implementing real brand marketing as part of a long term strategy can sustainably increase your turnover without affecting margin and reduce price sensitivity amongst consumers.
Back in 2013 Binet and Field researched the effect of long term brand building strategies against sales activation led strategies and found that long term sales growth and reduced price sensitivity is only achieved through solid brand building. Generally within ecommerce we see a lot of bottom of funnel sales activation and less true brand led campaigns.
How do I build my brand?
Building your brand is all about Storytelling. It’s about communicating the Why of your brand. And the best way to communicate the ‘why’ is through emotion.
We all know that harnessing audiences’ emotions is a key tactic to brand marketing – it’s why those well know Christmas campaigns do so well. Think about your brand and your brand story and what emotion you want to convey through your advertising; is it freedom, serenity, adventure, passion? This emotion needs to be threaded into your creative, your messaging, your website.
Acquire new customers. We know that it’s easier (and cheaper) to market to your current customers than to acquire new ones but if you’re current customers are used to those pay day sales and will only purchase during promotional periods, you’ll struggle to ever see true growth.
Go back to the starting line and look at acquiring brand new customers who have never been exposed to your brand before (this could even be a new demographic or new territory). Present them with your brand building storytelling campaigns. Hook them with emotional content and consistently target them with brand based messaging. When they are finally in market to purchase, they’ll buy full price as they understand the value.
How to tactically use promotions.
Sometimes promotions are needed for more than just generating revenue. If you have out of season stock that needs moving, promotions can be an effective way to clear your warehouse.
There are ways that you can still run these promotions without damaging the valuable brand you’ve spent time building.
Release the promotions you need to use for end of season stock to your most loyal or valuable existing customers. Instead of blasting promotions and sales across all your advertising, send email or SMS notifications to segmented audiences with high LTV and reward their loyalty with exclusive access and discounts to an outlet or sale section of your website.
These consumers will feel special and seen by your brand, improving brand reputation and further increasing LTV over time.
Reducing the reliance on promotions is a combination of brand building, storytelling, new customer acquisition and careful planning.
This is not a short term solution.
Making this transition is not something that is going to reap rewards immediately. Marketing teams need to have patience and understand that purchase journeys are longer and more complicated than ever and that brand building is a long term solution to incremental growth. It can be daunting not to run that sale on pay day when you haven’t met your revenue targets but there will probably be a period of decline before you start to see the needle move in a positive direction. It’s about remaining resilient, testing, learning and looking past monthly KPIs.