Spacer Image
Chapter 2 of 5

The economics of sales promotions


Table of contents

Spacer Image

Retail guides > Retailer's guide to making money > Working out profits and prices

The economics of sales promotions

You may be able to drum up more sales by offering deals. But not all sales promotions are equal. We take a look at the economics of the three main types.

3 types of sales promotion

  • Discounting – 25% off

  • Sweeteners – Buy this, get that too

  • Bulk deals – Buy two, get one free

Short on time but want to get the most out of this guide?

Download the free ebook now

Beware of the discount trap

Discounts are perhaps the most common form of sales promotion, but there are traps. Most people – including a lot of shopkeepers – struggle with percentages. They don’t realise how quickly a seemingly harmless discount will eat their markup.

How discounts crush markup

20 percent discount
20 percent discount
20 percent discount
20 percent discount

 

You can see how a generous markup will vanish at the hands of a far more modest-sounding discount. Discounts essentially give away cash. Think hard before choosing that route.

Sweeteners and bulk deals can work better

A good sales promotion should be of high value to the customer, and low cost to the retailer. By that measure, bulk deals and sweeteners often fare better than discounts.

Imagine you’re designing a sales promotion for a $150 deck chair (which cost you $75 wholesale). Here’s how the three different approaches might compare.

Discount vs sweetener vs bulk deal

In this case, the 25% discount provides the least reward to the customer, and reduces profit by the most. It doesn’t always break down like this. The final numbers will depend on your markups. 

It’s also worth noting that different types of promotions will do a better job of boosting sales depending on the circumstances. Not many homeowners will buy two roofs to get a third for free, for example. But as you can see, it’s worth putting in some thought (and doing some maths) before settling on a discount.

Promotions that don’t give anything away

Promotions don’t always have to cut into profits. If you have your customers’ contact details, or good networks for promoting events, then consider hosting something such as a:

  • launch party for a new product (especially if it comes from a popular brand)

  • preview of new-season stock

  • reception for loyalty-club members (bring a friend!)

  • demonstration or training session

  • meet-the-producer night

There are dozens of options. You just need to know what would appeal to your target customers.

Chapter 3: How budgeting works

It’s never too late to start budgeting. It can provide a huge boost, even if you’ve already been in business for years. Accountants say it’s an area where many retailers fall down.

Read chapter 3

chaptered-guide-cover

Download the ebook

Everything you need to know about making money in a retail business in one handy printable guide.

Thanks! You'll receive an email shortly with the ebook link.