Discounts and promotions have been used by businesses for many years as a marketing strategy, but not all discounts are created equal. While some can be a valuable tool for acquiring new customers and retaining existing ones, others can hurt your bottom line and brand reputation. So, how do you know when it is worthwhile to offer special discounts? In this blog post, we delve into the various factors that businesses should consider when deciding on discount and promotions.

1. Cost of Goods Sold (COGS)

Before offering any discounts, businesses need to know their COGS, as discounts can eat into the profits. In general, it is only worthwhile to offer a discount if the reduced price still enables the business to make a profit. For example, if a product has a COGS of $10, offering a 20% discount reduces the profit to $2, assuming no other costs are incurred. If the business can still operate with a $2 profit, the discount works, but if this cuts too deeply into the profit margin, it is not recommended.

2. Target Audience

Businesses also need to consider who they are targeting with a discount. If the discount is too broad or random, it may not attract the right customers needed to achieve the desired result. However, if the discount is targeted at the right audience, they are more likely to respond positively and become loyal customers. For example, offering discounts for loyal customers can help encourage repeat business while offering discounts for student cardholders can attract a younger generation.

3. Competitors

Assessing competitors is critical when a business is considering discounting. If competitors are offering discounts, there is a good chance that the business may need to follow suit to remain competitive. Nonetheless, businesses should not throw unspecified discounts into the market – they need to remain mindful of COGS, target audience, and profit margins when doing so.

4. Timeframes

The timeframe in which a discount is offered can ultimately make or break a promotion’s success. In general, promotion periods should be short-term and limited to specific situations, such as holidays, product launches, and special events. Long-term discounts can make buyers wary and not want to buy products offered at full price, causing demand to dwindle, and profits to suffer.

5. Promotion Type

Not all discounts are created equal – some may be more effective and cost-effective than others. For example, a percentage-off discount may provide a quick boost to revenue, but offering a free item with a purchase can increase the likelihood of customers buying complementary items and upgrading to more expensive options. Businesses need to identify the promotion type that will work best for their brand and align with the objectives of the promotion.

Conclusion:

In conclusion, it is essential to remember that not all discounts are worth the time, money, and effort that they require. Before offering a discount, businesses need to assess their COGS, target audience, competitors, timeframes, and promotion type to ensure a worthwhile return on investment. Given that discounting should assist in building a long-term relationship with customers, a discount that is successfully targeted, works with COGS, and is aligned with a promotion type that works, can equate to increased customer loyalty and a long-term profit.