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Hello All, As we get closer to the end of the year, many small business owners are contemplating their sales strategies for Black Friday, Cyber Monday and the holiday season. As most of us know (and some eagerly await), American thanksgiving leads the way to a shopping season that peaks the day after Thanksgiving and continues until Christmas. Customers have now come to expect that their favourite retailer or service provider to offer a meaningful discount or sale that are often accompanied by colourful adjectives such as blowout, unbelievable and zen. This means that small businesses must decide whether it makes sense for them to create a holiday offer and if so, what is the best strategy. There is a concept in economics referred to as elasticity of demand. This means that the less essential a product or service is, the more likely it is to react to price changes. For example the demand for basic groceries or gas doesn’t change much even when prices go up or down as we all need food to live or to travel to work. Conversely, the demand for a brand new TV will increase following a reduction in price since (usually) the purchase of a new TV can be postponed . Another factor that impacts elasticity of demand is the availability of similar substitutes. If the price of Captain Crunch cereal goes up, you might decide to replace them with Froot Loops, which are cheaper and almost as good (I apologize to any Capn Crunch lovers who might vehemently disagree :)) There are many other influences on how price changes affect demand, not all of which are in your control or even rational. So how does determining the elasticity of our product (or service) help us determine whether to put it on sale? If what we are selling is a product or service that customers need and for which there are no comparable substitutes, then having a sale might not even be necessary as consumers will buy your product anyway. (This is an ideal situation for a business, but also very rare as it is hard to stave off competition for long). Alternatively, if your product or service is similar to your competition or isn’t really a must have but more a nice to have, then offering the customer something extra or discounting your prices can have a greater impact on sales. The other question to ask yourself when deciding your holiday sales strategy is what are the costs and associated benefits. Discounting your items will very likely increase sales but this means that your profit, per item, will be lower. Consequently, you have to sell more to compensate for the reduction in profit. There are other benefits and implications that should also be considered: Does it increase visibility for your product or service and create repeat customers, who will buy from you at regular prices, or will the customer only come back when there is a sale? Does it allow you to get rid of older inventory which you would likely have to have sold at a reduced price anyway (this is the strategy used by many big box stores as they sell off older inventory to make room for new products)? Will the customers who are drawn in as a consequence of the sale be persuaded to purchase other non sale items? Will you need cash flow to cover your additional costs and expenses to market your sale? Do you have a marketing strategy and adequate customer service in place to deal with the anticipated (hopefully) surge in sales? How will the sale affect your overall profitability?
If you decide to have a sale, as with most things, it is best to have a strategy in place that helps you evaluate what you want you want to accomplish. This will help you set your expectations and drive your marketing strategy. You can then compare the actual results (which you can compile in your accounting software) to your estimates to help you hone and refine your strategy in years to follow.
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