Continuous Sales Promotions are Bad for Profits

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Monday, April 28, 2014

Some observers and analysts of the retail sector of the economy speculate that the constant discounting via various promotions of every segment of the retail business is bad for sales.

This may be the case, but what is absolutely certain is that continuous sales promotions are bad for profits.

Sales promotions used to be along the lines of “Annual Inventory Clearance,” or limited to short events following major holidays.

The retail environment now, however, is that everything is on sale, all the time. The impact of this reality is that profits are down, stores go out of business and consumers are constantly wary of making purchases out of the fear that they may see a lower price after the fact.

Bucking this trend are the retailers, such as Apple, that are shifting to an approach that emphasizes a perception of value and the actual experience of the purchase, as opposed to a strict focus on offering the lowest price. This approach includes tactics that hopefully offer customers something of a value that surpasses a slightly higher purchase price, such as loyalty programs that reward multiple purchases, free gifts and similar techniques designed to convince customers that they are winning and coming out ahead whilst spending more.

Maintaining customers’ interest beyond the initial sale and persuading those customers to make additional purchases is receiving a big boost from the idea of supplying entertainment through game-like activities that offer customers fun activities that appeal to the emotions that run deeper than the simple necessity of a purchase.

An example of this concept would be Buy to Win, where a customer has the opportunity to receive their purchase free of charge at the check-out. Even though the actual probability of receiving a purchase for free is very minimal, wagering-obsessed Australian customers are demonstrating that the concept is a valid one. Anyone who actually did receive an item for free would remember the occasion for a lifetime.

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