The Finance of Promos & Discounts

With Labor Day promotions behind us, it feels like a good time to talk about the financial impact from discounts, promotions, and marketing campaigns on your business.

It goes something like this:

1. We want to get rid of slow-moving inventory, how about a 30% off sale?
2. Sign up for our email newsletter and get 15% off your first order
3. Buy this pair of shoes and we'll throw in a pair of socks for free
4. It's Tuesday, here's another 20% coupon

These aren't necessarily bad strategies. Remember, promotion is one of the "4 P's of Marketing." But we typically fail to account for them properly when looking at our numbers.

You might have some hidden costs in your business if you're not looking at these properly.

So what should you do?

Don't just throw in the towel... promotions are a good thing. They help us drive traffic to our products and services (whether virtual or physical).

The easiest place to start is by incorporating discounts and promotions into your unit economics. Build yourself a cheat sheet like the one below. It'll save you time when planning your next big sale event.

Let's get tactical

Enough of the boring finance talk... here are some tactical promotional strategies that can work in most businesses:

• Bundles – Promotions aren't just discounted prices. There are lots of creative ways to promote your stuff. Bundling multiple products and services together into a single offering can improve margins and give customers something new.
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• Trials and samples – Everyone loves free stuff. Giveaways come in different shapes and sizes but they can be valuable gateway offerings to get customers in the door (i.e. this newsletter!).
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• Flash sales or capacity sales – These are urgency-based promotions with limited timeframes (24-48 hours). Also, if you're a service company, try a capacity sale (i.e. "we only have capacity for 5 more clients this month"). P.S. we have capacity for only 1-2 more service clients this quarter :)
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• The foot-in-the-door approach – For service companies with long-running clients, consider discounting your services for an initial period to help land that key account (i.e. the first 1-3 months at a reduced rate). Make sure to highlight the discount you're offering on your initial invoices!
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• Closeout sales – For retailers with lots of inventory or large product catalogs, keep an eye on slow-moving or discontinued products. There’s no better time than now to get rid of those items hanging around the back of the warehouse, even at thin margins.
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• Seasonal sales – If your business has lots of seasonality (holiday stores, home services, etc.), consider an off-season promotion to both unload seasonal items and to generate some offseason revenue. Think: signing up summer lawncare clients in the winter with a promotion.

A quick case study

You've likely seen the news around the fast food price wars – McDonalds $5 meal deal, Subway's $6.99 footlong, etc. – franchisees of those systems are now left with a corporate-imposed promotion they'll need to navigate.

Some franchisees are protesting while others are celebrating the revenue and traffic growth.

Which is right?

Without studying the economics or impact, it's hard to know. My point is that these are highly relevant concepts in a world where businesses are trying to drive more traffic and worried about their margins more than ever.