Promotional pricing: stale tactic or smart strategy?

It occurred to Nancy Taylor slowly. Could it be that what she thought was a tremendous success was actually a tremendous failure? For years, and like clockwork, Nancy would have regular storewide sales at Dream on Futon, offering all merchandise at twenty percent off.

She has always concluded that her sales were tremendously successful because they drew in customers and prompted them to buy.

But when she stepped back to take a broader look at her business, she realized how little inventory she sold during other times. “My sales were actually failures,” she reasoned. “I was actually training my customers to wait for my sales.”

On the promotion treadmill

I haven’t spoken with any retailer who sets out to train his customers to put off buying. Yet this is what regular markdowns and promotions can inadvertently accomplish. How does this happen? Maybe it creeps up on a retailer this way.

Business is slow, and the bell atop his store door hasn’t been jingling as much as he’d like. “Better run a promotion,” he thinks. “That’ll bring some people in.”

He selects some items from among his inventory and prices them in a way that will grab attention. He places advertisements in the weekly newspaper, along with some radio spots, perhaps.

Sure enough, traffic picks up. The store becomes busy again! Customers like his futons. They like his prices. He admits that profit margins are a bit slimmer, but stuff is selling!

For a while, at least. Once the promotion is over, that familiar quiet settles upon the store again. “A promotion! That’s what I need!” he concludes. And the cycle begins again.

Stale Tactic

Countless futon retailers that are caught in this gerbil wheel of slow sales, followed by a promotion and increased sales, only to return to slow sales again. It’s not surprising that one retailer told me “sales are a ‘must have’ in this business.”

The biggest problem with this pricing strategy is that it is reactive rather than proactive. Ideally, retailers should proactively decide upon a target market niche. Then all pricing and promotion decisions can be targeted upon that strategy. But in surveying futon retailers, I found that many are mainly reacting to their mounting inventory, cash flow crisis or to the silence of their store bell.

By offering reactive, unanticipated markdowns and promotions, retailers could be shooting themselves in the foot. Rather than spurring customers to buy futons, frequent storewide markdowns can actually dissuade purchases. “Why buy that futon today?” the shopper thinks, “It’ll probably be on sale next week.”

Furthermore, by moving most of their merchandise at promotional prices, a retailer reduces his profit margins. He gambles that these diminished margins will mix with an increase in volume that will float his store into the black.

Smart Strategies

There is a way to get off of this gerbil wheel and think proactively about sales, promotions and pricing. Markdown pricing takes on new effectiveness when retailers aim at a chosen target. Promotions become increasingly effective when they are used to implement a strategy the retailer has chosen. Here’s proof.

Baiting the hook

Bryan Collins at the Futon Store has decided to target customers “whenever they feel like spending money.” That means that Bryan tries to lure them away from competitors and into his store during the busiest times of the year. In his Manhattan, Kansas store, this means back-to-school and Christmas time.

Here’s his plan. To reel in potential customers, He uses bait called a loss leader. He offers a super low price on an item, often a metal frame, to bring in customers. He is willing to offer the item at cost or even at a small loss, just to attract customers.

Once they enter his store, his sales staff is let loose to introduce customers to other frames that have higher markups. Or he may be willing to take a loss on the metal frame but then make a steep profit on the mattress and cover that will be also bought.

At Siesta Sleepworks, Tilson Bennett also has a promotion strategy for grabbing a larger share of his market during the busy futon season of August through December. He offers competitive prices every day, but adds an addition lure. He offers a mattress upgrade at no extra cost. Like a loss leader, he lowers his profit margin on mattress sales, but maintains the established markups on his frames and covers.

Working the 80-20 rule

The 80-20 rule applies here. Like typical retail stores, futon dealers can expect that eighty percent of profits will come from twenty percent of their customers. Keeping this in mind, savvy retailers can focus their promotion strategies to take good care of customers that buy.

John Thorud takes care of his best customers at Deep Sleep Mattress Company and targets promotions exclusively to them. His store has a Presidents’ Day sale for his mailing list customers. His mailing list, he says, “is worth its weight in gold.”

Martha Leven, at Harborlight Futon, also seeks to cultivate relationships with existing customers. At least twice a year she sends out a postcard mailer, offering a private sale just for her mailing list customers. Sometimes this offers them an additional 5-10% off her prices. At other times, she pays the sales tax on their purchases.

Satisfying Sale-Addicted Customers

Customers in today’s retail environment are looking for bargains. “People are into sales these days,” as Nancy Taylor describes it. Many customers believe that if something is not on sale, they are paying too much for it.

Jacqueline Morgan has seen this attitude in customers at Morgan Imports but refuses to give in. She takes pride in the fact that her store is not a promotional store. “We don’t have sales,” she remarks, “but I have had to accept that my customers don’t believe my prices are good.”
In order to satisfy sale-addicted customers, some dealers find one or two items on their sales floor to offer as promotional items, solely for those customers that come in looking for something “on sale”. These dealers take advantage of manufacturer’s specials and factory select covers in order to appeal to these customers.

Promotional sales in today’s market

Larry Spayth has always spotlighted Futons 4 Less as an ‘every day low price’ store. But he made a radical switch when business dropped off after September 11. For the first time ever, Larry put his entire store on sale and has continued to do so. He has doubled his advertising budget, cut his profit margin, and increased his sales volume.

What has he learned about using sales and promotions?

“I guess every dealer has to figure out what he wants to do.”

I couldn’t agree more.

FL