Article Collection

Avoid the trap of huge discounting

01 Jun, 2020 Marketing communication

Profit misperceptions

Many marketers make the mistake of massively discounting some products in sales promotions, especially at times like post-Christmas sales, and for Black Friday promotions, which typically signal the beginning of the holiday shopping season.

A lot of customers don’t understand the use of ‘loss leaders’ – items promoted heavily and sold at a loss to attract customers to come to the store in the hope that those customers will buy other products while they are in the store. As a result, those customers think retailers have huge profit margins and can afford to heavily slash their prices.

Those customers therefore believe companies make big profits out of charging unfairly for their goods and services, thus putting profits before staff wellbeing and customer service, according to a poll taken for the Confederation of British Industry in 2015. The poll found that 72% of respondents believed businesses put profit before the needs of consumers, while 66% said that “businesses put profit before the wellbeing of their workforces.”

The business lobby group said the word profit was used “like a dirty word” by a majority of consumers, who believe businesses abuse their trust and sacrifice loyalty for a quick return. It said the results should persuade companies to be more transparent about how they generated profits.

The CBI said the findings showed there was a need for “an open conversation” about how businesses generate profits. It said business leaders needed to make the case for profits that allowed companies to grow, create jobs and invest in new products and services. Marketing communicators need to take this on board.

The findings are consistent with a 2002 US study that found consumers routinely believed companies ‘gouged’ customers and reaped large profits, estimated at 30% of revenue. In reality, retail net margins are usually 1-2%. *

The research found these perceptions to be very ‘sticky’, ie hard to change. And managers don’t seem to realize the extent of these customer misperceptions.

(These types of discounts are different from the discounts offered by retailers who need to move last season’s stock out of the saleroom to make way for new stock, especially in the fashion, clothing and auto industries.)

* Bolton, Prof. Lisa; Alba, Joseph and Warlop, Prof. Luk. “Pricing and fairness: do your customers assume you are gouging them? Article in 11 September 2002 issue of Knowledge @ Wharton online newsletter, Wharton School of Business at the University of Pennsylvania: http://knowledge.wharton.upenn.edu.

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