We’re all busy this time of year so I want to keep this short and sweet. We’re coming up on Black Friday soon and many businesses already have their promotions up and running. I may be too late with this warning, but I hope I’m not. I hope I can still save your business some precious profits.
A great offer, an irresistible offer, is a great way to get business. People want to get more for less and having a sale or irresistible offer gives them what they want and you get the customer. But the danger of doing a sale the wrong way can be catastrophic. To illustrate, and for simplicity, I’m going to use a break-even business scenario. (your business better be doing better than just breaking even – if not – call me NOW!)
So these numbers might be larger than what you have but as I said, I’m going for simple. So we’ll use big easy numbers to illustrate my point.
Let’s say you’re doing $1,000,000 in sales. Taking out your COGS (cost of goods and services) of 65% you have a gross margin leftover of $350,000. You have $200,000 of fixed expenses (rent, utilities, insurance, etc.) and 15% of variable expenses related to sales. So you’re breaking even each month.
Now let’s say you cut prices by 10%…how does that affect you?
That 10% has to come from your profit margin – but if you’re only breaking even before, then you’re going 10% in the red after… in this case $100,000. Yikes!
So what would it take to make up that loss and get back to just breaking even again? This is where it’s crazy…but the numbers don’t lie.
In this scenario, because your COGS and variables are associated with the number of sales, you actually would need to double your sales just to get back to breaking even.
Now the numbers will obviously be different for your business, and you should have a better profit margin and business setup where a 10% discount isn’t going to put you that far under, but it could still be very damaging.
And the reality that you have to dramatically increase the number of sales you have in order to make up for the discount is always true.
So what specifically can you do to avoid going into the red with a Black Friday sale or any other sale or discount? Honestly, I don’t know – I’m not your personal consultant helping you figure that out (we might be able to change that though).
My suggestion is that you have several systems in place that grow your business exponentially before you publicize your offer. You should have these anyway…so this exercise should be good for you.
- A Value Web. A value web is all the possible up-sells, down-sells, and cross-sells that you can offer a customer whenever they make a purchase. When they purchase your sale or discounted item, you can recoup the cost by offering the rest of your value web. (Want to know more about value webs? You can read about them here.)
- Customer Penetration Systems. Do you have a system that develops a relationship with a new customer and takes them from being a new customer to a “bought-in” or a “brand loyal” raving fan customer? If you do, (and you know the Lifetime Value of each customer – if not read this) then you can justify the loss of profit upfront, because you know you’ll make it up later in the lifetime of doing business with them. But without this system in place, you’re only hoping, or should I say worrying.
- A Powerful Referral System. Instead of just relying on word of mouth and the hope that people will talk about and recommend your business – put into place a referral system. Good referral systems have two elements. First, a clear and easy way that you both incentivize and reward your customers for bringing you new business. It could be a free item, a discount, or my favorite – a gift card to your business. (You could give them a gift card to a local restaurant or Amazon but why not bring them back for more of your stuff?) The second part is giving them an incentive to offer their friends and family. Maybe you give them their own promo code or gift certificates. Whatever it is you use, make sure you can easily track and measure it.
If you have these and other business growth systems and strategies in place, then having a Black Friday or any other sale, promotion or irresistible offer, is less risky and maybe even beneficial. (On the flip side, you wouldn’t believe the power you have if you were able to actually increase your prices. Yes, there are ways to do it that your customers actually understand and benefit from – but that’s secret sauce that I reserve for my clients. Sorry.)
So go for it this Black Friday, as long as you make sure to do it the right way. If you’d like some help figuring it out and implementing it, contact me and let’s have a conversation about it.