Special offers.  Which is better: To give a discount or to give extra value?

When we see so many companies offering “Special Offers”, we may be tempted to think that we should be doing so too

Special offers are intended to entice customers to buy from you.  But how much might these offers cost your business and how effective would they really be?

We can compare these offers by conducting a cost-benefit analysis:

Let’s start with the offer where the customer GETS MORE

In this example, you might open a fast-food outlet expecting to sell about 2,000 burgers and other items each month and you decide to give an Opening Offer to attract customers.  How would it work?

We see that the business’ operating costs are made up of:  salaries, marketing fees, running expenses, rent, and ingredients and materials

The ingredients for 2,000 standard burgers come to about R 10.00 each

If you sell a standard burger for about R 40.00 and all the costs of running the operation have already been covered in the selling price of all your sales, then, to produce one more burger would cost you just R 10.00 – the cost of its ingredients

That means that you could offer “Two burgers for R 49.90” – and not make a loss. 

The psychology goes something like this:  If the customer is going to buy a burger and was happy to pay R 40.00 for it and s/he sees that they can get two burgers for just a little more, they may as well buy two 

Although your store now sells 4,000 burgers instead of 2,000, the running costs don’t increase much.  But here’s the difference: the customers don’t only buy the two burgers, they buy chips and cold drinks and other stuff too

The magic of this example is that it costs you hardly anything more to give your customer double what they are paying for.  You score because your happy customers buy more, and the satisfied customers are happy to spend more with your business

Now let’s look at the offer where the customer PAYS LESS

For a limited time or on specific items or while stocks last, stores will give their customers a certain discount, say 20% off certain items.  They do this to entice the customers to make the discounted purchase and while there, make up the difference by buying additional items.  They also clear out dead stock (lines that are not selling)

A clothing store or electronics goods shop might stock a range of 1,000 products, so when they offer 20% off the price of a few items, they plan to offer them as loss leaders to attract customers to make up the shortfall

That’s not similar to a small business owner giving away 10% of their hard-earned income.  The SMME cannot afford to sacrifice the money they have worked for

To demonstrate this: you decide to open a scholar transport business

You figure that you could charge parents R 600.00 per month to take their kids to school and back.  If you transport 30 kids, that comes to R 18,000 income per month.  Not too shabby

But 30 kids means 3 trips of 10 kids each way, so that’s more fuel.  The expenses start to add up: fuel, driver’s salary, vehicle repayments, maintenance, licences and permits, insurance and owner’s salary all comes to about R 16,000 per month

But competition is fierce and to launch your venture and attract new customers, you offer parents a 10% discount for next year.  So, now your monthly income is only R 16,020

By giving a 10% discount, you are now actually making a ‘profit’ of only R 200 per month – before tax

If you hadn’t given the discount, you would have had R 1,440 left over after expenses and tax

An offer where everyone wins

How can we remedy this?  First, and most important: Rather give extra value and NOT a discount.  That’s your hard-earned money that you are giving away

If you must give a “Special Offer”, give something that costs you little but that your customer sees as having extra value for them

Since most of your scholar transport business’ costs are covered by taking the kids to and from school and the return journeys are empty, you have an opportunity to take paying customers to the shops or the clinic on the way back, or to deliver groceries

For every paying child, you could also offer one ‘free’ trip to a sporting event or a kids’ party.  That would cost you only the fuel but could be greatly appreciated by the parents

The vehicle is not tied up over the weekend so you can shuttle people to and from weddings, funerals, the airport, parties…  And after tax, what they pay you is almost all pure profit

Does this explanation help you to make a more informed, and profitable, decision over how you give special offers?  Please let me know

See our illustrated discussion about special offers on YouTube

Rick Ed
DoBetter.Business

2020/11/28

CC BY-SA

Click here if you want to discuss business resilience, recovery and growth

You are welcome to leave a comment

%d bloggers like this: