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
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