Small to medium-sized enterprises (SMEs) operating in South Africa need to be strategic in how they do their digital marketing. This means offering customers discounts without denting their profits. Knowing how to make discounts work effectively can bring about many benefits for SMEs and their customers.
South Africa is a country made up of many demographics, each with its own needs, demands and cultural nuances. These factors are crucial in how local consumers choose where to spend money and when to spend money.
By developing strategic discounts, SMEs can not only improve the customer experience, but they can ensure profits remain positive.
In this article, we look at the types of discounts there are, and how to make discounts work effectively.
What is a Discount?
A discount is a price reduction applied to the list price of a product or service. In other words, it is a certain percentage or amount of the sales price that is removed by the seller. Discounts are generally applied for the following purposes:
- To increase sales
- To attract customers and build customer loyalty
- To reduce inventory
- To gain a competitive advantage
- To encourage cash payments
Types of Discounts
Here are some of the most common types of discounts.
1. Buy One, Get One Free
A buy-one-get-one-free discount, also called a BOGO discount, typically encourages customers to purchase two of the same item. Sometimes the free item is not the same as the featured item and represents a product of equal or lesser value. As part of this promotion, the customer receives one of the items for free. This discount can help businesses move inventory and encourage customers to increase their order size. Customers may also perceive more value because they receive two items for the price of one.
2. Percentage Sales
A percentage sale is a discount on an item based on a percentage of its value. Businesses sometimes set percentage sales based on specific criteria. For example, a business may offer a 30% discount on purchases for customers who are members of its loyalty programme. A business could also provide a 25% discount on orders when customers purchase three or more items.
3. Free Shipping Discounts
Businesses use free shipping discounts to encourage customers to make online purchases. These discounts help make the online shopping experience easier and less costly. Some brands put a minimum order cost or quantity threshold to help reduce the cost of free shipping.
4. Bulk or Wholesale Discounts
This applies to customers who purchase items in bulk, often offered by wholesalers, manufacturers or suppliers. Wholesalers typically offer discounts based on a threshold of units included in the order.
5. Loyalty Programme Discounts
Loyalty programmes that offer discounts encourage customer loyalty by providing benefits that only members can get. The format of these programs can vary. For example, a business may reward customers with points when they interact with or purchase from them. When these customers reach a particular point threshold, they may receive a discount code or offer.
6. Trade-in Credits
Businesses can offer trade-in credits when they release new versions of products, encouraging customers to bring in the old versions they own and purchase the new ones. For example, a business that sells smartphones may offer customers a discount on a new model if they trade in a previous model.
7. Referral Discounts
Referral discounts offer customers an incentive each time they refer a new customer to the business. Existing customers receive a unique referral code that they can share with other people. This referral code may offer a two-way discount, with the new customer earning a discount on their first purchase and the referrer receiving discounts based on the number of customers they bring to the business.
How to Make Discounts Work for Your SME
For SMEs, effective discounts require strategic planning to protect profit margins and avoid training customers to only buy during sales.
When Should You Offer a Discount?
Before you offer a discount, you need to be clear on what you are trying to achieve. This could be:
- Increasing foot traffic
- Attracting new customers
- Clearing old stock
- Freeing up retail space
- Showing appreciation to your existing customers
Consider the Disadvantages of Discounting
Before you start to mark down your prices, take a moment to consider potential impacts such as:
- If you discount too often, customers may start to doubt the value when your product or service is offered at full price.
- Bargain hunters are not usually long-term customers. They usually leave as soon as they find something cheaper.
- You’ll need to sell a lot more to earn the same amount. Even a 10% price cut can result in needing to sell a third more just to break even.
- Be careful not to get into a price war. Undercutting your rivals can hurt everyone’s profit margins.
Calculating Your Discount
You need to know the number of sales required to maintain your current levels of profitability. This means working out the following:
- The profit margin of each product or service you plan to discount.
- The mark-up percentage for each product or service.
- The breakeven point, which is the number of products or services you’ll need to sell during the discount period to maintain your profitability.
Calculating these figures will give you a clear understanding of the volume you’ll need to sell during the discount period.
Alternatives to Consider
If you are not sure whether you can meet the sales volume needed to keep profits up during the discount period, consider these alternative strategies that can add value and attract new buyers.
- Provide an add-on service. This can be a free demonstration on how best to use the product, free installation or after-sales support.
- Offer an additional product or service for the same price
- Give bulk buy discounts, which will allow you to sell a larger volume of products before a discount is applied.
- Put down conditional promotions that require a certain amount to be spent before a discount is applied. Examples include spending R200 and getting 20% off or buying three items and getting the third one free.
Once you have worked out the details of your promotion, plan some marketing activities to make sure the offer will be seen by the right people in your target audience.
Small to medium-sized enterprises (SMEs) operating in South Africa need to be strategic in how they do their digital marketing. This means offering customers discounts… Read More
