Discount voucher is you doing price cannibalization

An advertising guru David Ogilvy stated here "A steady diet of price-off promotions lowers the esteem in which the consumer holds the product: can anything which is always sold at a discount be desirable?"

That is precisely what some promoters of discount voucher are trying to sell to my clients. The result of this will be a lowering of esteem for the shop as well as people get used to this steady stream of discounts. Hold this thought!

A discount voucher works when a customer buys stock, the retailer then issues that customer a voucher, the point of sale software then issues a discount based on some profit calculation in the hope that the customer will purchase something more. It works if you are prepared to sell product cheap. Here is an example that a client just gave me of three transactions taken with a discount voucher system in place.

A client came in and purchased on this receipt $522.76

Once this was done the point of sale software promptly issued the client, a discount of $62.55 for their next purchase.

So the client then used this to buy a further $189.40 of product.

Which after this discount was applied, the transaction came too $126.85 just over 33% discount. Clearly, the retailer needs a good margin to cover that sale to make it worthwhile, many of my clients would need to restrict the goods that this discount could be used. This new transaction generated a discount of $15.22 which the client then used to buy a further product here

Which after the discount was applied came to $49.76, a discount just over 23%. Notice how the sales are falling as the discounts are going down. That is not a good sign.

So overall you would say that probably an extra $176.61 was sold in the shop at a discounted price of just over 30% which may be the client might have bought later at full price. Even at 50% margin of product, I doubt there was much profit in it for the merchant in these extra sales. I certainly would not be writing any magazine articles about this as a great achievement. Now unless the client is an idiot, they have learnt the system. The next time they come to purchase a $500 of product, they will buy $300, then use the discount voucher to buy a little more and then once they have that discount voucher purchase a little more, use that discount to buy more and so on, to give them a lovely discount. Once they have that in place, they will start thinking of that shop as a discount shop and will be expecting discounts all the time.

The issue is can the business be profitable if they are giving away substantial discounts? It is one thing to give away discounts to attract new customers who will regularly return, pay full price on future visits. But if discount vouchers are only providing discounts to long-time customers, they will overtime sharply reduce overall profits. Of course, the way discount vouchers work, they cannot be given to new customers, as no-one can get a discount voucher if they have not bought anything.

I can see places where discount vouchers have uses for example in a holiday area where you will never see the customer again or when you are part of a festival, and the place is full of people you have never seen before. Also, consider doing what pubs often do give the discount on a different day to encourage the people to come back again.

As a rule, a discount scheme should run at about 1% of sales, so if you are doing a million dollars of sales, the cost to you including discounts is about $10,000.