Every now and then I come across really useful articles, something that can add value to your business. This is one of them.
There are always some marketing tools that businesses use frequently, because they are easy to implement. You are having problems with sales, so temptation waves its allure across your eyes. There’s a problem with temptation; it rarely delivers.
It may take you a little while to get into this article by noted marketer Drayton Bird but it is worthwhile. It delivers a really important message about a trap most businesses fall into at some time or other.
Now I’ve written about this danger a number of times. There are two reasons I’m passing it on to you, one is that it reinforces the dangers but suggest the results can be more catastrophic than I have suggested, and secondly, he backs the danger with research.
I’ll give you my “learnings” in a minute. Let me know if you agree.
Take it away Drayton ….
The mistake that almost killed some of the world’s biggest brands……and is killing one now, I suspect.
As I predicted when I wrote in 2010, Dell has fallen off its perch. And more recently Groupon’s shares have slumped 80%.
Life is strange. I am one of the most disorganised jokers you’ll ever meet but a book by one of the world’s best organised people influenced me hugely … even if it didn’t do much good.
It was “My years with General Motors” by Alfred P. Sloan. Sloan led General Motors to become the world’s largest motor manufacturer. It was so important to the U.S. economy that they used to say “What’s good for General Motors is good for the USA.”
But General Motors – and Ford and Chrysler – got into terrible trouble and had to be bailed out, barely surviving.
There were many reasons why, but one was their marketing. Besides their ads all tending to be boastful and dull, they fell into a habit I see as the marketing equivalent of crack cocaine addiction: heavy discounting.
This gives an immediate boost to sales, but you become addicted to it. And you get nasty after-effects – as with crack.
• The people who buy most from a promotion are your best customers, who would have bought anyhow.
• People bring forward their buying so there is a slump afterwards.
• You are training your customers to expect bribes.
To explain more why this is so dangerous, I must take you back 25 years.
Ogilvy and Mather had a unit called the Ogilvy Centre for Research in San Francisco. The Director, Alex Biehl, worked on a project called PIMS – which stood (I think) for Profit Impact of Marketing Strategies.
The aim: to discover how different marketing weapons affect profits.
Over 200 firms in the U.S. and Europe took part, and the project was run in partnership with Professor Andrew Ehrenberg and various associates – I think at The London Business School. David Ogilvy said Andrew had the best mind in marketing.
One thing the project revealed was very simple, very important – yet is news to almost all marketers.
Firms that spend more money on discounting than advertising are far less profitable than those that spend more on advertising than discounting.
The project divided firms into four quartiles.
• Those in the top quartile spent most on advertising and least on discounting.
• Those in the bottom quartile did it the other way round.
The ones in the top quartile were on average twice as profitable as those in the bottom one.
When you spend more on offering deals than explaining why people should want to buy your stuff, you are perilously close to saying “Our stuff is not good enough to sell on its merits at full price”.
To go back to where I started, today General Motors is no longer the world’s biggest automotive firm. Toyota is.
Another brand once led its market but no longer does. It is Dell. And guess what? Every single email Dell sends me offers a deal. They have been overtaken by Hewlett Packard and Acer.
I am not saying never discount. I offer discounts all the time. Nor am I saying traditional advertising is the answer to your problems.
What I am saying is that messages through whatever medium, that give people reasons, emotional or rational, for buying are the key to building your business and brand.
I also suggest that when you discount, give a reason for doing so. Two good reasons are to get a new customer or to thank someone for being a customer.
Thank you Drayton.
So what are my learnings;
√ Firms that spend more money on discounting than advertising are far less profitable than those that spend more on advertising than discounting.
√ When you discount, GIVE A REASON for doing so
√ Good reasons are firstly, to gain a new customer, or secondly to thank a customer
√ The people who buy most from a promotion are your best customers, who would have bought anyhow.
√ People bring forward their buying so there is a slump afterwards.
√ Discounting trains your customers to expect bribes.
Let me know what your experience has been.
To your profitability.
© Copyright 2014 Adam Gordon, The Profits Leak Detective (except for the bits by Drayton Bird)
Some profit losses are pretty obvious - so you fix them.
BUT, what if you don't know profits are leaking, cash out the door?
Possible leaks could be anywhere.
Are there some clues or symptoms that are tell-tales?