How to set discounts without hurting profits: a merchant's guide

Setting discounts is a science. Retailers take advantage of the psychology of consumers to persuade us to purchase items – including those we don't even need! There's no doubting the potency of a end of season sale. Sales can double your daily revenue, earn you new customers and help you shift stock that's taking up valuable room in your warehouse. However, lazily planned promotions can slash profits and even make a loss.

Here's how merchants can set more effective discounts that won't put you in the red.

#1 Define objectives

As with any business decision, first you must decide on your goals. Are you trying to attract new customers, secure the return of previous customers, or clear out old stock? With your objective in mind, it'll be easier to understand the types of discount that are likely to be the most effective. Ensure that all managers are aware of your goals for the current set of discounts, enabling them to make smart decisions about stock, store layouts and when and where to apply the discounts.

#2 Segment your customers

Using the information in your EPOS system, plus your own knowledge of your customers, split them into groups based on their spending habits. You'll have some trade customers who are loyal to your business and are happy to pay full price, but will jump at the chance to stock up on key items when they're on sale. Another group might only make purchases when the sales are on. Think about the types of discounts that will appeal to each group, and how you'll communicate these discounts.

Your frugal customers will be tempted by window displays, and may also follow you on social media so that they can keep an eye out for discounts. Your trade customers may have signed up to your email marketing list, or they'll see the offers when they make their regular visits to your store.

By planning who the discounts will appeal to, your approach will become more focused and more effective.

#3 Avoid heavy discounts

Loss leaders aside, avoid discounts above 20 or 30%. Customers will quickly adjust their pricing expectations based on the frequency and size of discounts. If they know that you'll put certain products at half price at the same time each year, they'll delay purchasing until the sale. Sales should be infrequent enough for them to count as an 'event' - something that your customers will be excited about and will mention to their friends and family.

Instead, opt for discounts based on minimum spend, or buying one product full price to secure generous discounts on a second. Additionally, for items that cost less than £100, display discounts in percentage terms. For items over £100, display sales in absolute terms – a £50 saving on a £200 product seems more substantial than a 25% saving at first glance.

#4 Urgency

Sales should instil a sense of urgency in consumers – you want them to buy the product now, and not wait for a lower price or a better time. In your marketing materials, use phrases such as 'while stocks last' or 'selling quickly' or 'for a limited time only'. Sales should last for a couple of weeks at most, else the sense of urgency will be lost.

#5 Learn from previous sales

If you use an EPOS system, trawl through sales data from previous promotions. Use reports to track how sales, and, most importantly, profitability, changed as result of the promotions. Did the extra sales make up for the reduced profit margin? How quickly did product sales return to normal after the sale was over? Find out which product types performed best when discounted, and which discounts made little to no difference in sales volume. Don't trust your hunches – look to the data and use it as a guideline for future sales.

Overall, well-crafted discounts certainly don't have to eliminate your profit margin. By creating smart promotions that tap into consumer psychology and specific segments of your customer base, you can be confident that your future sales will be a success.

Don't forget – you can use your EPOS software to set promotions so that they're automatically applied at checkout.

Are you in need of a new EPOS system which can handle promotions more effectively? See what Trader has to offer builders' merchants and hardware stores.