Disadvantages of Black Friday Sales (Deep Discounting)

In the previous article, we have already seen what Black Friday sales or deeply discounted sales are. We also know the economic rationale behind such sales.

Some of the benefits which are derived from these sales have also been discussed in the previous article. However, it would not be appropriate to say that deeply discounted sales do not have any drawbacks.

There are some significant drawbacks associated with such pricing. In fact, the impact of these drawbacks can last for a long period of time.

Hence, it is important to know the economic and financial shortcomings of using deep discounting as a strategy in the retail sector.

  1. Short Term Gain: Deep discounting is often considered to be a short-term strategy to increase sales with immediate effect. In fact, this day is called Black Friday since historically businesses used to operate at a loss i.e. in red till this day. On this day, businesses would make huge sales and thereby end up in a profit i.e. in black.

    There are many retail experts who believe that Black Friday sales are a sure-fire way to increase your sales in the short run. However, it damages the financials and reputations of the business in the long run.

  2. Cannibalization: There are many critics who like to poke holes in the price discrimination theory which is peddled by the proponents of deep discounting. These critics do not believe that the set of people who shop are Black Friday are completely different from the people that shop on regular days. They believe that people deliberately postpone their sales in order to get the benefit of Black Friday sales.

    Hence, at least some part of the revenue which is generated on Black Friday is actually generated from revenue which is lost on a day-to-day basis. This means that retailers are effectively cannibalizing their day-to-day sales in order to generate huge sales on Black Friday.

  3. Preference for Online: The rise of online retailing has further added complexity to the Black Friday sales dynamic. This is because Black Friday has been typically associated with physical duress which customers have to undergo in order to buy products.

    However, with the rise of online retailing, customers can get the same price from the comfort of their homes. There is still some discomfort involved in availing these prices. However, it does not totally disrupt the holiday schedule. Hence, even people who work busy jobs are willing to spend an hour or two if it saves them a significant amount of money.

  4. Diminished Brand Value: Retailers have observed that brands which sell at highly discounted prices generally find that their brand value has diminished over the years. This is because retailers are only able to sell at high prices if they maintain an aura of exclusivity.

    When brands start selling deeply discounted products, they no longer remain exclusive. As a result, customers which buy these products at full price tend to feel cheated.

  5. No Customer Loyalty: Retail stores tend to bank on customer loyalty. The lifetime value of a customer can be pretty high in the retail sector. However, this is not the case when it comes to customers who buy deeply discounted products. These customers tend to bargain shoppers who have no loyalty towards any store. These customers tend to shop at whichever store offers them the best price.

    Hence, the whole concept of customer relationship-based marketing ceases to apply if a store starts deeply discounting their products at regular intervals of time.

  6. Price Wars: Deep discounts are also known to trigger price wars amongst retailers. This is because the same strategy is being followed by every retailer. Hence, a discount of 60% at one store may not be enough since another store is offering a 70% discount. The end result is that retailers get engaged in a never-ending race to the bottom.

    Aggressive price cuts by retailers are matched with even more aggressive price cuts by their competitors. The end result is a permanent state of price war which does not benefit anyone in the industry over the long term.

  7. Higher Communication Spends: Simply discounting the products is not enough in modern retailing. Retailers also need to cut the clutter and reach out to their customers in real time if they want to make the most of deeply discounted sales.

    Since almost all retailers organize their sales at the same time of the year, they are forced to spend a large amount of money to ensure that their customers are aware of the prices that they offering. As a result, retailers are forced to spend large sums of money as communication spends. Since the cost of advertising has skyrocketed in the recent past, this communication spend rapidly add to increasing costs and end up making the event financially unviable.

The above points clearly demonstrate that deep discounting is not a strategy which can be followed by every retailer. There is a very clear impact on long term sales, profitability as well as the overall brand value of retailers if they decide to use this strategy. It is important for the retailers to be mindful of this impact and create their strategy in such a way that they can avoid the negative outcomes associated with deep discounting.

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Finance in Retail