US News: To Discount Or Not
Bob Vereen investigates how some retailers in the US are solving the problem of providing quantity discounts to customers…
As small chains and independent stores seek to build their businesses in the face of giant mass merchandising competitors like Wal*Mart, Target and Kmart, and home centre chains such as Home Depot, Lowes and Menards, many are attempting to increase their sales to contractors, tradesmen and commercial/industrial customers.
Independent stores and small chains always garnered some of this business and certainly offer a convenient source of supply to such buyers, as well as time-savings in concluding transactions faster than in most big-boxes. Also, the convenience of offering in-store credit to these customers has been important. Plus, in most cases, their staff have better product knowledge. The question is how to boost these sales in a more organized fashion and to entice new customers from those categories?
However, trying to sell more to those kinds of customers creates a new problem – should one provide quantity discounts in order to get the business. And if so, how to do it?
The problem is especially difficult for retailers whose primary business has been serving consumers only. Many dealers accepted some industrial/ commercial business without making any special efforts to get it. In other words, one price for everyone, no matter who the customer.
Some of the considerations a retailer must face in going after this segment of trade more aggressively include:
- Is a discount essential to build substantial business with these kinds of accounts?
- What kind of system works best?
- How large a discount should be offered? And on what products?
- How can it be managed effectively?
- How can it be developed so it does not alienate the DIYer who pays one price, while a commercial customer might pay another?Retailers who are successfully serving both the general public and industrial/commercial customers and trades people admit that discount programs require a lot of work to be successful. Moving too hastily, without considering all the ramifications of a program, can fail to deliver enough extra business to justify the discounts, or it can alienate other customers. One system, which seems to work for a number of dealers, is to offer quantity discounts based on the amount purchased at any one time – to every customer, cash or commercial. This eliminates the hazard of irritating a DIYer.
Most dealers do exclude some products from these kinds of plans – items which are already very price-competitive, for example. It is important to explain the reasons why a discount is being offered by telling customers that it saves the store labor when one is able to sell a case of something – eg cans of spray paint – and you want to pass the savings on to the customer.Discounts vary by item, based on one’s margin for the product and what you are trying to get the customer to do. Those items with fat margins can offer as much as 30% discount. An example would be the sale of a full box of fasteners versus the sale of a small bag or the sale of one or two items. Lots of time and labor is saved selling a full box and the customer should enjoy enough of a saving to encourage the larger purchase.
Some other items can offer multi-tiered discounts based on the size of the sale. Spray paint, for example, can offer a small discount for 12 cans, and progressively larger ones for 36 and 144 cans. This would enable customers to mix colors to reach the quantity pricing in such a case, but would not offer price breaks for a mixed quantity of fasteners because of the low unit value and labor involved in counting and bagging.
Retailers feel that the systems should be simple, out in the open and available to anybody. Because a quantity discount is based on size of sale and labor saved, it legitimizes one’s regular retail as a “real” price, not artificially high. Some retailers now use a loyalty card to offer such prices, others think there is no need for a loyalty card or buying club to join.
When a customer asks what the price is, a dealer can simply ask: “How many do you want?” This is an especially important point when dealing with commercial/industrial accounts. Those retailers who have a large commercial/industrial business admit that the quantity discounts can amount to thousands of dollars, but they also realize that commercial and industrial customers will find it advantageous to buy from a local source which offers competitive pricing as well as convenience. The time spent getting products, especially last-minute needs, is a labor cost to these accounts, so the faster a purchase can be made, the more advantageous it is to the commercial account.
A number of retailers report that their experience with “terms discounts” have generally been negative. If one wants to try it, some suggest doing it as a promotional event with a starting and ending time. One way would be to have a coupon book printed in color, with the discount deals in bright ink, and the rules for your acceptance on the back. Such promotions should be a limited-time offer. One can always repeat the promotion – brought back by popular demand!
Here is some advice offered by dealers now racking up substantial sales from quantity discounts:
- Start small and test the returns of any plan – your discount plan must pay for itself.
- Once you give a special discount, it is hard to take it back.
- If you are “cutting deals” with special customers, establish a review date at the beginning so you can see whether the discount is paying off for you, not just the customer.
- Do not allow cashiers or salespeople to discount on their own.
- Keep it simple – if it’s complicated, the system will eventually fail.
- Promote the plan – talk it up and use signage to remind customers. Have your staff talk it up, too. (“If you buy two more, there’s a case discount and you’ll actually save money.”)
- Use point-of-purchase signs liberally throughout the store and in specific departments.
- Bin labels can be used and should say: ‘Quantity discounts available on this item.’
- Recognize that if you ask customers how much they normally buy, they will invariably over-estimate their previous purchases and their anticipated purchases.
- When a customer has to remind you that they are “one of your best customers,” they generally are not.Other Discount Ideas
Another concept might be to allow professional and business customers to choose one department to receive a straight 10% discount – a plumber the plumbing department, a painter the paint department. Other retailers have set up volume discounts based on total purchases – ie 2% discount for sales of $100; 4% for $250, 6% for $500, 8% for $750 and 10% for $1,000 or more. The strategy behind this concept is to make one’s store the primary source of supply for all the customer’s needs.By Bob Vereen, Australian Hardware Journal’s US Correspondent