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The Promotional Dilemma

As in years past, Shop.org recommends discounting and free shipping for Thanksgiving:

Give customers a good reason to shop online while brick and mortar stores are closed on Thanksgiving day.
-- Ed Henrich, Shop.org blog, 11/7/08

Ed's advice is not P&L-based. There's no whiff of a "discounting will lower your percentage margin but can generate enough incremental revenue to generate incremental profit" argument behind the recommendation. No, the Shop.org advice is based on competitive pressure.

Without an offer on Cyber Monday, your email will get lost. Last year 32% of retailers offered free shipping on all orders for Cyber Monday – in addition to other promotions.
-- Ed Henrich, Shop.org blog, 11/7/08

Competitive pressure which looks to be especially widespread this year.

Like the prisoner's dilemma in paid search bidding, retailers also face a prisoner's dilemma in promotional pricing. If retailer A cuts prices and retailer B doesn't, A has a shot at stealing share, increasing sales, and hopefully profit. But retailer B is thinking the same way. And when both A and B cut prices, neither gains share but both lose margin. So both sides lose.

The right strategy isn't obvious. The score is the bottom line, not top line. And complicating matters are fixed costs which must be covered.

David Bolotsky offered a well-argued stand against promotions back in August (see One Retailer’s View on Why Not to Offer Free Shipping). Yes, Dave sells uncommon goods, items not easily found elsewhere. But that detail doesn't dismiss his argument.

Promotions are like drugs -- they create dependencies -- customers will certainly respond, but will also defer purchases in order to take advantage of the special offer -- i.e. wait for the sale. Consequently, once you offer it, it is difficult to take away.
-- David Bolotsky, Shop.org blog, 8/22/08

Promotions are where many retailers are heading. It is going to be an extremely rough-and-tumble Q4 in retail this season.


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