Tuesday, November 16, 2010

Don't discount natural demand.

Yet more evidence that discounts seldom build incremental sales.  Instead, they tend to pull forward demand and reduce profitability.

According to a study out of the University of California, Berkeley, the government's "Cash For Clunkers" incentive increased car and truck sales by 360,000 units.  Sounds great until you read that sales for the next seven months were down by 360,000 units.  That was a $1.4B investment in discounting natural demand  (360k units x $4k/unit).

My purpose here isn't to criticize this specific program.  As economic and social policy, it put more money back into the consumer's wallet and helped remove less fuel-efficient cars from the road.

But this does reinforce what we see time after time in marketing – straight cash incentives (coupons, cash back) tend to discount sales marketers are likely to get anyway.  The best promotions tend to be those designed to change preference and long-term demand – e.g., discounts targeted at competitive customers (register-generated coupons targeting competitive users, online retargeting to reach competitive customers with a trial offer, member-get-a-member referral offers) or incentives to stimulate sales during off-peak periods (fly this summer, get a discount next winter).