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Black Friday: Great strategy or sheer folly?

November 8, 2010 by Dale Furtwengler — President, Furtwengler & Associates, P.C.

Retailers have decided to move Black Friday, the day they begin their heavy holiday season discounts, up a month. Typically Black Friday is the day after Thanksgiving.
 
Why would they do this? Here's what a major retailer said: "We don't think buyers are going to be spending as much this year so we want first crack at their dollars." Is this sound strategy or a self-inflicted wound? Let's take a look.
 
Let's assume that you're a retail buyer (who isn't?), it's the holiday season and you have indeed decided to spend less this year. Your child is pining for the latest video game. You see an add for some great discounts on clothing for your child, which do you buy - the clothing or the video game?
 
If you're like most parents, unless your child's clothing is going to subject them to some bullying by other kids, you're probably going to buy the video game. Even if their clothes have to be replaced, you're likely to go to the discount chains and buy only what's needed in hopes of still being able to get that video game.
 
If what I've outlined is anywhere near accurate, what impact would a heavy discount at Macy's have on your buying decisions? None that I can see. My experience has been that buyers spend money on what they really want. You don't have to trust me on this. Simply recall a time when you drove through a trailer park and saw a dilapidated trailer with a brand new $30,000 pickup truck in the driveway. Or an older subdivision of 900 square foot homes with a $150,000+ RV in the drive.
 
These folks may have scrimped on housing, eaten store brand canned goods and gotten their clothing at WalMart, but when it came to what was really important to them - the pickup truck or RV - money was no object. They paid the price.
 
Let's take this analysis a step farther. Let's see what the retailers are really accomplishing. As we've already seen, the likelihood of generating additional sales is low because buyers decisions are based on their wants, not on the availability of low prices.
 
Second, if the retailers predictions are accurate and buyers aren't going to be spending a freely as in previous years, then it's going to be even more difficult to attract sufficient buyers to offset the revenues lost through discounts. In other words a 20 percent discount means that the retailer must now attract six buyers to generate the same revenues they would have gotten from five. Raise that discount to 50 percent and you'd need 10 buyers instead of five. How can your reasonably expect to garner those buyers at a time when you expect lower traffic in your stores?
 
Third, discounts alter the timing of sales, not the volume of sales. If I offer a discount to people who would typically buy my offering anyway, I may get them to buy earlier but I'm not going to get them to buy more. By accelerating sales into the current month I'm digging a hole in future months' sales. If I do this often enough (Black Friday occurs every year), I train my buyers to wait for a deal before buying. In essence I've shifted from a shovel to a backhoe in digging that hole. Soon that hole will be so deep that I won't be able to find a ladder tall enough to crawl back out - think Chrysler and GM before the bailouts.
 
If this strategy was employed in baseball, the batter (retailer) would have struck out. It's counter-intuitive, but discounts don't attract more business. They simply keep you from generating the revenues available to you.
 
How do you avoid this mistake? Communicate the value you provide to buyers who actually value what you have to offer. You may make fewer unit sales, but you'll enjoy significantly greater profits with a lot less effort.

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