Have I got a deal for you

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Have I got a deal for you: How to discount wisely

By David Swanston

July 2010


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As consumers’ foodservice spending has slowed in recent years, offering discounts has become a tempting way to increase traffic. Every day we hear about wing night, three dollar beer, and buy-one-get-one half-price offers. Unfortunately, these tactics often backfire and can do lasting damage to your brand.

Discounts must be significant in order to interest consumers and to generate a response. Financially, these discounts lower your margins, leaving little to cover your other variable and operating costs. Cost of sales and labour cost percentages increase, often motivating management to make cuts to service and quality. According to Statistics Canada, operators average 4.4 per cent pre-tax profit margins, which can easily be wiped out completely by aggressive discounting.

The larger cost of discounting is only felt later on when consumers have come to expect special offers, making it difficult to stop. How many operators could pass along a 25 to 50 per cent increase in prices without experiencing a drop in business? Eliminating discounts after a long period of time effectively has the same impact. Once you start discounting it is difficult to go back.

If discounting isn't lucrative, and can permanently alter your business model, then why do it? Operators will say that it brings new customers into their establishment and increases sales. The problem with this logic is that those same customers are only there because of the discount and are unlikely to return at other times to pay full price. Once the discount is gone, so are they.

Discount chasers are highly disloyal. They move between providers taking advantage of the variety of discounts available. In the end, no operators gain an advantage. So if you can't win long-term customers, nor can you make money from them while they're there, then discounting should be avoided at all costs, right? The truth is that discounting can be effective when used properly.

Promote non-menu items, such as daily features, at prices that deliver high value to customers.
Avoid ongoing discounts of regular menu items, as this devalues those items and makes it difficult to justify the regular prices.
If you want to offer a discount to promote a new menu item, then only offer it as a limited introductory price to encourage trial.
Package discounts as part of broader promotions such as the World Cup or Mother's Day so that customers know that they have a specific purpose and end date.

Remember that people don't appreciate what you have to offer if you have to give it away. When consumers value your menu, they are willing to pay a fair price for it. Discounting may be an easy way to promote, but rarely will it help you achieve your broader marketing objectives. Today's feature A cost-effective way of building sales during slow seasons is to offer value added promotions to your existing clientele. One promotion that I have found to be particularly successful is to give away a free meal every week for a year to one of your patrons. If your goal is to increase volume during the month of January, start promoting during your busy period in December. For the first four weeks in January every customer, every visit, will receive a ballot to win a free meal at your establishment every week for the rest of the year. No strings attached. No minimum purchases. No special conditions. Provide the winner with a letter that they can present to their server that entitles them to a complimentary appetizer, entrée and dessert. For those worried about the cost of such a program, the numbers actually reveal that this promotion can almost pay for itself. Assume that the average cost of the meals given away total $13 per week. Most winners will still purchase at least one beverage and typically will dine with at least one guest who will pay full price. The contribution received from beverages and guests will cover more than the cost of the free meals. This program will create interest and excitement, as well as drive repeat visits during traditionally slower periods. About the author: *David Swanston* is a Hospitality and Foodservice Consultant, Principal of Focused Industry Training Seminars and is an instructor at major Canadian university business schools. Since 1997, he has helped a wide variety of organizations develop and launch new concepts, turn around troubled operations, and improve sales, profits, controls and efficiency. To learn more about how he can help you improve your sales, profits and performance, contact him directly at 905.331.6115 or contactfit@fitseminars.ca.




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