Black Friday: a profit disaster for companies
Danilo Zatta, PhD, MBA
Helping companies grow revenues and profits I TopLine, Pricing & Revenue Models Advisor
Dear Friends,
Black Friday is a sad day for many companies: despite higher sales, reduced margins and cannibalization of future sales is what is left behind. Let’s deep dive this below.
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Black Friday: a profit disaster for companies
‘The Black Friday discount battles are like a black hole for retailers’ is the comment of a retail entrepreneur. In many cases, the often high discounts offered during this day bring in nothing for retailers. ‘There may be more sales, but less profit,’ summarises the managing director of the underwear brand Aikyou. Unprecedented discounts are putting pressure on the entire retail sector.
Success bought at a high price
Data from the e-commerce software company 7Learnings shows that some retailers' sales increase by up to 200 per cent on Black Friday itself. However, this success comes at a high price. The reason: demand usually drops significantly before and after Black Week.
Customers simply shop when the highest discounts are available. If you include the weeks surrounding Black Friday in the calculation, you will find that the overall increase in sales is just 7 per cent.
According to research done by management consultants Valcon customers intend to spend on average up to 420 euros in the upcoming Black Friday.
Cannibalization of the Xmas business by Black Friday sales
However, most retailers do not base their pricing strategy on demand anyway, sometimes even granting blanket discounts for the entire range. Black Friday has become an obligation rather than an optional extra and is therefore getting out of hand. Retailers are destroying each other's margins.
The extent to which discounted Black Friday sales cannibalise the important Christmas business was demonstrated last year. Back then, shoppers bought significantly more around Black Friday than expected. High inflation had made customers even more price-sensitive than they already were. The result: according to data from e-commerce service provider Salesforce , spending increased by nine per cent.
At the same time, however, the average discount was 29 per cent. The receipt came a month later, like in Germany: the German Retail Association had previously expected sales of 120.8 billion euros in November and December. However, only 119.8 billion euros were spent, an increase of just 0.6 per cent compared to the previous year – similar figures can be found across different countries.
There is less and less of a move away from the normal price. If you don't offer a top price, you won't do any more business. Despite the available figures, retailers are driving each other to ever higher discounts. Those who don't keep up are afraid of losing sales. Hardly any companies have the courage or foresight to take a stand against this. This accelerates the downward spiral of prices. It's all about sales with too little return. A dangerous side effect is that retailers have to spend money on online advertising, but this is lost in the mass of offers.
Many retailers respond to the drop in demand after Black Friday with new bargains. Logically, this encourages consumers to think: why should they actually buy at the normal price? The next discount is sure to come. Like in the case of Chinese retailer Temu , that brought prices down to a level which scares most Western retailers.
One way out of the Black Friday trap could be price models that utilise artificial intelligence (AI). They analyse purchasing patterns from the past and compare them with current market data on customer behaviour and competitor prices. This enables them to estimate very precisely what discount is necessary for a particular product to persuade customers to buy it.
According to several surveys, potential buyers generally expect much higher discounts than they actually receive. Nevertheless, they still go for it on Black Friday, as evidenced by sales on this day. Felix Hoffmann , co-founder of 7Learnings, explains: ‘Retailers could take advantage of this behaviour by using AI-optimised pricing to create the right balance between attractive and profitable prices.’ His software solution is used by retailers such as Westwing , babymarkt.de GmbH and Tom Tailor . Another fact shows just how crazy the bargain hunt has become: retailers who forego discount campaigns and accept a possible drop in sales can double their profits!
What is your view on Black Friday?
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You are most welcome to share your views, feedbacks and own pricing experiences. Thanks a lot for your interest and support!
Lead Retail Excellence (pricing; commercial strategy) at bol.com
3 天前Hi Danilo - thnx for sharing. What would be your #1 route for retailers to get out of the spiral of increasing promo pressure?
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6 天前Great piece Danilo Zatta, PhD, MBA How ironic. Black Friday got its moniker because for many decades it purportedly has been businesses finally went in the black - made a profit - for the year. The data also validates the value of keeping good prices everyday. Such a strategy avoids sales cannibalization; builds trust with customers; and reduces ebbs and flows in labor spend. And as you highlight this behavior by retailers creates an expectation of discounting that hurts future sales as customers "wait" for the prices to come down again. (A lesson for Pricing folks in B2B as well - today's discount is tomorrow's starting price for a buyer.)
Pricing and sales analytics for foodservice and ecommerce brands | Helping my clients grow by making results-oriented decisions driven by data.
6 天前I know I'm probably in the minority among the pricing community but I don't understand the hysteria around Black Friday. For most retailers, at least the good ones, the Black Friday deals are planned months in advance and are integrated in the company's annual budget. It's only a "profit disaster" for those who don't plan ahead or only look at their KPIs month-to-month. It seems to me that the main issue is with companies where pricing is completely disconnect from the rest of the business, and especially from marketing. It creates this unnecessary friction when the time comes to run a promotion, which then leads to an over-correction by way of excessive (and inefficient) discounting. Companies that know what they are doing, where pricing and promotions are integrated into the overall business strategy, typically don't dread Black Friday, they look forward to it.
experienced Pricing Manager M.A.|M.Sc.|M.B.A|D.B.A
6 天前Good article with 2 flaws. 1st point: At the end of November, many German employees receive Christmas bonuses, other countries do not have this bonus. This is also what the Black Friday campaign will be aimed at. The money that has been spent once is then gone, especially in times of economic decline. 2nd point: Depending on the product portfolio, AI can indeed provide purchasing patterns, but this is mostly the case with an assortment that has either a longer or seasonal life cycle. With constant product changes, an AI has argueably limitations.?
LinkedIn 'Top voice' in Digital Marketing | VP Marketing & Growth | B2B SaaS
6 天前Dear Danilo Zatta, PhD, MBA thank you for featuring 7Learnings study! We’re beyond honored to be mentioned in your newsletter—thank you! As someone who deeply admires your work, I have to say: you’re my favorite pricing writer, and I’m feeling a little starstruck here! ??