2019-04-29 04:00:47 Growing & Complex Businesses English Epic sales promotions seem like a good idea, but the end results aren’t as glamorous as expected. Here’s what happens during sales... https://quickbooks.intuit.com/r/us_qrc/uploads/2019/04/Does_Your_Business_Get_Hit_Hard_by_Sales_Hangovers_featured.jpg https://quickbooks.intuit.com/r/growing-complex-businesses/6-signs-your-business-has-a-sales-hangover-and-how-to-prevent-them/ 6 signs your business has a sales hangover and how to prevent them

6 signs your business has a sales hangover and how to prevent them

15 min read

You aren’t the only one holding your breath. There’s massive excitement built up around the upcoming sales promotion amongst you and your team, as well as customers who’ve caught wind of it. The sale starts and you watch as traffic pours into your store. Then you start looking at your sales reports, which are looking real good.

But when the smoke clears, your epic sales promotion may not have been as exciting (and profitable) as it initially seemed it would.

Much like a night of binge drinking at a bar, an all-you-can-eat buffet, or a marathon on Netflix, retail sales blowouts are full of excitement and energy in the moment. But you inevitably wake up the next day wondering…

“Why the heck did I do this to myself?!”

When you plan a sales promotion, the goal is to move a ton of inventory and increase revenue in a short amount of time. However, what happens when:

  • The major draw of the sale sells out too early, leaving customers frustrated with the lackluster inventory levels?
  • The inventory you’re trying to get rid of doesn’t move at all?
  • An unexpected number of customers come in with returns?

Epic sales promotions may seem like a good idea, but often the end results aren’t as glamorous or pleasant as expected. Here’s what happens during sales hangovers, as well as what you can do to avoid them in the future.

Are you experiencing any of the symptoms of a sales hangover?

Massive sales promotions can be dangerous if you haven’t accounted for less than rosy outcomes in the lead-up to them. Just because a blowout seems like an easy way to clear out large quantities of inventory doesn’t mean it’s the best solution. In the end, the costs may greatly outweigh any revenue earned.

Symptoms may vary, but the common trait they all share is this:

PAIN.

There are a variety of ways in which epic sales promotions can take their toll on your bottom line. Consider the following:

Post sales hangover symptom #1: refunds & returns

Refunds are a big part of the reason why retailers get into hot water after major sales.

In some cases, it doesn’t matter how hard you work to prepare for a massive sale. You could have every angle covered and there will still be returns and refunds to handle. Not only that, you can expect an exponentially greater number of refunds simply because of the increase in sales processed.

According to research from the ECR Community Shrink & OSA Group, a retailer-manufacturer working group that devises better ways of managing inventory and waste:

“Using benchmark retail costs, our research showed that for a reasonably expensive item retailing at around £89 ($117), there would still be a cost of £3 ($4) per item from various overheads if there were no returns of the item.

“At a 20% rate of returns (the average for e-commerce), the cost of returns rises to £11 ($14). At 35% rate of returns (the average for clothing bought online) the cost of returns is £20 ($26). At a 70% rate of return (reported by some German clothing firms we spoke to) the item makes a straight loss for the company.”

It’s not as simple as to issue refunds either. Other costs you have to think about include:

  • Return shipping labels and fees
  • Returns fraud or abuse (42% of U.S.-based retailers report issues with serial returners)
  • Payment processor fees
  • Storage facility charges to reprocess, repackage, and restock items

Bottom line: the cost of refunds and returns is unsustainable for a good portion of retailers.

Unfortunately, this practice has come about thanks to companies like Amazon and other giant retailers that have a free return policy. Customers are conditioned to expect these kinds of return policies which puts a lot of pressure on smaller retailers to have similarly structured return policies. Then, you have companies like REI with its lengthy return policy. Even REI shows us the danger of trying to compete alongside unrealistic goals, having recently had to drop its lifetime return policy to one year.

Post sales hangover symptom #2: shipping costs

The Amazon Effect is a term we use to refer to the disruption caused by e-commerce within the retail sector and how retailers have tried to adjust to it. If you haven’t done so yet, consider what it could do to your costs during one of these blowout sales.

GeekWire reported significantly more shipping costs for Amazon than revenue earned from shipping:

That’s a loss of $2.6 billion in 2016 alone.

Now, a company like Amazon can bear this loss well enough because it makes a good chunk of money from its digital services: Amazon Web Services and Prime.

However, even Amazon has felt the pressures of shipping costs—especially free same-day and two-day shipping orders that take place en masse around holiday sales. As a result, it’s invested in new fulfillment centers as well its own alternative methods for delivery and freight.

There aren’t too many retailers in the world that can bear those costs with ease or develop their own proprietary systems to reduce them. So when you run a major blowout sale, you have to carefully think about what the actual costs to ship will add up to.

  • Are you encouraging customers to buy heavier items or larger quantities than they normally would?
  • Are you offering expedited shipping and can your distribution center handle it without an additional fee?
  • Have you accounted for the additional packaging and labels needed to ship out all this sold inventory?

Without estimating how your shipping costs factor into a sale, you could be in for an unfortunate surprise when the final accounting is done. Shipping might not seem like a big deal in the day-to-day, but epic sales events can throw that predictability out of whack.

Post sales hangover symptom #3: website costs

One key difference between a typical sale and a blowout is the density of web traffic that a blowout can bring to your site.

If your website and server are properly configured to scale as traffic grows, then you should be fine. However, many companies purchase web hosting plans to accommodate the average amount of traffic the website gets.

If your website falls into the latter category, a sharp spike in traffic could effectively take your website down in the middle of the sale.

According to ITIC’s annual survey, enterprises report losses of $100,000 to $300,000, on average, for just an hour of downtime. Every retailer is different, though, so I’d advise you to take a look at your numbers.

First, determine how many people visit your store each hour. Then, figure out how much your website generates in sales during that same timeframe. How much money do you stand to lose if your site goes down for one hour using this baseline?

Now, calculate what that looks like with your projected visitor count and revenue for the sale. Remember: you won’t just lose sales; you’ll lose first-time customers who were interested in your site because of the sale.

While your website going down due to too much traffic might seem like something to celebrate—“Hurray! Our sale went viral!”—it can wipe out profits and damage your brand in the process.

So, you need to prepare for it. Unexpected traffic surges are one thing, but there’s no excuse not to be ready for a sale you’ve planned in advance.

The best thing to do is get in touch with your web hosting company and let them know exactly what you have planned and when. They can also help you estimate how much your monthly website costs will go out during each sales period. They can then work with you on either temporarily upgrading your server capacity or move you to a plan that automatically scales as your traffic fluctuates. If this remains a challenge, or if they’ve failed in the past, consider partnering with an ecommerce host that is known for its uptime amidst sales spikes.

Post sales hangover symptom #4: customer service costs

Every retailer is going to run into the same problem during big sales, whether they have a brick-and-mortar shop or an online store:

With more customers and sales to process comes a need for greater customer service before, during, and after a big sale.

What’s more, your customers expect omnichannel retail support. Is your operation ready for it, or are you planning to rely on the same amount of staff and automation you use during normal periods?

The last thing you want to do is rush into a blowout sale because of the promise of more money. If your business is unprepared for the onslaught of traffic—and all the questions and complaints that come along with it—be prepared for lost sales, upset customers, and a damaged brand reputation.

According to Genesys research (courtesy of SuperOffice), a positive customer experience leads to greater sales over the long run because of it:

  1. Improves customer retention rates.
  2. Increases customer satisfaction.
  3. Improves the efficacy of upselling and cross-selling.

While #2 is obvious, it’s #1 and #3 you should pay close attention to.

Loyal customers are willing to spend more money with a business than one-off customers. They’re also the ones that see the value in upsells and cross-sells, which makes them far easier to sell to.

In addition, long-term customers are much cheaper to maintain relationships with than constantly having to go on the hunt for new customers with omnichannel marketing initiatives (which may be the whole reason you’re running this sale). Earn their loyalty now and shape future sales around these loyal big spenders.

When planning for a sale, don’t forget to check your omnichannel customer service strategy — and be sure to man it with the right amount of support staff. Otherwise, it’ll cost you to pull team members away from sales and omnichannel marketing tasks to cover customer service.

You’ll want to have teams in place that are well-prepared and educated on:

  • Live chat
  • Social media
  • Email
  • Phone
  • In person (when relevant)

Oh, and don’t forget about self-service either! There are some customers who would rather track down answers to their questions without the help of another person. Having a robust set of FAQs enables them to find an answer while also relieving your team of one less customer who needs one-on-one assistance.

Post sales hangover symptom #5: brand reputation damage

While online shoppers might not be able to fight with one another over the item on a shelf, they can certainly take their grievances about out-of-stock products to social media where they’ll likely find people willing to listen to their anger over being cheated out of what they were promised.

Make sure your house is in order and inventory is properly stocked for the sale. You want to avoid flaring any tempers because you understocked a popular item in high demand and end up with a bad company reputation.

And be prepared to apologize as Flipkart did back in 2014.

Basically, the company decided to test its selling capacity with a massive one-day sale. Heavily discounted items were the major lure during “Big Billion Day”, so it was no surprise that people flocked to the site for the pre-announced sale. To be more specific, Flipkart sold 2 million items over the 10 hours that the sale ended up lasting.

What was the problem? Well, the sale was supposed to last all day. Then, the retailer had promised sales on specific items across certain segments, so the expectation had been set. Finally, the website crashed (even after they attempted to boost the server 20 times). Needless to say, customers were not happy, which is why the CEO had to apologize for failing to meet customers’ expectations.

But that’s not all. News outlets picked up the story and ran with it, ensuring that anyone who had missed news of the sale or the ensuing disaster would eventually hear about it.

The message here is this: a bad customer experience will spread like wildfire if you let it.

Post sales hangover symptom #6: setting a bad precedent

One last thing to consider is the long-term hangover effects you may feel from a blowout sale, especially if you use a sale as a gimmick to drive up store traffic or to release a boatload of inventory just to get it off your shelves.

Once you set the precedent that you’re willing to heavily discount your prices, customers will come to expect it from you. And when another sale fails to show up in the future, you can kiss those return customers goodbye.

As we saw many years ago in the example set by Ron Johnson of JC Penney, customers love their sales. Take bargain-hunting away from them and you may find it hard to retain long-term brand loyalty.

But that wasn’t Johnson’s only mistake. He explained that he changed JC Penney’s pricing structure to one that was “fair and square”. Why? Because he claimed that the previously higher prices were only over-inflated so that consumers would fall for the heavy discounts they saw during sales. It’s basically like pulling back the curtain on the Wizard of Oz. All of the allure of chasing sales was gone.

There’s another risk to think about here in terms of brand reputation. If you’re in the business of selling upmarket or premium goods, what’s it going to look like if you sell them off at heavily discounted prices? You’ll compromise the value of the product you sell, leaving consumers to wonder why they paid so much in the first place.

How retailers can avoid sales promotion hangovers

The possibility of losing money on a big sales promotion meant to generate profits is a painful one to consider. That’s why you must project figures for your gross profit margin and net profit margin for different scenarios before having a big sale.

Be careful not to only focus on the rosier projections. For example, Gross Profit Formula may seem like a good predictor of the outcome of an epic sale:

Total Sales Made – Cost of Goods Sold = Gross Profit

Sure, the cost to create your goods, market them online, and handle the initial sale is part of it. But, as we’ve seen, things like refunds, shipping costs, and customer service failures can come into play when you try to push massive amounts of inventory out the door.

If you’re nervous about the repercussions of a blowout sale gone bad and don’t want to deal with the resulting sales promotion hangover, a better idea is to calculate your Inventory Turnover Ratio. There are two formulas you can use:

Total sales made ÷ average inventory

Or:

Cost of goods sold ÷ average inventory

By analyzing the average days in inventory of your items, you can more adequately prepare your store for a sale. Items that are in hot demand and that turn quickly can be manufactured or purchased in bulk before the sale. Or, if you’re trying to clear out inventory, you can inform customers that there will be a limited amount available.

Conversely, you can use sales to promote items in your inventory that are less popular, which is why they have a low turnover ratio. By only discounting these items, you’ll encourage bargain hunters to buy these hidden gems they wouldn’t have otherwise found.

Besides just knowing your numbers, there are some other things you can do to ensure you wake up hangover-free from an epic sale:

  1. Rewrite your refund and returns policy. It should be attractive to shoppers (like free returns within a short timeframe), but not so much that they’re eating into your profitability.
  1. Keep better track of shopper behavior. You may be unintentionally wasting money on blowout sales. Your website and sales software will tell you exactly which segments are worth discounting. In other words, what are your customers dying to get their hands on and what do you have enough of in stock to make that happen?
  1. Communicate. Your support team, sales team, suppliers, shippers, storage facility and anyone else who’ll be involved in the sale need to be kept in the loop. Advance communication is essential if you want to reduce the chances of any part of the workflow failing in the middle of it.
  1. Have a liquidation process in place… just in case. Liquidation isn’t always about selling off inventory when a business is closing. Retailers can use a similar strategy if they find themselves with an excess of stock they couldn’t sell. Look at ways to bundle those items with more popular ones and sell at a discounted price. Or consider giving the cheapest of those items away as a freebie in your lead generation efforts online.
  1. Develop a strategy for customer retention. The cost of unhappy customers might not seem like a big deal in light of something like product loss, but it is. Return customers are willing to spend more—and more frequently—with brands they know and trust. Establish those relationships now and create tailor-made sales for your most loyal of customers. They’re sure to run more smoothly and lead to more predictable results in the end.

You can wake up from a sale hangover-free. You just have to plan it well.

Final thoughts

Sales hangovers happen for the same reason people end up feeling lethargic and sick to their stomach after a big Thanksgiving dinner or a trip to the buffet. Their eyes were larger than their stomachs, and they didn’t think about what they were getting themselves into.

The possibility of moving a bunch of inventory and boosting your sales overnight is tempting—especially if you’re anticipating a major slump in the months ahead—but tread carefully. If you’re not fully prepared for the sale, you could end up with an endless barrage of headaches and regretting the whole thing in the end.

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Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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