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Tuesday, April 28, 2009

Unintended construction marketing costs

Yesterday, I picked up my car from the local dealership. The air conditioner condenser had been damaged, and the total repair bill approached $900.00. Although high, I accepted the charge and paid the bill.

I returned home to find in my mail a letter in the dealer's name from the manufacturer (Honda) offering a 10 per cent discount on parts and service as long as you bring in the car for work before July 31.

Today, I returned to the dealership and firmly asked for the credit. To the dealer's marketing credit, they granted it, putting close to $90 back into my Amex account.

While this solution is the correct strategy -- you don't want to alienate a client with marketing promises -- clearly if the intent of the letter is to attract new business and revenue, it backfired in my case. Not only do they have to give back money which would otherwise flow 100 per cent to profit, they have accounting and administrative costs to absorb in processing the refund. And I haven't purchased a cent more than I would otherwise spend.

Price discounts are dangerous, always, for marketing. They cut your margin, induce expectations "if I wait I can get a savings" and often cost real money rather than attract new revenue.

Consider, for example, all the other people who would -- without incentive -- use my dealers' service without the letter. Some marketing guru might count all the letters turned in and "new business obtained" because of the discount marketing piece, but how many would have purchased anyways, at the full price!

I realize many businesses set discounts into their system and expect people to pay the lower price generally -- anyone who pays the full price is just providing a bonus. We for example, charge 25 per cent less for advertisers who pay within 15 days of invoicing. We calculate our sales based on the discounted price, capturing the additional cash for the people who pay late as a bonus which offsets the bad debt.

However, you should always be wary about any strategy where you lower your price deliberately from your existing price base just to find new business. You could, like the auto dealer today, be throwing much good real money after bad in your marketing expense.

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